The Purpose of a Corporation, on its Second Birthday
By Patrick Decker, President and CEO, Xylem Inc.
Two years ago, this week, Business Roundtable got a lot of attention for making what might have seemed, to some, a rather obvious assertion: that corporate purpose and responsibility don’t end with shareholders. Obvious or not, it sparked plenty of comment. Was shareholder primacy — long taught in business schools around the world — suddenly being replaced with some new-fangled stakeholder capitalism?
Business Roundtable’s “Statement on the Purpose of a Corporation” wasn’t the first declaration that big business should operate in the interests of more than just the shareholding few. But it was the first to attract the endorsement of nearly 200 CEOs from some of America’s largest companies. I was privileged to be among them.
Two years on, that more inclusive concept of corporate purpose is looking less controversial, and more and more essential. If business is to be an engine of prosperity for a city, a nation or a planet, then surely its intentions must be tuned to the interests of more than the few thousand shareholders who stand to benefit from its profits. That would seem true at any time. The last two years, however, have offered vivid examples of why — as a pandemic has taken countless loved ones, a reckoning with racial justice has shaken us, and the impacts of climate change have arrived in the form of floods and droughts.
Businesses are not neutral actors, whether or not we might want them to be. Across the Fortune 500, we deploy more capital than do most governments. A 2021 McKinsey study concludes that “The business sector overall contributes 72 percent of GDP in the OECD, and corporations with more than $1 billion in revenue account for an increasingly large share of that.”
Inevitably, our investments have impact far beyond the creation of shareholder wealth. Where and how we place our bets have enormous influence on the prosperity around us. Corporate purpose and behavior have big consequences. And it has been obvious to everyone from Winston Churchill to Stan Lee that “with great power comes great responsibility” — and not only responsibility to investors.
That does not imply that shareholders and stakeholders must be pitted against each other. If societies are systems, then the best solutions to our greatest challenges cannot isolate winners and losers.
The company I lead makes water technology — the equipment that tests, treats and transports water. Our shareholders only make money if we sell more products. But that only happens if our technology creates better outcomes for communities: cleaner, more affordable water, less pollution, and lower impact from floods and droughts. And that’s our purpose: to solve the world’s greatest water challenges, one community at a time.
We look at the floods in Europe and China, and the extreme drought in the American west, and we want to be part of the solution. We know we can help. The technologies exist to make those communities more resilient, and to do it affordably. That’s good for those communities, it’s good for our business, and it’s good for our shareholders. That’s business and purpose, hand-in-hand.
But corporate purpose must also see beyond the crises of the moment. Serving communities is the source of our value. Therefore, anything that threatens the community threatens our business model. And if it threatens communities all over the world, then we’d better be part of the solution.
That’s how we see climate change. There is no greater existential threat to communities’ well-being. So, we’re invested — literally putting our investors’ capital on the line — in decarbonizing the water sector.
This two-year anniversary is not an occasion to be smug about foresight, and certainly not a time to declare victory. We can’t say big business always optimizes across the sometimes-conflicting interests of our many stakeholders.
Nor is it a moment to suggest that corporations should expansively take on roles for which they are not suited. Government, civil society organizations and others are all essential. Commerce, on its own, is an insufficient response to market failure or the great moral challenges of our time.
It is, however, an occasion to recommit to creating economic value and social value hand-in-hand.
That is at the heart of sustainable business, sustainable communities and sustainable national prosperity.
It’s not easy. But it’s worth the work. And when we get it right, our business and our broader purpose are not just complementary, they are inseparable.