BRT Statement of Corporate Purpose: Debate Continues

Randi Val Morrison is Vice President at the Society for Corporate Governance. This post is based on her Society for Corporate Governance memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

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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One Comment

  1. Bernard S. Sharfman
    Posted Friday, August 28, 2020 at 11:16 am | Permalink

    Randi, I hope your understanding is correct. What your are saying is that the management of stakeholders must be seen through the lens of shareholder wealth maximization. I couldn’t agree more. The BRT could resolve this ambiguity by changing the third paragraph to read: “The management of stakeholders must be seen through the lens of shareholder wealth maximization. In doing so, we share a fundamental commitment to all of our stakeholders. We commit to:”

    I would also drop the fifth bullet point in that paragraph as it now becomes redundant.

    Bernard S. Sharfman
    Senior Corporate Governance Fellow RealClearFoundation
    Member, Editorial Advisory Board, Journal of Corporation Law