Was the Business Roundtable Statement on Corporate Purpose Mostly for Show? – (1) Evidence from Lack of Board Approval

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, and Roberto Tallarita is Associate Director of the Program on Corporate Governance, and Terence C. Considine Fellow in Law and Economics, both at Harvard Law School. Related program research includes The Illusory Promise of Stakeholder Governance.

Wednesday of next week marks the first anniversary of the Business Roundtable (BRT) statement on corporate purpose. The statement, which was described by the BRT as “moving away from shareholder primacy,” was heralded by observers as “an important shift… in corporate America” and a “sea change in terms of how the core purpose of business is defined.” However, in a recent Wall Street Journal op-ed, we present evidence that the statement was, more likely, a mere public-relations move rather than a signal of a significant shift in how business operates.

The op-ed, Stakeholder Capitalism Seems Mostly for Show, was based on evidence collected in our study The Illusory Promise of Stakeholder Governance. This evidence indicates that corporate leaders should not be expected to make substantial changes in the treatment of stakeholders. This conclusion will be greatly disappointing to some and quite welcome to others. But all should be clear-eyed about what corporate leaders are focused on and what they intend to deliver.

This post is the first of a series, published around the BRT statement’s first anniversary and aimed at providing Forum readers with a brief account of each of the pieces of evidence that we have collected on the expected consequences of the BRT statement. This post will focus on the lack of board approval.

Joining the BRT Statement: Who Made the Decisions?

In assessing the extent to which the BRT statement should be expected to bring about major changes, it is useful to examine whether the decision to join the statement was approved by each company’s board of directors. The most important corporate decisions (such as a major acquisition, the amendment of the by-laws, or an important change in the corporate strategy) require or at least commonly receive approval by a vote at a meeting of the board of directors. Thus, if the commitment expressed by joining the BRT statement had been expected to bring about major changes in a company’s choices and practices, it would have been expected to be approved by the board of directors.

Therefore, to examine this issue, we contacted the public relations offices of 173 companies whose CEOs signed the BRT statement. (The initial signatories of the BRT statement were 181. As of December 17, 2019, we identified 3 additional companies that publicly joined the BRT statement, for a total of 184. Of these 184 companies, we contacted all the 173 companies for which we found a public relations / media inquiries email address on the corporate website.)

We asked each company to indicate who was the highest-level decision-maker who approved the decision to join the BRT statement, whether the CEO, the board of directors, or an executive below the CEO. 48 companies responded to our inquiry. Of the responding companies, 47 companies indicated that the decision was approved by the CEO and not by the board of directors. Only one responding company indicated that the decision was approved by the board of directors. Thus, among responding companies, about 98% had no approval by the board of directors. (We also received two ambiguous responses that we did not include in the total of 48. For example, one company responded that the decision was “a collaborative effort,” declining to specify a particular decision-maker. Also, of the 48 responding companies, two added that while the decision was taken by the CEO, the CEO consulted or “usually consults” with the board.)

To be sure, a majority of the companies declined to answer even after a follow up. Still there is no reason to expect that these companies were more likely than the responding companies to have had the decision approved by the board. Thus, the strong results we obtained for our sample of 48 are telling.

What can explain the decision of CEOs to join the BRT statement without approval by the board of directors? It is implausible that CEOs chose not to seek approval for decisions that they viewed as sufficiently important to merit board consideration. Even “imperial” CEOs are unlikely to disregard the formal location of the board of directors at the top of the corporate pyramid; instead, such CEOs are likely to use their power and influence to get the board to approve the choice they favor.

Similarly, it is implausible that CEOs did not seek board approval because they viewed joining the BRT statement as a matter of personal belief rather than a statement made in their “official” capacity as corporate head. The BRT described the CEO signatories as committing “to lead their companies for the benefit of all stakeholders.” Therefore, the BRT statement did not express a shared personal belief by a group of individuals but a commitment regarding the goals that the companies led by these individuals would pursue.

In our view, the most plausible explanation for the lack of board approval has to do with the way CEOs viewed the content of the statement. According to this explanation, CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. In the absence of a major change, they thought that there was no need for a formal board approval. Indeed, two of the companies that responded to our survey stated that joining the BRT statement reflected an affirmation that the company’s past practices have been consistent with the principles of the BRT statement rather than an expectation that the company would make major changes in its future treatment of stakeholders.

To the extent that this view was widely shared among other signatories to the statement, it can explain well why the decision to join the statement was commonly not approved by the company’s board of directors. In this case, however, the BRT statement merely reflected (i) the CEOs’ positive assessment of how their companies have been treating stakeholders thus far, as well as, importantly, (ii) the CEOs’ expectation that the statement will not lead to substantial changes in how stakeholders are treated.

Thus, the lack of board approval is consistent with and supports the conclusion that the BRT statement was not expected by signatories to bring about major changes.

The study on which this post is based, The Illusory Promise of Stakeholder Governance, is available here.

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  1. carol l cone
    Posted Wednesday, August 19, 2020 at 11:44 am | Permalink

    Fascinating analysis. Yet lets not count out the dramatic impact of the BRT declaration. if the conclusion is correct, that the signatories expressed their personal conclusion, stakeholders such as employees, consumers, and communities are pressuring companies and CEO’s to reflect an active stakeholder based approach. Indeed recent research from Morning Consult, finds overwhelming support for CEO’s to be engaged with society with impact. And they quered 11,000 consumers, investors and influencers. And companies that authentically integrate society and all stakeholders into their operations are better run and increasingly more profitable. That zeitgeist shift is likely why so many CEO’s signed that statement. And they will be help accountable via their actions and transparency of reporting their progress.

  2. Jose Flores
    Posted Wednesday, August 19, 2020 at 11:54 pm | Permalink

    I understand the corporate rate to this date is a medical model yet here we are withstanding a mole made into a mountain. These and many statistics ate covering stakeholders influence with again general non-ambivalence. Please be the entity you are and of course to borrow an old cliche feel free to raise your ugly head its a must in a burning desire to share we are experiencing once again. Saludos to (stakeholders : with continued cross cultural interpersonal relationships ) it has always been to our advantage. Nominally speaking. Lol