Leadership & Decision Making in Purpose Driven Organizations
Taking outside capital into your company is a commitment by you to all future stakeholders of the business. You are obligating yourself, from a legal and moral perspective, make decisions with those shareholders interests in mind.
If you, like me, believe that companies should exist for a purpose greater than returning capital to shareholders, you now have a problem. How should you make a decision when all stakeholders are fully considered? Are shareholders 'first among equals'? Or just one of many interest groups, including customers, employees, the environment, and your community?
Depending on how you formed your company, there may be a specific legal answer (disclosure: not legal advice). I am more interested in the moral question. How can I communicate to potential shareholders today such that I will can make ethically sound decisions in the future?
The trite - 'focus on the long-term and everyone wins' is unsatisfying to me. Yes, all businesses invest in their employees to generate long term shareholder returns. But does a stakeholder mindset ever require paying 'above market rate' to employees? What about adding 25% cost to your packaging to help the environment? Or just 5% cost?
Stakeholder capitalism, even in its strongest form, says that a manager should balance the interests of shareholders with other stakeholders in the business. I have yet to see a coherent framework to help CEOs, Board Members and other leaders of purpose driven companies manage difficult tradeoffs in day to day operations.
The B Corp movement, of which I am a supporter, provides a helpful scoring system for managers, and investors, to evaluate their progress. Their system is best in class, full stop. But even this contribution, like financial reporting, is backward looking - it states how you did in the past on a predetermined set of dimensions. As a Manager, I want a framework for making decisions today.
Here's my advice to leaders of purpose driven organizations, in order of escalation of commitment and clarity:
- State Your Objectives. As early as possible, but especially before any equity capital raise, write down your objectives for the business. Drive for as much clarity as possible in your goals. Highlight this written description to potential investors with an offer to discuss any ambiguity or concerns. This written document will later serve as a guidepost of sorts, a reminder of what was said about balancing stakeholder values before outside capital entered the business.
- Use Governance Tools. Where possible, integrate a stakeholder perspective into the governance of the organization. You should add an Independent Board member, either as truly independent or representing a specific stakeholder group, such as a local community leader. Or, consider providing a permanent seat to represent the interests of an entire class, such as a non-Founder Employee representative.
- Use pre-commitment devices. Consider formal pre-commitment devices codified in the governance documents of the company, such as setting aside a certain percentage of equity, profits or revenue to an identified purpose or group. This level of specificity provides the most clarity for your future self and investors: if your marketing materials and all shareholder documents say you will give 10% of pretax profits every year to a non-profit, then there is no ambiguity (and accompanying sleepless nights) about whether you should or should not donate such amount when the time comes.
My final advice (for myself) is to visualize defending this decision to an intelligent but independent body of people you admire. I used to use the 'newspaper test' here – consider how the decision would look on the front page of the newspaper tomorrow morning – but that adds a frightening dimension of sensationalizing and media filtering. I can imagine many sound decisions getting distorted by the current press/social media outrage machine.
If you had to provide the full data available to you at the time of the decision with your argument for and against a potential path to this group of intelligent, dispassionate people, would you feel good going into that room?
That's a simple test. Thinking it through in this way will limit both self-dealing and an over emphasis on any one stakeholder group. If you feel stuck, consider actually making the argument to a trusted party outside the company, such as a spouse, former colleague, or friend. Even better, appoint an "Ombudsman" advisor - someone you trust for confidentiality and sound morals. Having that person grow with you in a repeated game over time makes it easier when the stakes get continuously higher.
Finally, get relevant data. Survey different stakeholder groups periodically to see how they feel your leadership balances their interests. Longitudinal data is a wonderful management tool, providing a reliable measure of decision making over time. You can't, and shouldn't please everyone. But seeing how your decisions land across disparate groups provides a useful outside-in perspective.
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