Outlaws of the Roundtable? Adopting a Long-term Value Bylaw

Neil Whoriskey is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The CEOs of 150 major US public companies recently pledged to act for all of their “stakeholders”—customers, employees, suppliers, communities and yes, even stockholders. [1] Much commentary ensued. But before we get too excited about whether these CEOs are grasping the mantle of government to act on behalf of the citizenry and other people who aren’t paying them, there is the prior question of whether, as a matter of Delaware law, they can.

Under Delaware law, directors owe a fundamental duty of loyalty—the question is, to whom? There has been some academic debate over the years as to whether this duty is owed exclusively to stockholders or is also owed to other stakeholders of the corporation, but the weight of decided Delaware law comes down firmly on the side of stockholders. [2] The Delaware Supreme Court ruled 30 years ago that the interests of other stakeholders may be considered only if “there are rationally related benefits accruing to the stockholders.” [3] The current Chief Justice of the Delaware Supreme Court echoed this view: “[T]he object of the corporation is to produce profits for the stockholders. . . [T]he social beliefs of the manager, no more than their own financial interests, cannot be their end in managing the corporation.” [4] In other words, the duty of loyalty requires that the corporation be run for the benefit of stockholders—a predictable result, as the Chief Justice points out, in a governance system that in all its particulars is based on the “relationship between corporate managers and stockholders. . . where only stockholders get to vote and only stockholders get to sue to enforce directors’ fiduciary duties.” [5]

This conclusion is underlined by the historical fact that Delaware decided in 1990, after considerable debate, not to adopt a constituency statute—that is, a statute that would have explicitly freed directors to consider the interests of other stakeholders. Constituency statutes, which permit, but do not require, directors to consider the interests of employees, customers, creditors, suppliers and communities, were adopted at the time in 33 US jurisdictions. While these statutes may give a handful of the 150 CEO signatories a legal basis for fulfilling their pledge, Delaware CEOs have no such permission.

The objections raised three decades ago to constituency statutes are strikingly similar to the objections now being raised to the Business Roundtable pledge—namely, that a sound regulatory framework is what is needed to govern and limit the externalities and excesses of capitalism (not the occasional and unenforceable vows of goodwill by managers), that attempting to balance the priorities of the various stakeholders would result in confused decision-making at the board, and that, by creating un-prioritized duties owed to undefined constituencies, policing violations of the duty of loyalty would become so bewildering as to effectively eliminate accountability of directors to stockholders or to anyone else. It is hard to believe that corporate actions, based on an approach that did not pass legislative muster 30 years ago, will somehow pass judicial review now.

So, in the face of these obstacles, how do Delaware CEOs make good on their pledge?

The most immediate practical solution—assuming that these 150 companies will not shortly be electing to convert into public benefit corporations—is to focus on one nuance in Delaware’s reading of the duty of loyalty [6]. Delaware fiduciaries are allowed to consider the interests of other stakeholders, and even sacrifice immediate stockholder value to other stakeholders, if that sacrifice is in the long-term interest of stockholders [7].

Now, plenty of corporations have become focused on providing short-term returns to stockholders, endlessly seeking the fleeting love and affection of the trading markets. There is little hope that these corporations, no matter how well-intentioned, will have much time or attention to spare for other constituencies. In a recent McKinsey study, fully 55% of survey respondents from companies with a short-term focus would delay starting a new project, explicitly sacrificing long-term value, in order to meet a quarterly earnings target. 71% of such respondents would decrease “discretionary” spending—such as on R&D or advertising—to hit a quarterly target. [8] If these companies are willing to sacrifice the economic interests of long-term stockholders—their most constant owners—to please the trading markets, it is a very good bet that squeezing suppliers for a few more pennies per share, or focusing on employee redundancies rather than “discretionary” education or training opportunities, will be part of the same playbook. One would imagine regard for the community in which they operate would also be a low priority for companies that willfully disregard the interests of long-term stockholders to preserve the integrity of a consensus earnings forecast.

