Will Corporations Deliver Value to All Stakeholders?

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School; and Roberto Tallarita is a Lecturer on Law and Associate Director of the Program on Corporate Governance at Harvard Law School. This post is based on their forthcoming article.

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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Stakeholder Capitalism in the Time of Covid by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

In August 2019, in the Business Roundtable’s Statement on the Purpose of a Corporation (the “BRT Statement”), numerous major company CEOs announced their commitment to deliver value to all stakeholders and not just shareholders. Some observers viewed this event as a milestone and the Statement as reflecting a meaningful commitment to improve the treatment of stakeholders (the “Commitment Hypothesis”). Others, by contrast, including us in previous work, viewed the Statement as a PR move with little practical impact on stakeholders (the “PR Hypothesis”). Which hypothesis best explains the BRT Statement?

In a forthcoming article, Will Corporations Deliver Value to All Stakeholders?, we investigate the aftermath of the BRT Statement to assess whether joining it represented a meaningful commitment or was mostly a public-relations move.

Our analysis is based on a review of a large array of corporate documents of the 128 U.S. public companies that joined the original BRT Statement in August 2019 (the “BRT Companies”). We manually collected and analyzed over six hundred corporate documents, which we are making publicly available in an online archive, the BRT Corporate Purpose Archive. The documents include governance guidelines, bylaws, proxy statements, and SEC no-action letter requests, and cover the period through the end of August 2021, two full years after the publication of the BRT Statement (the “Two-Year Period”).

Our analysis of these documents provides considerable evidence inconsistent with the Commitment Hypothesis and in support of the PR Hypothesis. These findings, we argue, have significant implications for the heated debate on stakeholder capitalism.

Below is a more detailed account of our analysis:

Part I discusses the significance of the BRT Statement and of the question examined by our article for the broader debate on stakeholder governance. The Statement was originally signed by 181 CEOs, including most of the country’s major companies, and it committed to move away from shareholder primacy and to deliver value to all stakeholders.

If the BRT Statement were found to represent a meaningful commitment, this finding would lend support to the idea that managerial discretion can be relied upon to increase stakeholder welfare (“stakeholderism”). By contrast, if the BRT Statement were found to represent a mere public-relations move, this finding would support critics of stakeholderism and their claims that the promise of stakeholderism is illusory, and that it is aimed at serving the interests of corporate leaders rather than those of stakeholders.

Part II begins the presentation of our empirical analysis by examining the corporate governance guidelines of the BRT Companies. Governance guidelines, which are frequently updated, are official corporate documents that provide a detailed account of the main principles and procedures guiding the company’s corporate governance. These documents therefore provide a natural place to look for the company’s official position on corporate purpose and the objectives that should guide the board of directors.

Almost 100 BRT Companies updated their governance guidelines after the BRT Statement. However, almost none of them made any changes to the language describing their corporate purpose. More strikingly, a majority of the updated guidelines reaffirmed an explicit commitment to shareholder primacy. In general, when we examined all the guidelines of BRT Companies that were in place at the end of August 2021, regardless of whether they had been updated since the BRT Statement, we found that a majority explicitly supported shareholder primacy.

Part III analyzes the response of 26 BRT Companies to shareholder proposals regarding the companies’ implementation of the BRT Statement. Each company invariably opposed these proposals and reacted to them by trying to exclude them from the ballot, by recommending that shareholders vote against them, or both.

Our analysis indicates that, whereas the shareholder proposals were based on the premise that joining the BRT Statement was a meaningful commitment that would require changes to the companies’ governance and policies, none of the companies receiving a proposal accepted this premise. To the contrary, a substantial majority of the companies explicitly stated that their joining the BRT Statement did not require and was not expected to bring about any changes in their treatment of stakeholders.

Part IV examines the bylaws of all the 128 BRT Companies in force as of the end of the Two-Year Period. Bylaws are legally binding documents setting forth principles and procedures for the company’s governance. While bylaws commonly refer to shareholders a very large number of times, we found no relevant mention of stakeholders in general, or of particular stakeholder groups, with the exception of the bylaws of one BRT Company.

Part IV also examines the 2020 proxy statements of the BRT Companies in order to identify any mention of the BRT Statement that BRT Companies chose to include (other than in instances in which they were forced to do so by a shareholder proposal on the subject). Consistent with the PR Hypothesis, we found that the majority of BRT Companies chose not to mention the BRT Statement at all in their proxy statements. Of the minority of companies that included such a mention, none described the BRT Statement as representing a meaningful commitment that could require or bring about material changes, and several of them explicitly indicated that no such changes were required or expected.

Part V examines the principles and actual practices of the BRT Companies with respect to director compensation. The structure of director compensation is important for assessing the objectives that companies want directors to pursue, both because compensation shapes the directors’ incentives and because it sends them a strong signal as to what goals the company considers important. We begin our examination of director compensation with a review of the principles regarding director compensation contained in the governance guidelines of the BRT Companies. We found that a majority of the guidelines of BRT Companies included an explicit requirement that directors own company stock or be paid with company stock in order to align their interests with those of shareholders. By contrast, none of the guidelines of BRT Companies included any requirement to tie director compensation to any metric reflecting or related to stakeholder interests.

Part V then turns to examine the actual practice of director compensation in BRT Companies. We found that BRT Companies generally tie such compensation tightly to stock value and avoid any tie to stakeholder metrics. In particular, we found that during the year following the issuance of the BRT Statement, BRT Companies commonly paid a substantial fraction of director compensation in stock. By contrast, we did not find any instance in which director compensation was tied to any stakeholder objective either to incentivize the directors to pursue such an objective or to signal its importance.

Finally, we present our conclusions. Our findings overall are inconsistent with the Commitment Hypothesis and support the PR Hypothesis. Thus, our findings question the promise of stakeholder governance that relies on the discretion of corporate leaders to serve stakeholders. These findings indicate that pledges by corporate leaders to use their discretion to serve stakeholders, and reliance on the use of such discretion, may well not produce their purported benefits for stakeholders. These findings also support and reinforce concerns that such stakeholderist pledges and the support expressed by corporate leaders for stakeholderism might be aimed at serving the private interests of corporate leaders rather than truly addressing the rising concerns regarding corporations’ treatment of stakeholders.

Our study is available here, and the BRT Corporate Purpose Archive is available here.

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One Comment

  1. Bruce W Bean
    Posted Monday, May 23, 2022 at 12:52 pm | Permalink

    Bylaws are legally binding??
    They are changeable at will in almost all cases