As the role of the chief executive officer changes, Manny Chirico, chairman and ceo of PVH Corp., said there’s a balancing act one must perform when it comes to purpose versus profits.
Chirico asked: “How do you prioritize your stakeholder groups, and how do you balance your company’s purpose with driving quarterly profits and meeting Wall Street expectations?”
Chirico noted that there is increasing conversation and buzz today around what the purpose of a company should be, and there is the question of what role ceo’s should play as leaders both inside and outside their organizations.
Around the world, frustration has grown with stagnant wages and uncertainty around the future, fueling popular anger and nationalism. Given the global macro backdrop, he said, the Business Roundtable, a nonprofit association based in Washington, D.C., whose members are ceo’s of major U.S. companies, recently released a new purpose statement that moved away from shareholder primacy and positioned all stakeholders as equal. “I think that’s a monumental change as you go forward, and it’s really going to challenge corporations…,” he said.
The question of a company’s purpose dates back to the Seventies, he said. The American economist Milton Friedman put together “six thoughtful pages” on what the purpose of a corporation was, and to some degree, his message was bastardized and basically said, there is one and only one purpose that corporations are responsible for, and that is to drive profits for its shareholders and its shareholders only. It had a dramatic effect on corporations throughout the U.S. He said corporate America was in a bit of a lull in the Seventies, but in the last 50 years “we’ve seen American corporations become the most efficient, the best operating companies within the global community.” It drove a lot of focus on short-term earnings and quarterly profits, and some ceo’s took it to an extreme, without giving consideration to other stakeholder groups.
Fast forward to 2019, and this past August, the Business Roundtable came out with a statement and expanded their definition of what the purpose of a business was.
“They now say that customer value, investing in employees, the fair and ethical sourcing of product and supplier relationships, care for the community and environment are priorities in addition to driving long-term shareholder value,” Chirico said. He said the long-term modifier is critical because the Business Roundtable believes that by shifting the time horizon, they can better align all stakeholder interests.
He attributed how we got to this point to a polarized public around the world, greater income inequality, bombardment of real-time information flow and thoughtful discussion that has become partisan tweets. He said companies are focused on delivering quarterly earnings and the short-term versus long- term results. “There’s been a complete lack of leadership, particularly at the governmental level, which has created a void as you go forward,” he said.
Chirico believes consumers have been frustrated by these economic changes and the failure of government to provide solutions. “Society is looking more and more toward the private sector and companies to come up with solutions to these issues,” Chirico said. These issues range from protecting the environment to retirement to gender and racial inequality, among other things, where ceo’s haven’t been involved directly in the past.
He described five stakeholder groups: shareholders, associates, suppliers, communities where they operate and customers. The Business Roundtable basically said all stakeholders are equal. “That really creates a challenge for corporate managers when you’re trying to prioritize stakeholder interests. It’s a real balancing act to prioritize those groups, and it’s critical that you try to align those groups as you move forward,” he added. But, he said, what happens when stakeholder issues are in conflict?
He gave an example of a company that closes a U.S. factory to outsource overseas. It’s good for shareholders since it saves $20 million profitability annually, but it’s bad for the employees and the community where the factory is, but it will improve financial performance in the short term and the long term and will be a benefit for one’s shareholders. “How do you balance that if you’re charged with treating all stakeholders as equal?” he asked.
He cited another example of a drug company that has a new drug that will solve and cure some basic disease. “The ability to overcharge and charge exorbitant prices is there, and the demand is there for that product. “How do you balance that out with the other stakeholders’ interests — your customers and society at large?” Chirico asked.
“With all this rhetoric about the stakeholder model and stakeholder importance, I think today the shareholder is still king,” Chirico said.
Another topic he discussed was ceo compensation, which is totally aligned with the shareholders. The compensation programs incentivize ceo’s to drive short-term financial results. You’re incentivized to drive stock price. If you are really trying to serve all stakeholders equally, then compensation is misaligned, he said. The law in Delaware, where a vast majority of corporations are incorporated, provides that directors owe fiduciary duties only to the shareholders.
