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What is the purpose
of the corporation?

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This is one of the
most controversial

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and perhaps one of the
most important questions

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that we need to
address in this course

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and that you will need to
address as the next generation

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workforce leaders.

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Why is this the case?

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Well, because American
CEOs have answered

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this in two different ways.

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From the 1940s through the '70s
and '80s and into the 1990s,

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there was a broad view of
the corporation that has now

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narrowed down to focus
on maximizing shareholder

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value in the short run.

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Here's a quote from the CEO
of Sonesta Hotels, Roger

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Sonnabend.

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He says, "Social responsibility
and expanding profitability

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are not at odds
with one another.

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Quite the contrary.

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They are two faces
of the same coin."

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That view was shared by a
lot of CEOs of his era--

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best illustrated
perhaps by graduates

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of this important institution
called the Harvard Business

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School.

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The class of 1949 is known for
producing an enormous number

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of CEOs that spread across the
economy over the next decade

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or two.

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Many of them had been
veterans of World War II.

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In fact, 90% went to the Harvard
Business School on the GI Bill.

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Many of them were
first-time college students

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in their families.

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Many of them grew up
during the Depression,

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and they were imprinted by
the hardships of that time

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as well as a commitment
to community service

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that was embedded in
them during World War II.

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So they had a particular
view of their responsibility.

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Let's start with an example from
one of the best-known companies

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of the 1950s through the '80s.

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Xerox-- one of the
companies that was a pioneer

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high-technology company--

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lead in the development
of office products.

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And it was led, from 1968 to
1982, by Peter McColough--

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one of those graduates of
Harvard Business School,

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class of 1949.

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Peter McColough graduated
and went to work at Xerox,

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worked his way up through
various managerial capacities,

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became CEO in 1968.

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Xerox was located in
Rochester, New York, where

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they had manufacturing
operations,

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and McColough
believed very strongly

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that the role of the CEO was
to be a good corporate citizen

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in the community.

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He worked very hard
to improve education,

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to build strong community
colleges, which then provided

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a very competent workforce
for his organization

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and for others in the region.

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He worked on local
and national politics.

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He worked closely
with the labor union

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that represented
the manufacturing

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employees at Xerox.

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They were among the first
to develop, for example,

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quality-of-working-life programs
and quality circle improvements

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to improve productivity
and to compete with growing

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international competition
in the 1970s and 1980s.

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And in particular, he
believed very strongly

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at developing talent from
within the organization

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and particularly led the
way for developing talent

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among women and among
minorities within Xerox.

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So it's not an accident
that, in 2002, Anne

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became the CEO of Xerox--
one of the first women

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to rise to that level of
authority in American industry.

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And it's not surprising then,
in 2012, that when Anne retired,

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the first African American
CEO of a very large Fortune

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100 company--

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Ursula Burns-- succeeded her.

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And the culture carried forward.

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The same view of corporate
social responsibility

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can be seen in the
words of these CEOs

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as was the case with
Peter McColough.

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So if you look on Xerox's
Social Responsibility Report

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on the web, you'll
find currently

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the same words that mirror
what McColough stood for.

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Quote, "Since our
earliest days, Xerox's

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has embarked on a
neverending journey

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to demonstrate that good
business and good citizenship

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are not only compatible
but are synergistic."

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The report then goes on to talk
about customer satisfaction,

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innovation via patents,
community participation,

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avoidance of workforce
injuries, and so on,

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employee participation
in community affairs, all

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as part of what they believe
are the responsibilities

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of the modern corporation.

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This was the dominant
view, not only of Xerox,

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during this time, but also
of other corporations--

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best-illustrated by the
statements of the Business

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Roundtable, the largest
corporate association

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of executives from
the 200 largest

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companies in the United States.

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And as late as 1990,
the Business Roundtable

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made the following
public statement:

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"Corporations are chartered
to serve their shareholders

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and society as a whole.

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The interests of
shareholders are primarily

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measured, of course, by
economic returns over time.

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The other stakeholders
in the corporation

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are its employees, its
customers, its suppliers,

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its creditors, its communities
where the corporation does

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its business and society as
a whole, and all of these

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are vital to the long-term
economic performance

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of the corporation."

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That's the view up until
around the mid-1990s.

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By this time,
business is convinced

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that it should focus
on shareholder value.

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And so the Business
Roundtable says, "In our view,

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the paramount duty of management
and the board of directors

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is to the corporation's
stockholders.

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The interests of
other stakeholders

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are relevant only as derivative
of the duty to stockholders.

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The notion that the
board of directors

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must somehow balance all
of these other stakeholder

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interests fundamentally
misconstrues

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the role of the directors
and the responsibility

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of the corporation."

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Well, this is a big change.

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What caused this change?

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Well, it was a
revolution in ideas

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about the corporation
that came largely

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from the academic
literature of the time.

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The leading finance professors
of the time, Fischer Black

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and Bob Merton at MIT and
their colleague Myron Scholes

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at the University of
Chicago had developed

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a formula for better
ways of pricing options--

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that is, shareholder stock--

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so that you could use stock
options to compensate for CEOs.

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Their formula made it easier
to use these processes,

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and then colleagues at the
Harvard Business School

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published a number
of papers saying

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we ought to tie shareholder
value to CEO compensation

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through the use
of stock options.

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And you saw the role
of stock options grow.

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You saw the CEO compensation
grow from what used to be about

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a ratio of 30 to 1-- that is,
the CEO earned about 30 times

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the average employee
in the firm--

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to today, where it's
well over 300 to 1.

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Well, what was the
consequence of all of this?

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One of the examples
that we could

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turn to is another venerable
company, STANLEY Tools--

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a company that was
a household term

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because every toolbox
in America had

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good wrenches and other tools
made by the STANLEY Corporation

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in Connecticut.

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It was a very
socially-responsible company

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until the board of
directors got taken over,

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and someone said let's really
focus on shareholder value.

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And so a new CEO
was brought in place

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and started to lay people off,
not as a last resort because

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of economic necessity,
but as a preemptive step

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to try to boost
shareholder value.

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More and more
companies did that.

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And in fact, that led New York
Times reporter Louis Uchitelle

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to write a very well-known
book called The Disposable

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American basically
chronicling how

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American corporations changed
their behavior over time.

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Did it really benefit
shareholders all that much?

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Well, if you look at the data,
the data show that shareholders

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got about the same rate
of return-- about 7%--

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in the old stakeholder
era as they

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were getting in the
shareholder era.

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If you had just forced
some of this restructuring,

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in fact, their rate of
return goes down a little bit

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from the previous time period.

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So we've imposed a lot
of costs on society,

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but have we really
benefited the shareholders

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as the theory might suggest?

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That's a question that
you will have to answer.

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The era of maximizing
shareholder value

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in the short run
is still with us.

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Does this work for the future?

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Does it work for
your generation?

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That's a question
that you will need

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to address as you shape
the work, the workforce,

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and the corporation
of the future.