What should ultimately be the business of businesses? To what extent should company performance be judged by matters beyond the narrow focus of the returns on their operations? These questions, frequently debated on Vox (e.g. Krekel et al. 2019, Edmans 2021, Tonin and Vlassopoulos 2012), date back to long before Milton Friedman's famous contention that the social responsibility of business is to make profits (Friedman 1970). Until recently, there was a view – dominant since the mid-1980s – that maximising shareholder value would be tantamount to serving a company's social purpose (Easterbrook and Fischel 1991).
Critics of this proposition have pointed out its shortcomings, including an overly short-term viewpoint, implying a lack of incentives for R&D and investment (Hayes and Abernathy 1980, Barton and Wiseman, 2014). Academic critique has also grown in response to intensified debates around climate change and corporate performance (Mayer 2013).
In our research (Manyika et al. 2021), we set out to devise a way of accounting for who benefits from a company's value creation and why. In doing so, rather than treating financials and environmental, social, and governance (ESG) or other societal metrics to describe company impacts separately, we consider all possible impacts on households, especially financial flows, in one integrated framework. We draw on two sets of novel analyses. The first maps the pathways through which corporate value flows both directly and indirectly to households. The second groups companies and defines archetypes, based on the link between what they do, how they do it, and how they are positioned relative to each of the pathways we mapped.
Pathways of value flows from firms to households
Our research primarily focuses on companies with more than $1 billion in revenue that were headquartered in the 37 OECD countries in 2018 (about 5,000 in total). We compare two time periods: from 1994 to 1996 and from 2016 to 2018. One of the findings is the extent to which the mix of value creation across archetypes has changed over time.
We identify eight pathways through which economic value from corporations flows to households and the economy (Figure 1). In doing this, we integrate a company view, as reflected in financial statements, with a household view, as reflected in national income and product accounts. Given the stronger emphasis put on firms' societal purpose in the public discourse, an integration of these two views can help prompt more constructive debates.
Five of these pathways are directly measurable monetary flows: labour income, capital income, taxes, investment in capital assets, and payments to suppliers. Importantly, a narrower GDP view would not include payments to suppliers. In that view, only final goods count. Intermediate goods are netted out, since otherwise that would mean double counting; those payments just go to the other four pathways of the supplier companies. However, to show a complete picture from the perspective of all parties involved, we also include these income flows. Thus, we account for how an average large company affects all stakeholders, including intermediate ones, through its value flows to households.
Figure 1 Corporate economic gains flow to households via eight pathways
Source: McKinsey Global Institute.
The sixth pathway through which value is channelled is consumer surplus, that is, the area between market price and the demand curve (the latter capturing willingness to pay). While this surplus is unobservable, data on consumer behaviour allow for imputing demand curves, and hence also for backing out the size of the area above price (Cohen et al. 2016). We use two approaches. First, we estimate consumer surplus for all the companies in our data set on a per-dollar-of-revenue basis. We take a deductive approach by assuming that, in the long run, in competitive markets value is split equally between the many buyers and sellers. We look at the value-added portion and adjust based on evidence of markups above factor costs. In the second approach, we start by observing relative price changes over time: we decompose the change in revenue between 1994-6 and 2016-18 into price and volume components.
The final two pathways we account for are negative and positive spillovers, which we do not assess comprehensively beyond the examples of environmental impact and contributions to total factor productivity growth (the residual, unaccounted for in additional labour or capital input).
Main sources of value flows and their change over time
Indexed to corporate revenue, we find that labour income is the largest direct-to-households pathway, with wages and benefits accounting for $0.25 for each dollar of revenue. A further $0.58 goes to suppliers, reflecting the role they play in enabling corporations to create and deliver their products and services to consumers or downstream businesses. The rest, totalling $0.17 of each dollar of a company's revenue, goes to company assets, shareholders, and taxes. We estimate the consumer surplus pathway with less precision to be about $0.40 per dollar of revenue. This represents the value on the other side of the transaction from the company and so represents value beyond the $1 of company revenue.1
The size of the pathways has changed over the past 25 years. Our findings quantify for large companies the growth of capital income and the corresponding decline of labour income and supplier payments that is widely noted for the broader economy in the literature (Autor et al. 2020, Barkai 2020, Karabarbounis and Neimann 2014, Mischke et al. 2019). Between 1994 and 1996 and 2016 and 2018, we find that the capital income pathway increased from $0.04 to $0.07 per revenue dollar. Applied to the $40 trillion in revenue represented by our sample of 5,000 large companies, this amounts in absolute terms to an increase in capital income of just over $1 trillion. The labour income pathway shrank by $0.02, or 6%, and supplier payments fell by $0.02, or 4%. The fall was especially steep for small and midsize enterprises. The share going to domestic suppliers in each country also fell, reflecting cross-border outsourcing and shifts in the value chain (Baldwin 2016). The tax pathway held steady overall in our per revenue view.