The prevalence of these practices is somewhat astounding, and may have helped spark the Roundtable statement. Another McKinsey study looked at 615 public large and mid-cap companies over a 14 year period and determined that only 164 of them (about 27%) were classified as having a long-term focus throughout or in the latter half of that period. [9] This would mean that 73% of that broad sample had little inclination to favor long-term stockholders over the trading market, much less in promoting the interests of other constituencies.

If this approach to management produced outstanding returns, at least one constituency (stockholders) could be happy. But in fact, the opposite is the case—long-term companies in the study generated 81% higher annual economic profit on average than the other companies, added on average $7 billion more in market capitalization over the study period, invested more in R&D, and created 12,000 more jobs on average than the other firms. [10] Other than the deep gratification of meeting expectations set by the trading market (often implicitly or explicitly widely shared by individual stockholders, managers and directors), it is hard to find the upside to operating for the short-term, whether deliberately or by default to generalized expectations.

Fortunately, directors are not required to run their corporations for the short term. In fact, they are empowered—and expected—in the discharge of their fiduciary duties, to select “a time frame for the achievement of corporate goals,” and need not “abandon a deliberately conceived corporate plan for a short-term shareholder profit.” [11] It is fully in the power of the directors at the 150 signatory corporations to elect a long-term time frame for the achievement of their corporate goals.

Expressly selecting a long-term focus could help our outlaw CEOs in fulfilling their pledge to other constituencies. Given the significant value created by a long-term focus, it is quite possible that, at any given corporation, directors could reasonably conclude that an investment in human capital to create a well-trained workforce, although a near term cost, could add measurably to the corporation’s value in the longer term. They could decide that efforts to improve the community could attract more high value employees, or that efforts on behalf of local education would create a better prepared pool of potential employees, in each case with effects on the long-term bottom line sufficient to justify the investment. Similarly, a decision not to bleed suppliers at every opportunity may pay off by creating a more stable (or even innovative) supply chain. [12]

The point here is that deliberately and expressly choosing to operate for the long-term should, fully consistent with existing Delaware law, grant our outlaw CEOs and their directors the protection of the business judgment rule when integrating the interests other constituencies into long-range corporate planning. This is not quite the same thing as independently considering the interests of the other constituencies and weighing them against the interests of stockholders, but it does allow a thoughtful approach to recognizing and addressing the interests of other constituencies to the extent they align with the long-term goals of the corporation—all while preserving for stockholders and courts a rational framework to evaluate duty of loyalty claims.

While the Roundtable statement includes a commitment to generate “long-term value for shareholders,” it is unclear whether this commitment was in all cases supported by a board decision, much less by shareholders. Moreover, the Roundtable statement itself is not wonderfully clear on just how the boards of the signatory companies will balance the claims of the various constituencies they have now committed to “deliver value” to—something that may raise more questions about the duty of loyalty than was intended. So, particularly in the face of a pervasive and value destructive short-term culture, a more deliberate and permanent commitment to a long-term focus, ideally supported by stockholders, would send a strong and credible signal to both managers and the market of a purposeful shift in priorities away from the short-term. A bylaw amendment (or even a charter amendment) approved by stockholders, could commit the entire organization to a long-term focus while explicitly acknowledging that an investment in employees or other non-stockholder constituencies may be justifiable based on the anticipated long-term return to stockholders.

For example, the Roundtable statement signatories could propose to stockholders a bylaw along the following lines: “The primary objective of the board is to build long-term stockholder value, and, in support of this objective, the board shall consider the interests of customers, suppliers, and the communities in which the corporation operates to the extent such interests align with the creation of long-term stockholder value.” [13]

The more permanently this focus is imprinted into the corporation’s DNA, the less likely managers will be to look to next quarter’s earning guidance in setting their capex budgets. Given that BlackRock and Vanguard are signatories to the Roundtable statement, the stockholder votes should be there. The benefits to stockholders of taking a long-term approach would presumably make it difficult for ISS or Glass Lewis to find an objection. In short, it should be quite simple and uncontroversial to affirm the duties of Delaware directors and set the timeframe for accomplishment of corporate goals. Yet to do so would very significantly change the priorities of perhaps the majority of US public corporations. It is clearly time.


