Was the Business Roundtable Statement Mostly for Show? – (2) Evidence from Corporate Governance Guidelines

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.

Tomorrow 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, and in our study The Illusory Promise of Stakeholder Governance on which the op-ed was based, we present evidence that the statement was likely a mere public-relations move rather than a signal of a significant shift in how business operates.

This post focuses on evidence obtained from a review of corporate governance guidelines. The post is the second of a series, published around the BRT statement’s first anniversary, aimed at providing Forum readers with a brief account of each of the pieces of evidence on the expected consequences of the BRT statement that our study puts forward. (The first post, which focused on the lack of board approval, is available here.)

Learning from Corporate Governance Guidelines

Corporate governance guidelines (also called corporate governance principles or policies) are official governance documents that are typically approved by the board of directors. They are updated with some frequency and contain the main governance principles and procedures of a public company. Although governance guidelines mostly deal with governance processes, they also often contain general principles or specific provisions regarding the goals that directors must pursue.

These documents therefore provide a natural place to look for the company’s official position on corporate purpose. If companies whose CEOs signed the BRT statement are indeed committed to “moving away from shareholder primacy,” we should expect this commitment to be reflected in the companies’ governance guidelines.

To examine this aspect, we reviewed all the corporate governance guidelines of the U.S. public companies whose CEOs signed the BRT statement. Our findings, which will be fully detailed in a paper that we plan to issue this fall, indicate that these guidelines largely reflect having shareholder value as the sole goal. In The Illusory Promise, as well as below in this post, we illustrate the findings of this broad review by discussing the corporate governance guidelines of the companies in the “BRT Board Sample”—the 20 U.S. public companies whose CEOs sat on the board of the directors of the BRT at the time that the BRT statement was issued.

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Of the twenty companies in the BRT Board Sample, ten amended their governance guidelines after the issuance of the BRT statement. Nine of them, however, did not make any changes in their formulation of corporate purpose. In particular, some companies left unchanged the text that explicitly reflected shareholder primacy by prescribing that directors must:

  • “promote the interests of shareholders” (CVS);
  • “act solely in the best interests of the Corporation’s shareholders” (Duke);
  • “maximize shareholder value over the long-term” (Eastman); or
  • “serve the best interests of the Company and its shareholders” (Stryker).

The only company that amended its guidelines with language related to corporate purpose seems to be S&P Global. This company added to its guidelines a paragraph stating that “the interests of the Corporation’s shareholders are advanced by also considering and responsibly addressing the concerns of other stakeholders.” Even in this case, however, serving shareholder interests remains the purpose of the corporation, while “responsibly addressing” the concerns of other stakeholders is only a means of advancing these interests.

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The remaining 10 companies in the BRT Board Sample chose not to amend their guidelines after the issuance of the BRT statement, and many of them have guidelines containing a strong endorsement of the shareholder primacy principle.

Notably, explicit endorsements of shareholder primacy can be found in the corporate governance guidelines of the two companies whose CEOs played a key leadership role in the BRT’s adoption of its statement. JPMorgan Chase, whose CEO Jamie Dimon is the chairman of the BRT, states that “[t]he Board as a whole is responsible for the oversight of management on behalf of the Firm’s shareholders.”

Similarly, Johnson & Johnson, whose CEO Alex Gorsky chaired the BRT’s Corporate Governance Committee at the time the BRT statement was issued, states in quite clear terms that “[t]he business judgment of the Board must be exercised . . . in the long-term interests of our shareholders.”

(Johnson & Johnson’s guidelines include the company’s 1943 credo, which notes the corporation’s responsibility to customers, employees, and communities, but do make it clear that directors’ business judgment must still be exercised in the interests of shareholders.)

To note two additional examples of guidelines that retained their shareholder primacy language:

  • AECOM’s governance guidelines affirm that “[t]he primary responsibility of the Board of Directors […] is to oversee the affairs of the Company for the benefit of stockholders;” and
  • Lockheed Martin’s governance guidelines state that “[t]he role of the Board is to oversee the management of the Corporation and to represent the interests of all the Corporation’s stockholders.”

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Before concluding, we would like to stress the presence of some exceptions. The guidelines of a few companies in the BRT Board Sample contain, and contained also prior to the issuance of the BRT statement, references to stakeholder interests, but they still do so without abandoning the focus on shareholder value as the ultimate goal. Cisco’s guidelines, for example, mention “high customer satisfaction and superior employee working environment” as goals the company seeks to achieve, but they do so while requiring that “[n]ominees for the Board should be committed to enhancing long-term shareholder value.” Similarly, the guidelines of Boeing, Marriott, and Walmart recognize that treating stakeholders well might enhance shareholder value, but they retain shareholder value as the ultimate goal and refer to the treatment of stakeholders as means of advancing this goal.

Finally, among the twenty companies in the BRT Board Sample, two companies, Cummins and International Paper Company, which are incorporated in states with constituency statutes (Indiana and New York, respectively) have (and had had long prior to the BRT statement) guidelines that contain stakeholder-oriented language that echoes the statutory language in the constituency statutes governing them. With this language adopted long ago and based on the language of the governing constituency statute, the language in these guidelines does not reflect any changes prompted by the BRT statement or the development of new stakeholder-oriented attitudes among corporate CEOs in recent years.

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Our review of the governance guidelines of the companies in the BRT Board Sample, as well as of all the other companies whose CEOs signed the BRT statement, identified a clear pattern. This evidence casts doubt on the commitment of these companies to moving away from a focus on shareholder value, and it supports the conclusion that the BRT statement should not be viewed as a signal of coming changes in how these corporations treat stakeholders.

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