Clustering of companies: Eight archetypes and their varying economic and social impact
In our second analysis, we clustered large corporations into eight archetypes based on the factor inputs they use (for example, labour and both physical and intangible capital), how they create economic value (for example, cost structure and R&D spending), and how they affect the economy via the eight pathways noted above. Our analysis suggests a growing disparity between types of companies in terms of their impacts on the eight pathways. For example, one of our archetypes, which we call ‘Discoverers’, is notable for high expenditures on R&D, substantial intellectual property, and strong capital income. It includes pharmaceutical and biotechnology companies as well as some household product companies that rely heavily on scientific discovery and intellectual property to differentiate their products. Another archetype is ‘Technologists’, which range across hardware, software, digital retailers, and media and which also have high R&D spend, supporting continuous productivity growth. Where they differ from discoverers is that the tech firms also contributed substantially to consumer surplus through steep price reductions over time. ‘Deliverers’ are notable for high employment levels and large supplier costs, typical of retail and distribution, and include some ostensible manufacturers such as footwear and luxury apparel companies that also have high marketing costs and, in many cases, outsource the making itself. ‘Experts’ include for-profit hospitals, health services, business services companies, and private universities that particularly rely on high-skill workers and devote the highest share of their value-added to employee compensation.2 ‘Builders’ include utility, telecommunications, and transportation companies that construct, use, and operate physical infrastructure, as well as manufacturers of materials and chemicals. They have double the physical assets of the average and, along with energy companies, the highest scope one emissions (direct from owned or controlled sources) and scope two emissions (indirect emissions from the generation of purchased electricity, steam, heating and cooling).
Other manufacturers that balance moderate capital intensity and skilled labour at scale are in the ‘Makers’ class, which is the largest archetype, accounting for about 25% of the revenue of all companies and 27% of employment. Finally, ‘Fuelers’ and ‘Financiers’ align more closely with traditional sectors as they play fundamental enabling – intermediating – roles in the economy.
Structural adjustment: Changing the relative size of archetypes
Makers and Builders were long the predominant archetypes and mainstays of industrial economies, as large corporations captured the advantages of scale, particularly in physical capital. Indeed, at the time of Berle and Means' seminal study of US business in 1932, these two categories accounted for more than 85% of the total revenue of non-banking companies. That share among large corporations has dropped sharply as companies have become more distributed among the archetypes, reflecting greater differentiation in the services and knowledge economy. These shifts in the relative size of the archetypes have in turn affected the pathways. For example, the archetypes whose revenue has grown in share have lower labour income contributions on average than those shrinking in share, especially Makers. This composition effect (arithmetically) accounts for two-thirds of the overall labour income decline across companies. The smaller share of the labour income pathway also stems from a 30% to 40% drop in employees per dollar of revenue in the past 25 years (in constant dollar terms) for Experts, Fuelers, and Builders as productivity increased.
Some trends are common to all archetypes, particularly the growth in capital income, intangible investments, and productivity growth (declining labour intensity).
One of the biggest positive impacts for all households has been the growth in consumer surplus, primarily emanating from Technologists and Makers. Their prices dropped by 50% and 20% during the last quarter-century, respectively, while output volumes grew the most in absolute terms.
The more diverse distribution of companies across the archetypes – and the sharpened distinctions among them – indicate greater corporate specialisation over the past quarter-century (Figure 2). For example, Technologists and Discoverers increased their stock of intangibles, R&D expenditures, and capital income more than other archetypes. Deliverers increased their employment share by nine percentage points, the largest by far. Fuelers added physical capital assets, while most others reduced them. Experts increased wages by almost 40%, the biggest rise, also reflecting a skills premium.
Figure 2 Most archetypes became more pronounced in their core features in the past 25 years
Source: McKinsy Global Institute.
Conclusion: A more comprehensive perspective on companies' stakeholder footprint
The purpose of our dual analysis is to provide business leaders and policymakers with a nuanced way to assess how changes in the corporate landscape affect households. Specifically, this analysis allows for new perspectives on some of the largest shifts in the societal impact of large corporations and how that varies based on the type of company and how they produce their economic value. Further research is needed to broaden the sample of companies beyond the OECD, including China and India, and small and medium-sized enterprises. Moreover, more of the non-monetary spillovers should be accounted for, and the labour-supplier split should be measured with more precision. But already, our first findings suggest that a micro-to-macro view can help better quantify a company's stakeholder ‘footprint’, linked to its core assets and operations, and thus add value to the current debate about the corporate impact on society.
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1 The estimate of $0.17 flowing to capital, investment, and tax pathways is based on well-reported firm level data; compensation data is less complete and so we anchor estimates of the split between labor and supplier pathways using granular domestic sector data and adjust for large firms.
2 We do not include public sector hospitals and universities because of a lack of data.