Throughout the history of industrialized economies, the primary goal of a business was to make money and the chief objective of Corporations was to increase shareholder value above all else. This approach has had clear benefits. Over the last four decades, American-owned firms have become the largest, most visible companies in the world, and the United States has established itself as the world’s largest, most innovative free market.
At the same time however, this approach to corporate governance has drawbacks. In this system, companies are incentivized to cut costs to maximize profits. This leads to companies overlooking the impact that their decisions have on the environment, the communities in which they operate, and the personal well-being of their employees.
The global economy has reduced prices on many consumer goods, but business practices that reward cost-cutting measures have depressed wages, which puts home ownership, education, and class mobility – staples of “The American Dream” – out of reach for many Americans. While globalized supply chains, technological advances, and the gig economy continue to upend traditional employer-employee relationships, business owners may feel conflicted, thinking that every decision they make pits themselves against their employees, customers, and stakeholders.
But where many see uncertainty, forward thinking entrepreneurs and small business owners see opportunity. As the 21st century pushes on, and public opinion on issues such as climate change and equity in the workplace continue to evolve, the idea of shareholder primacy is not only beginning to look dated, but also increasingly like bad business. It’s clear that consumer preferences are shifting, and they expect companies to practice social responsibility. In fact, individuals overwhelmingly report that they are more likely to purchase goods and services from companies that embrace environmentally and socially responsible business practices – and that they are willing to pay a premium to do so.
Already, there is a growing community of entrepreneurs and small business owners embracing a more modern, socially and environmentally responsible version of capitalism, driven by the idea of Corporate Social Responsibility.
Corporate Social Responsibility – or CSR – is an umbrella term, used to refer to voluntary actions taken by private businesses that enhance a company’s commitment to managing the social, environmental, and economic effects of its operations responsibly, and in line with public expectations.
There is not a defined set of CSR initiatives, but actions are generally related to creating value for customers, investing in employees, promoting diversity and inclusion, supporting the communities in which they are located and protecting the environment.
Companies that adopt these practices see their employees, the communities in which they operate, and the products and services they provide as equally important for long-term growth and financial success. They see offering benefits such as health insurance, paid family leave, and a representative voice and ownership for employees to increase worker productivity, lower turnover, and provide a competitive edge in talent recruitment.
But make no mistake about it, CSR does not have to come at the expense of profitability. Evidence suggest that firms embracing CSR are better able to survive during market downturns. In the wake of the 2009 recession, companies engaging in CSR activities reported average sales growth of 13% and profit growth of 12% compared to 6% and 4% for companies that focus on cost-cutting. Whether companies choose to organize as Benefit Corporations or Co-ops, offering Employee Stock-Ownership plans or a percentage of board seats to workers, many are choosing to prioritize their stakeholders over their shareholders.
And we know that over the years, many small firms have already been engaging in some of these socially responsible activities. Small firms have been building sustainable businesses, investing in their workers, dealing fairly with suppliers and creating valuable goods and services while also providing jobs on Main Street.
I especially look forward to hearing the testimony from our expert panel, who can give us a framework of best practices for our small businesses as we change our perspectives of sustainable business and capitalism. As we continue to look towards the future of corporate governance, I look forward to your guidance, and working with my colleagues on both sides of the aisle to ensure businesses of all sizes are creating not only jobs and profits but value for their customers and communities.