Chirico noted that the Business Roundtable came out with a 300-word statement but didn’t provide a roadmap, guidelines or time table to how to implement this major change in purpose. He said everyone is asking whether this statement was just public relations BS. “Was this done just to create some positive p.r. spin around corporate interest?” They are missing “a fantastic opportunity” to change the way one thinks about running a business, he said.
Chirico said Elizabeth Warren, whom he called “a very intelligent, powerful woman with an agenda,” put forth the Accountable Capitalism Act in August 2018, which would legally change the purpose of a corporation. She advocates that by regulation, stakeholder groups have to be considered in all one’s business decisions.…She is also trying to balance the power within those stakeholder groups. Her proposal would have that 40 percent of a board of directors would be elected by one’s employee base. “She’s advocating putting together an agency of the federal government that would regulate through regulations and more red tape how a corporation will be run,” he said.
“I think fundamentally that would be a mistake. We have the most efficient, best operating companies in the world here in the U.S. Putting the government in the middle of how corporations should be operated is a mistake and is a slippery slope toward socialism,” he said. He said it’s critical for every company to define its unique corporate purpose and what their reason is for being, and identify who one’s key stakeholders are.
He believes that leaders of companies need to be judged by more than just their bottom line or the strength of their balance sheet. “Without strong financial performance, companies will not be able to make the investment in their stakeholder groups, in their employees, in their customers, in the communities where they live and operate to contribute back to society overall. Financial performance continues to be critical in order to have the wherewithal to make the necessary investments. There has to be a shift away from short-term financial goals.” He said he knows the day-in-day-out pressure everyone’s under. “You need to bring more of a focus on long-term results. If you focus on the long-term value creation you bring your stakeholders together, and there’s much more alignment between all your stakeholder groups.”
In addition to setting financial goals, he said companies need to set targets to establish environmental, social and governance targets for the long term and they have to be willing to report against them in a transparent way on an annual basis.
Chirico noted that PVH will celebrate 100 years on the New York Stock Exchange next March. It is one of only 30 companies to reach this milestone and the only apparel company to do so. He said the company has been able to adapt to change within the company, industry and society, while staying true to its core values and corporate culture.
“We power brands that drive fashion forward, for good. Our brands and our people are our two most important assets. They are at the center of everything we do at PVH. By making investments in our brands and our people, we believe we drive value creation going forward and we drive long-term shareholder value going forward,” he said.
Just like they have clear financial targets, PVH formalized their Forward Fashion CR Strategy to set a new level of ambition and transparency for sustainable business. They established three core areas that aim to reduce their negative impacts on the environment, increase positive impacts with their associates and value chain, and improve more than 1 million lives throughout their supply chain.
This brings him to the question of the role of the ceo. “Are we corporate managers or have we become public advocates?” he asked. “I don’t think you have to take a stand on every social issue….You should take a stand on issues that have meaningful impact to your business, your customers or your employee base,” he said.
Chirico then shared two examples of companies who have taken a stand on issues. Chirico sits on the board of Dick’s Sporting Goods. It is a Fortune 500 company with 30,000 employees in the U.S., and is one of the largest gun retailers in the U.S. After the Parkland School massacre, Dick’s made a decision to stop selling assault weapons, high-capacity magazines and bump stocks. They also raised the age to purchase guns to 21. When Dick’s ceo made the decision, they had to consider its own employees and their target customer: the high school athlete and that athlete’s mother. Those two groups clearly want something to be done. The third group they had to consider was their own stockholders. Dick’s had about an $800 million guns/ ammunition business that this would put at risk. “They knew there would be a short-term hit, but they felt that in order to be true to their customer and their employee base, they had to take a stand on this issue,” he said.
Another example is CVS, which in 2014 became the first national retail pharmacy chain to stop selling tobacco products in all of their stores because it conflicted with their purpose of “helping people on their path to better health.” They were selling $1.5 billion in cigarettes and chewing tobacco. It was a significant hit to them in the short term, but he believes they moved the whole industry forward.
“Consumers want to buy brands that support and align with their values. Consumers are looking for an emotional connection to your brand and your companies,” Chirico said.
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