Today marks the third anniversary of the Business Roundtable’s Statement of the Purpose of a Corporation when the chief executives of 181 major US companies declared that businesses needed to do more than simply serve their shareholders.
They would, the CEOs declared, deliver value for their customers, invest in their employees, deal fairly and ethically with their suppliers, support the local communities in which they worked and, finally, generate long-term value for shareholders.
Coming just months after Larry Fink, chief executive of the world’s biggest fund manager Blackrock, had used the word ‘purpose’ 21 times in his annual letter to shareholders, there was genuine excitement that big business was finally changing. The Financial Times described it as ‘a major change in thinking’.
But new analysis from the Harvard Law School Forum on Corporate Governance suggests that, far from being a stunning new mission statement, the Business Roundtable’s Statement may have just been a PR stunt. (Cue cynics’ cries of ‘I told you so’.)
The academics have analysed more than 600 corporate documents issued over two years by 128 public companies that signed the initial statement, and found them wanting. To be fair, they had always been suspicious, having previously highlighted that most of the CEOs that signed the statement had not sought prior board approval, which suggested they did not view it as a meaningful commitment. (The BRT rejects this inference.)
The academics first reviewed the corporate governance guidelines, which lay out the principles and procedures that underpin a company. Of the 128 companies under review, 101 have updated their corporate governance guidelines since signing that all-important statement. You might expect these updates would reflect the philosophical shift that these companies have undergone.
You’d be wrong. Shareholder primacy reigns supreme. Witness Apple’s update, released on the first anniversary of the BRT Statement: ‘The Board… assures that the long-term interests of the shareholders are being served.’ A handful of companies, including Walmart and General Motors, do highlight that long-term success depends on strong relationships with stakeholders, but only after meeting their fiduciary duties to shareholders.
Ironically, some shareholders were emboldened by the BRT Statement and filed proposals to facilitate its implementation. For example, some challenged those companies incorporated in Delaware, which requires them to be shareholder centric. Others suggested appointing employees to the board, or to adopt stakeholder-based metrics for executive compensation.
Each targeted company opposed the proposals, with many arguing that signing the BRT Statement did not require, nor was expected to bring, any change in their treatment of stakeholders – which is not quite how the world interpreted their widely publicised announcement three years ago.
The final piece of evidence put forward by the academics regards executive compensation. Most of the companies require directors to own stock or be paid in company stock to align their interests with shareholders. But none tie executive compensation to any metric related to stakeholder interests.
In fact, the academics conclude that the main impact of the BRT Statement might have been to insulate the bosses from shareholders or even to ‘deflect outside pressures to adopt governmental measures that would truly serve stakeholders’.
Obviously, this is not the message that the Business Roundtable wishes to send, who celebrated the third anniversary of the statement with a round up of its three key elements. And a reiteration of the CEOs’ conviction that the long-term interests of all a company’s stakeholders are inseparable. It’s just a pity that the message doesn’t seemed to have filtered through to the mechanics of the business.
