What would Peter Drucker say about the Business Roundtable debate, and why should we care?

 

Written by MLARI Researcher, Karen E. Linkletter

 

Last year’s release of the Business Roundtable’s “statement on the purpose of a corporation” sparked considerable debate in this publication and elsewhere. The August 19, 2019 statement posited that for-profit organizations “share a fundamental commitment to all of our stakeholders.” While stakeholders include shareholders, they also include “customers, employees, suppliers, [and] communities.” For some, this raised the question: can a corporation be accountable to its shareholders, that is be profitable, and still be attentive to the needs of larger constituencies? Are we asking CEOs to answer to too many masters?

Wall Street - New York Stock Exchange. Credit: Carlos Delgado; CC-BY-SASource: Carlos Delgado; CC-BY-SA, Wikimedia Commons

Management theorist Peter Drucker said not only are we not asking too much, but that we must ask this of executives if the business organization is to survive as a legitimate part of a functioning society. What was a “functioning society” for Drucker? It was a society in which the institutions of power – companies, government, and non-profits – must “perform in responsible autonomy” and protect individual freedom and opportunity. Drucker’s concept of Management as a Liberal Art provides a philosophical foundation for the Roundtable’s statement, showing that corporations must see themselves as part of a larger picture, not simply as profit-making entities. Management as a Liberal Art requires that institutions of power in society view management and leadership from a larger perspective, seeing the role they play in impacting the human condition. In Drucker’s words, “Leaders in every single institution and in every single sector … have two responsibilities. They are responsible and accountable for the performance of their institutions, and that requires them and their institutions to be concentrated, focused, limited. They are responsible also, however, for the community as a whole.”  Particularly as growing wealth and income inequality (amplified by the current COVID-19 crisis) calls into question the promises of capitalism, it is crucial that businesses consider their place in society and the greater impacts of their decisions.

Drucker always emphasized that economic performance was the primary reason for the existence of business. Corporate enterprises could not exist without profit. But Drucker went one step further. Drawing on the ideas of economist Joseph Schumpeter, he argued that profit was a moral force. Schumpeter’s theory was that profit was a “temporary surplus of receipts over cost of production” rather than a reward for taking risk. Drucker developed this, arguing that profit was a cost of doing business, not merely surplus income. The only way to grow over the long term would be to sustain those profits. Thus, profit, for Drucker, was the only way of maintaining employment opportunities and creating new ones, as well as developing new products and services. Drucker then made the leap to profit as being the moral reason for business’s existence. Profit becomes the sustaining force to allow an organization to fulfill its reason for being – to be part of a functioning society that relies on viable, legitimate organizations. Once profit is understood in the context of uncertainty, of “Schumpeter’s dynamic, growing, moving, changing economy, what is called ‘profit’ is no longer immoral. It becomes a moral imperative.” In an increasingly uncertain environment, Drucker’s adaptation of “creative destruction” and the importance of profit to support not just shareholders but a larger constituency of stakeholders echoes the concerns of the Roundtable. Can a corporation be profitable and still be attentive to the needs of customers, employees, suppliers, and the greater community? Drucker says yes – its very survival depends upon it.

But Drucker recognized very early on that profit alone would not suffice to justify the vast power wielded by the business sector. At the heart of Drucker’s work was an attempt to stave off attacks on freedom, to fight the threats of totalitarianism and communism that he witnessed in Europe. Industrial America in the post-World War II era provided a model for a new society based on capitalist organizations that could not just provide financial security, but also social cohesion. Corporations were not just profit-generating organizations, but also places where people could feel they were making a difference through their work and contributing to the greater good of society. When people lose faith in institutions, they begin to turn to dictators and authoritarian leaders who make false promises. Drucker witnessed this in Europe and believed that a functioning society of thriving institutions under capitalism would be the only bastion against another wave of such deprivation of dignity and individual freedom, social upheaval, conflict, mass terror, and totalitarianism.

But the only way the institutions of such a functioning society could survive was if they exerted their authority in a legitimate manner. Questions of legitimate authority loom large in Drucker’s concept of Management as a Liberal Art. Corporations can only survive if stakeholders see that leaders are using their power responsibly. For Drucker, institutional authority is only legitimate if it reflects the values of a society (in America, for example, the shared values of a democratic society, such as equality of opportunity and individual liberty). CEOs who simply seek to maximize shareholder value ignore the reality that “although management is an organized body of knowledge and, as such, applicable everywhere, it is also culture. It is not ‘value-free’ science.” Because management and leadership are always grounded in human beings, corporations cannot help but be attentive to customers, suppliers, and employees. As Drucker said, “One cannot ‘hire a hand’: its owner is always with it.”

Thus, Drucker put a tall order on the role of the corporation very early on in his writing and established the idea of Management as a Liberal Art – a concept rooted on human dignity, respect for all stakeholders, and contribution to the community. Corporations, and their executives, must meet high goals, and not just financial ones. By its definition, management involves a concern for the human condition, and by extension the health of society as a whole. In order to sustain the for-profit sector, Drucker called for management to deal with “the fundamentals of knowledge, self-knowledge, wisdom, and leadership”, and to apply this knowledge practically to achieve effective results. Corporations need to pay attention to more than just their bottom lines, and the Roundtable’s statement last year reflects this. Growing concerns with wealth and income inequality, social unrest, and political polarization signal a society that is highly dysfunctional.

The term “plutonomy” gained popularity in the early 2000s, just before the global collapse that ushered in the Great Recession. Observers noted the dependency of economic growth on a small minority of wealthy individuals in the United States. Ajay Kapur, global strategist at Citigroup, developed an investment strategy of buying into luxury markets to capitalize on wealth inequality, and used the term “plutonomy” to describe countries characterized by such wealth inequalities. Kapur’s strategy is no longer avant garde; Pershing Square Capital Management CEO Bill Ackman recently sounded a warning about “black-swan-type” risk for investors resulting from growing wealth inequality. Perhaps it is time to actually pay attention to fundamental questions of how a business treats its employees, its suppliers, its community, and how it sees its role in a society that is grappling with long-term socio-economic problems that may call into nature the very existence of entire sectors.

That Drucker raised these questions almost 100 years ago tells us that the Roundtable’s statement is not that groundbreaking. What is groundbreaking and of utmost importance is that we are having a conversation about ideas that Drucker introduced, and that are exceedingly needed right now.
The author is Research Director of the Joseph A. Maciariello Management as a Liberal Art Research Institute

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