Most CEOs, at least in their professional lives, are not confused with Mother Teresa—capitalism being what it is. For this reason, there are those who would not want to rely overmuch on corporations adopting consistently altruistic practices to provide for the interests of non-stockholder constituencies. Others, apparently fearing that CEOs may at some point confuse themselves with Mother Teresa, do not want to grant CEOs and directors unfettered discretion to sacrifice value to non-stockholder constituencies. Both are rational viewpoints, well expressed recently in the debate about the Roundtable statement and years ago in the debate on constituency statutes. Yet, as comforting as it is to revisit familiar positions in this long-running academic debate, there is no debate under Delaware law.

So perhaps, when such a broad group of managers sees an urgent need for their organizations to do better in some socially significant way, we should instead ask whether the CEOs’ statement is a reaction to the fact that public corporations, by focusing to such an extraordinary degree on the short-term, are no longer recognizing the value these non-stockholder constituencies contribute in a properly functioning corporate environment—failing to recognize the long-term value creation possible (and, per the McKinsey studies, achieved) for the corporation and its dependent constituencies when corporations act with their long-term stockholders’ best interests at heart. An explicit recognition of the value of the long-term approach, especially if supported by a stockholder vote, would not solve all the social issues that corporations grapple with, but, if acted upon, could go a long way toward improving the perception of the broad social value of corporations.

And, it would eliminate any question about the outlaw status of the signatory CEOs.


1See Business Roundtable, Statement on the Purpose of a Corporation (August 2019) https://opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-of-a-Corporation-with-Signatures-1.pdf.(go back)

2Although the duty of loyalty is often phrased as running to the corporation and its stockholders, it is clear that in evaluating the interests of the corporation, only the interests of the stockholders (not other stakeholders) need to be furthered. See, e.g., Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) (“[D]irectors owe fiduciary duties of care and loyalty to the corporation and its shareholders.”)(go back)

3Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173,182 (Del. 1986).(go back)

4Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L .Rev. 135, 151 (2012).(go back)

5Id. at 153.(go back)

6While there is an argument that stockholders could amend their charter to extend fiduciary duties to other stakeholders, Rick Alexander, a long-time leader of the Delaware bar, makes a convincing case that any such amendment would be of doubtful validity. See Frederick Alexander, The Public Benefit Corporation Guidebook (2017).(go back)

7See TW Services, Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *7 (Del. Ch. 1989) (“[D]irectors . . . may find it prudent, and are authorized, to make decisions to promote corporate (and shareholder) long run interests, even if the short run share value can be expected to be negatively affected, and thus . . . may be sensitive to the claims of other “corporate constituencies.”). The one exception to this rule, of course, is when the corporation is for sale, and the short-term interests of stockholders prevail.(go back)

8Dominic Barton, Jonathan Bailey & Joshua Zoffer, Rising to the challenge of Short-Termism, FCLT Global, September, 2016.(go back)

9See McKinsey Global Institute, Measuring the Economic Impact of Short-Termism, McKinsey & Co, February 2017 https://www.mckinsey.com/~/media/mckinsey/featured%20insights/Long%20term%20Capitalism/Where%20companies%20with%20a%20long%20term%20view%20outperform%20their%20peers/MGI-Measuring-the-economic-impact-of-short-termism.ashx.(go back)

10Id.(go back)

11Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140,1154 (Del. 1989).(go back)

12One suspects that there are also plenty of long-term reasons for catering to the “customer” constituency, such as the need to stay in business.(go back)

13This strawman proposal is based in part on the express statement in Amazon’s corporate governance guidelines that the “Board’s primary purpose is to build long-term shareowner value.” See Guidelines on Significant Corporate Governance Issues, https://ir.aboutamazon.com/corporate-governance/documents-charters/guidelines-significant-corporate-governance-issues.(go back)

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