'Purpose Debate': Time to Tune, Not to Reinvent: Pay plan design doesn't need an overhaul for a stakeholder approach.

Author:Sullivan, Barry
 
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The more things change, the more they stay the same. You could say that about the recent Business Roundtable's announcement that the purpose of companies is to serve all stakeholders.

Albeit hugely symbolic in signaling that shareholders don't stand alone as beneficiaries of corporate value creation, the statement didn't change the biggest day-today challenge for CEOs: Making tough cost/benefit tradeoffs when it comes to spending company time, effort, and money.

The key to success is the same as it has been for years. After developing the right strategy, executives need to make the right tradeoffs to compete for investors, employees, customers, suppliers, and public support to execute that strategy. If executives succeed over the long term, they maximize profits and returns for shareholders along with benefits for stakeholders. What doesn't change, in other words, is that the challenge faced by executives is one of running a system. How do we work together with all the parties inside and outside the company to generate value?

So what does change? For one thing, the context in which companies operate. American business leaders formally announced a broader role for corporations, suggesting that, in serving stakeholders explicitly, companies should help with some of the big-ticket challenges facing the country and the world. That means that CEOs and executives will now change the weight they give to the value of each player in the corporate system. What does each stakeholder contribute to the whole? What does the company give back to stakeholders to elicit top performance?

Society's evolving values now influence that weighting. That's evident in the timing of the CEOs' statement. It comes as society and the media are ramping up their focus on corporate social responsibility and environmental, social, and governance issues. The timing horizons of different stakeholders also influence that weighting. Society cares about the very long term. Employees care about their individual career horizons. Shareholders care about their individual investment horizons, which means some may care most about the next quarter or year.

But in practice, competition influences the tradeoffs much more than specific social trends or time horizons --as executives have to decide daily how best to compete for capital, talent, vendors, community support, and so on. Company leaders thus need to re-weight their decisions to make sure they continuously serve--and in some...

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