Analysis of the Business Roundtable Statement

Morton Pierce is a partner at White & Case LLP. This is based on his White & Case memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Business Roundtable recently issued a much commented upon Statement on the Purpose of a Corporation (the “Statement”). The Statement purports to redefine the purpose of a corporation as a commitment to all of its stakeholders, including customers, employees, suppliers, communities and, finally, shareholders. Much has already been written speculating on the timing and motivation for the Statement. A more fundamental question is whether it is legally correct or necessary.

In Delaware, where many US public companies are incorporated, the law provides that the business and affairs of a company are entrusted to the oversight of its board of directors. Those directors have a fiduciary duty to act in the best interests of the shareholders. That reflects the basic fact that shareholders own a company, and the directors, and the CEOs those directors choose, are acting on behalf of the shareholder owners.

To state, therefore, that a corporation will act to further the interests of constituencies other than shareholders is legally incorrect. As the Counsel of Institutional Investors has noted in its response to the Statement: “Accountability to everyone means accountability to no one.” To deviate from current legal standards would leave a board with no guiding decision making principle.

The Statement is also unnecessary. Decisions of directors are, in general, protected by the business judgement rule and presumed to be in the best interests of the corporation and its shareholders if the directors have discharged their fiduciary duties of care and loyalty. The duty of loyalty involves having no disabling conflicts. The duty of care is discharged by showing that directors acted on a fully informed and reasonable basis. In discharging their duty of care, directors can consider anything they deem relevant to making their decision. Consequently, if directors feel that taking into account the views of employees, customers or suppliers on a given issue would further the interests of the shareholders, they are currently fully empowered to do so. There is no need to change the basis for corporate decisions in order to consider other stakeholders.

If the guiding principle underlying director decisions was not enhancement of shareholder value, how could a board evaluate the importance of other stakeholder interests? The job of directors in the age of shareholder activism has become increasingly difficult simply due to the need to evaluate competing shareholder interests in order to determine what is in the interests of all shareholders. The decision making process would become much more burdensome if directors also had to consider how much weight to give the views of other constituencies. That would allow each director, absent a shareholder value guiding principle, to determine for themselves which constituency was more important than others.

This also has potential liability implications for directors. To counter claims of breach of fiduciary duty, directors can now show that they engaged in a deliberative process and considered, and weighed, facts they deemed relevant in arriving at a decision they determined to be in the best interests of shareholders. If, however, directors decide to base a decision on the interests of suppliers, with negative consequences to employees or other constituencies, what will determine whether that judgment was reasonable or constituted a breach of fiduciary duty? It is an issue which the plaintiffs’ bar will be eager to explore.

The Statement also is counter to the recent shareholder rights movement and Delaware jurisprudence with respect to defensive measures in takeovers and acquisitions. Attempts by managements and boards to avoid takeovers and continue to run their companies increased in the 1980’s as hostile takeovers became more prevalent. The Delaware judiciary responded in a number of notable cases, including Van Gorkom (Smith v. Van Gorkom, 488 A. 2d 858 (Del. 1985)) and Revlon (Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986)), by limiting the ability of a company’s management to entrench itself and insuring that shareholders were given a choice in determining whether a company would be acquired. Some companies attempted to circumvent these decisions by incorporating in states that allowed directors to consider other constituencies. The Statement, whether intended to do so or not, would allow management to act as though a company was incorporated in an all constituency state and ignore a transaction which would otherwise be acceptable if it would negatively impact a favored constituency. The Statement, in essence, chooses 80’s style management decision making, with the potential for entrenchment, over today’s approach to decision making, which some may criticize as too quarter to quarter focused and too enabling of activists.

The Statement also ignores the fact that board action in certain circumstances, such as a merger, requires shareholder approval. The central fact of a corporation, as stated above, is shareholder ownership. If a board, due to its consideration of other constituencies, agreed to accept a lower priced merger proposal when a higher priced transaction was available, how likely is it that shareholders would approve the lower priced transaction. This also has fiduciary duty implications. If directors invoke the interests of stakeholders other than shareholders in reaching a decision that is unlikely to be approved by shareholders, it is difficult to see how that is acting in anyone’s best interests.

As the corporate law in Delaware, and most states, is currently constituted, the Statement is unnecessary. It would add a level of confusion to board decision making which is also unnecessary. Especially in this era of shareholder activism, the role of directors has become more difficult. Directors are devoting considerably more time to monitoring the business of a company and the conduct of management. They must balance increasingly diverse views and demands of shareholders. Reaching an appropriate decision under these circumstances is difficult enough. Changing the principles under which decisions are currently made would cause confusion and greatly increase this difficulty. Under current business judgment principles, directors can accomplish what the Statement intends to accomplish unburdened by the issues embedded in the Statement.

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One Comment

  1. Shane Goodwin
    Posted Thursday, September 26, 2019 at 3:40 pm | Permalink

    Mort,

    Thank you for sharing you thoughtful analysis. I have raised the inconsistency of this “virtue signalling” issue from day one. as we celebrate the 100th anniversary of the Ford v. Dodge decision — let’s remember what the ct concluded — “There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”

    Best regards,
    Shane Goodwin

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