This article was originally published in MarketWatch on September 9, 2019.
The Business Roundtable last month published an updated statement of business purpose signed by 181 CEOs, interpreted by many to be an acknowledgement that shareholder primacy is dead and stakeholder primacy has taken root as the appropriate capitalistic focus.
The statement marks a strengthening of leadership at the institutional level, something society has been sorely lacking of late. The statement points toward a desired future, upholding the rights and needs of five stakeholding constituents: customers; employees; suppliers; communities, and shareholders.
Critiques came quickly. From the Council of Institutional Investors, which chose to focus on the diminishment of shareholder’s rights and accountability: “Accountability to everyone means accountability to no one.” The Economist joined suit, dubbing the new statement one for “collective capitalism” and noting that “Accountability works only if there is competition.”
Meanwhile, 33 B Corporation CEOs, writing initially for Fast Company, urged their Business Roundtable peers to go even further: “Ensuring that our capitalist system is designed to create a shared and durable prosperity for all requires this culture shift. But it also requires corporations, and the investors who own them, to go beyond words and take action to upend the self-defeating doctrine of shareholder primacy. They can do this by making themselves legally accountable to create value for their workers, customers, suppliers, and communities — not just talk about it.”
However, it’s been an evolution for B Corps — companies willing to certified by the nonprofit B Lab, to become corporations with an actual legal difference as incorporated Benefit Corporations, for-profits with additional legal attributes for transparency, accountability, and purpose.
Lawyers chimed in too, saying that, for now, the Business Roundtable’s shift is largely symbolic. Perhaps over time, they said, a corporate board’s duty of care and/or the duty of loyalty would have to be updated, or a new duty might be added to reflect the need to balance constituent obligations. In the meantime, law experts note the business judgment rule is still in force, offering directors acting in good faith wide berth to discharge their duties. Perhaps companies will have to report more on ESG (environment, social and governance) factors, legal experts suggest, as evidence that companies are fulfilling this new purpose.
Yet in all this commentary, the position of owners — those providing capital — and directors — those providing governance — continue to be confused in a way that has long perpetuated a myth, best described by Prof. Lynn Stout from Harvard, that heeding shareholder primacy somehow means that other stakeholder’s needs cannot be considered. In fact, these needs must be considered, she argues — and I agree — to create value over the long-term.
Of course, defining value over the long-term has always been challenging, as owners hold different ideas of what the long-term time horizon is and have varying investment goals. Shareholders don’t possess a singular set of interests or common time frame.
Additionally, scholars Robert Eccles and Tim Youman argue in a working paper published in 2015, the role of the board differs from the desire of shareholders in one basic way. Shareholders want a return on investment, thus shareholder value is an outcome of the corporation’s use of capital, not the corporation’s objective, their line of reasoning follows. Shareholder value “should not drive corporate policy but be treated as a product of it.” Here, the objective of the corporation is to simply survive and thrive. Since shareholders own tradable rights, the burden of ownership and management of assets falls to the board of directors. This is fiduciary duty, according to Eccles and Youman.
To my way of thinking, the updated statement of purpose from the Business Roundtable reflects a reality that has already existed. But there is not unanimity around this point of view certainly, or that of Eccles and Youman, or Stout, or a host of others who study and comment on corporate objectives and governance. I doubt these views motivated the CEOs to make the change.
So why did they do it? Are they ethics-washing, as the B Corp CEOs seem to suggest? Or are they responding to the needs of followers who are desperate for moral leadership, for renewed trust in organizations, and for hope in a better brighter future? True leaders — not just those by title or position — respond to this need. I prefer to think that is what 181 members of the Business Roundtable decided to do.
CEOs shoulder the day-to-day execution of the burdens of asset ownership and management that boards carry. Evolved boards delegate to CEOs the responsibility to address these burdens and manage the various forms of capital found in corporation: financial; manufactured; intellectual; human; social; relationship, and natural, i.e. natural resources.
These 181 CEOs are likely not going to change much about how they do this each day. But they are in fact accepting responsibility and the accountability that the Council of Institutional Investors and the Economist are looking for. They are raising their hands. They are saying “we get it.”
The people on this list, many of them, have been in their roles for years. This is not a move people make to get a better deal for themselves. This is what leaders do to get a better deal for everyone else. As followers, if we want moral leadership, we have to support it when we see it.