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.
Comment Letter to DOL
More from: Jeffrey Mahoney, Council of Institutional Investors
Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on a CII letter to the Department of Labor. 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) and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).
I am writing on behalf of the Council of Institutional Investors (CII), a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds and defined contribution plans with more than 15 million participants—true “Main Street” investors through their funds. Our associate members include non-U.S. asset owners with about $4 trillion in assets, and a range of asset managers with more than $40 trillion in assets under management.
The purpose of this letter is to provide you with our perspectives on the Department of Labor (DOL) “proposed amendments to the ‘Investment duties’ Regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk adjusted economic value of a particular investment or investment course of action” (Proposed Rule).
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