Putting value on corporate purpose

The concept of “corporate purpose” is at risk of becoming a vague aspirational statement like “mission” and “vision” were years ago. These statements were put on boardroom walls, but they didn’t really change the way companies conducted business.

Companies have an opportunity to make tangible statements of purpose that will genuinely guide the decisions and behaviors of their executives and employees. But what if the corporate purpose puts the interests of shareholders at odds with those of other stakeholders (customers, employees, suppliers, and broader society affected by company actions)?

My view is that, for the most part, pursuing the creation of long-term shareholder value requires satisfying other stakeholders as well. You can’t create lasting value if you ignore the needs of your customers, suppliers, and employees. Investing for long-term growth should—and often does—result in stronger economies, higher living standards, and more opportunities for individuals.

Companies that prioritize short-term profits often put both shareholder value and stakeholder interests at risk. In the first decade of this century, banks that acted as if maximizing short-term profits would maximize value precipitated a financial crisis that ultimately destroyed billions of dollars of shareholder value. Similarly, companies whose short-term focus tempts them to cut corners that leads to environmental disasters destroy shareholder value by incurring clean-up costs and fines, as well as lingering reputational damage. The best managers don’t skimp on safety, don’t make value-destroying decisions just because their peers are doing so, and don’t use financial gimmicks to boost short-term returns.

That said, corporate leaders have to make complex decisions. Consider employee stakeholders. A company that tries to boost profits by providing a shabby work environment, underpaying employees, or cutting benefits will have trouble attracting and retaining high-quality workers. Inferior employees can mean lower-quality products, leading to reduced demand and damage to brand reputation. More injury and illness can invite regulatory scrutiny and increase friction with workers. Higher turnover will inevitably increase training costs. With today’s mobile and educated workforce, such a company would struggle in the long term against competitors offering more attractive environments. Additionally, companies that shift manufacturing to low-cost countries with weak labor protection often find that they need to monitor the working conditions of their suppliers or face a consumer backlash.

You can’t create lasting value if you ignore the needs of your customers, suppliers, and employees

But does all that mean the company should pay above-market wages just because it can afford to, at the expense of shareholders or other stakeholders such as customers or suppliers? I would argue that paying wages sufficient to attract quality employees and keep them happy and productive, and pairing those wages with a range of nonmonetary benefits and rewards, is a reasonable position. Companies should not be expected to pay more than necessary.

Far more often, however, the lines between creating and destroying value are gray, not black and white. Companies in mature, competitive industries, for example, grapple with whether they should keep open high-cost plants that lose money just to keep employees working and prevent suppliers from going bankrupt. Doing so in a globalizing industry distorts the allocation of resources in the economy, notwithstanding the significant short-term local costs associated with plant closures. At the same time, politicians pressure companies to keep failing plants open. The government may even be a major customer of the company’s products or services.

In my experience, not only do managers carefully weigh bottom-line impact but they agonize over decisions that have pronounced consequences on workers’ lives and community well-being. Yet consumers benefit when goods are produced at the lowest possible cost, and the economy benefits when operations that become a drain on public resources are closed and employees move to new jobs with more competitive companies. And while it’s true that employees often can’t just pick up and relocate, it’s also true that value-creating companies create more jobs. As I note in my book Valuation, when my colleagues and I examined employment, we found the U.S. and European companies that created the most shareholder value from 2007 to 2017—measured as total shareholder returns—showed stronger employment growth as well.

There are no rules of thumb that companies can follow in making these decisions. However, defining a clear corporate purpose and rigorously paying attention to long-term value creation can help executives make the difficult choices.

Tim Koller is co author of Valuation, the seventh edition of which was published this past spring. He is also co leader of McKinsey and Co.’s Strategy and Corporate Finance practice.

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