BRT Statement of Corporate Purpose:
Debate Continues
Posted by Randi Val Morrison, Society for
Corporate Governance, on Friday, August 28, 2020
A new WSJ op-ed: “‘Stakeholder’
Capitalism’ Seems Mostly for Show” (Lucian Bebchuk and Roberto Tallarita,
Harvard Law School Program on Corporate Governance) posits that the corporate
CEOs that signed onto the Business Roundtable’s (BRT) updated
Statement of Purpose of a Corporation last year appear to have done so
primarily to generate positive PR rather than to reflect real change in how
their companies operate based on the fact that few signatory CEOs sought or
obtained board approval or ratification. The conclusion rests on the theory that
if CEOs believed that signing onto the updated statement was an “important
corporate decision,” they would not have signed on without their board’s
approval as a matter of good corporate governance. The assertion that few
signatory CEOs sought or obtained board approval or ratification is based on
responses to the authors’ inquiries from 48 companies, or approximately 27% of
all CEO signatories, and the authors’ extrapolated expectation that the balance
of companies that did not respond to their inquiry would have responded
similarly.*
The op-ed theorizes:
“The most plausible explanation for the lack of board approval is that CEOs
didn’t regard the statement as a commitment to make a major change in how their
companies treat stakeholders. That may be because they believe their companies
are already meeting the standard for taking care of stakeholders. But it still
implies that they believed signing the statement wasn’t a major step for their
businesses.” The op-ed seeks to further support its view about signatory CEOs
taking action merely for appearances based on the authors’ review of the
companies’ corporate governance guidelines, which purportedly commonly reflect a
“shareholder primacy” approach.
As we reported last
year, in response to the presumably unanticipated deluge of positive and
negative commentary following the release of its updated statement, the BRT
itself clarified in
a Q&A format certain aspects of the statement that had generated confusion and
angst among investors (see, e.g., CII)
and others—indicating that the new language was in fact intended to more
accurately reflect business principles that the BRT had espoused for many years,
and was not intended to reflect movement toward a “stakeholder governance” model
or to promote “radical changes to corporate governance structures,” as
illustrated by these excerpts from the clarification:
1. Why did
Business Roundtable change their long-standing Statement on the Purpose of a
Corporation? [I]n recent years, an increasing number of members began
to tell us that the 1997 language did not mirror their view of how a well-run
company operates. Alex Gorsky, CEO of Johnson & Johnson and
Chair of the Business Roundtable Corporate Governance Committee, describes in
a LinkedIn
post: “BRT has always maintained that investing in employees and
communities is an essential part of generating value for shareholders. But the
fact is, words matter. And our own language was not consistent with the ways
our member CEOs strive to run their companies every day.”
3. Are
Business Roundtable CEOs abandoning shareholders? The new Statement
could not be clearer that companies need to generate “long-term value for
shareholders, who provide the capital that allows companies to invest, grow
and innovate.” What it pragmatically reflects is the reality that for
corporations to be successful, durable and return value to shareholders, they
need to consider the interests and meet the fair expectations of a wide range
of stakeholders in addition to shareholders, including customers, employees
and the communities in which they operate.
4. Are
Business Roundtable CEOs trying to move toward stakeholder governance to avoid
accountability? Won’t this lead to a decline in business dynamism? No.
We have not called for, and do not support, radical changes to corporate
governance structures, which could have serious unintended consequences. We
fully expect that shareholders will continue to hold companies accountable if
they fail to generate long-term returns. However, our companies are also
challenging themselves to do more.
5. Why is
Business Roundtable prioritizing political and social goals over its
shareholders? Shouldn’t government, not business, define and address societal
objectives? The Statement is not a repudiation of shareholder
interests in favor of political and social goals. Rather, the Statement
reflects the fact that for corporations to be successful, durable and return
value to shareholders, they must consider the interests and meet the fair
expectations of a wide range of stakeholders in addition to shareholders.
The BRT’s clarification
expressly reiterates the statement’s “unambiguous defense” of the free market
system and companies’ accountability to shareholders for generating long-term
returns, while articulating deep-rooted views that generating long-term value
and a sustainable (over time) organization demands consideration of multiple
stakeholder interests and expectations—not unlike the messages imparted by the
BRT’s October 1981 “Statement
on Corporate Responsibility.”
As such, based on the
facts as presented by the BRT, subject to company-specific protocols and
practices, it’s not surprising that the signatory CEOs generally would not have
sought board approval to sign onto the updated statement. According to the BRT’s
clarifying Q&A, the BRT CEOs were not intending with this statement to signal a
significant shift in how they operate and strive to operate their businesses or
a move toward a stakeholder governance model; rather, by their own accounts,
they were merely espousing long-held, non-controversial, common sense principles
that a successful business enterprise must consider various stakeholders in
order to build and maximize the benefits of corporate value—a notion that they
did not believe was accurately reflected in the organization’s immediately
preceding (1997) “Statement
on Corporate Governance.”
*The evidence in the
op-ed is reportedly based on the authors’ study: “The
Illusory Promise of Stakeholder Governance” (working draft) forthcoming in
Cornell Law Review this December.
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