I was intrigued to see this article in The Atlantic talking about how a group of CEOs have changed their mind about what the purpose of a corporation is. Previously it was taken to be strictly to maximize profits for shareholders but they have now broadened this scope to recognize that there are other stakeholders who ought not to be ignored including employees, customers, suppliers and citizens at large.
The only reason I noticed this article is because I remember being in college and having to do a course in principles and practices of management and I just could not seem to get the principles into my head. I failed the unit twice and finally the only way I passed was by paying for intensive revision classes and just cramming that information into my brain.
Some of that information, I clearly remember, included this theory on how a company’s main aim is to maximize shareholders returns. At that time being a young student who had never owned a single share in a company, this idea was completely abstract to me and did not make any sense. I would have thought at that time that the aim of say the milk company was to get some good, wholesome milk to me and the car company to get a nice looking, safe car to me.
So when I saw this article I almost felt validated that probably the reason I couldn’t understand the theories is because they were a bit off, as this group of CEOs has now recognized. There’s a lot of stuff going on in the corporate world that has led to this change of mind. For example, the companies that are now being sued in various states in the US as having contributed to the opioid crisis. They maximized their shareholders profits but at what cost? Many lost and destroyed lives and families. There are also companies like Amazon that have been under fire for underpaying their workers and having a hostile work environment.
The responsibility of companies to the environment is now widely recognized and measures have been put in place to keep track of things like carbon emissions. Here in Kenya we have recently had companies being shut down for discharging toxic waste into the Nairobi river following an expose report. I recognized one of the names of the companies as they sell a popular brand of milk that I normally buy, and now I’m rethinking the milk brand that I buy.
Another practice that has become common recently is the practice for companies with excess funds to buy back their shares from the open market, known as a stock buy back, which I just do not understand. I would think a company with excess funds would be reinvesting in their capacity, expanding to new markets or maybe pay their employees a bonus.
I am reading a book right now that advances the idea that no dividends should be paid out to shareholders when suppliers are still owed money. Otherwise you find companies failing and filing bankruptcy and suppliers lose out, but this same company has been paying dividends all through out. The buying back of shares by the way is usually tied to senior management remuneration which is often tied to the share price. Buying back of shares tends to drive up the share price so the CEOs get a healthy pay package, but isn’t this a pretty short sighted practice?
This group of CEOs is right in recognizing that the responsibility of a company lies beyond simply making profits to the exclusion of everything else. Socially responsible companies lead to healthier societies.
neon nairobi gal 