On August 19, 2019, the Business Roundtable, a nonprofit association representing the chief executive officers of many of the nation’s largest corporations, issued a press release redefining “the purpose of a corporation” as one that includes “a fundamental commitment” to all stakeholders, including customers, employees, suppliers, communities, and shareholders. We discussed this focus on “corporate responsibility” or “corporate consciousness” in a June 2018 article entitled The Currency of Capitalism With a Social Conscience. In that article, we described the position articulated by some of the top institutional investor CEOs to inject a form of corporate consciousness in the context of institutional investors and “impact investing”—to actively pursue investments in companies that focus on the betterment of society.
The Business Roundtable’s August 19, 2019 statement, signed by 181 influential and high profile U.S. CEOs, embraces a pluralism in corporate governance where the classically defined “purpose” of a corporation – maximizing shareholder value – is put on equal footing with a corporation’s responsibility to protect, enhance, and promote the interests of other corporate stakeholders, including employees, customers, suppliers, and the community in which a corporation resides. Founded in the early 1970s, the Business Roundtable boasts a history of “promoting a thriving U.S. economy and expanded opportunities for all Americans through sound public policies.” This most recent policy is founded on the concept that corporate success and social welfare are interdependent and that leading investors should be urged to “support companies that build long-term value by investing in their employees and communities.”
While it is hard to take issue with such altruistic objectives as providing fair compensation and benefits to employees, delivering superior products and services to customers, engaging in ethical business practices with suppliers, investing in local communities, and protecting the environment, some feel this new definition of a corporation’s purpose fails to properly balance shareholders’ interests. In that regard, some commenters have argued that a company restrained by a multitude of social guidelines bears the risk of losing its competitive advantage. Their concern is that, if companies employing these high-minded measures fail to generate profits that meet or exceed that of their peers, shareholders will undoubtedly flee for more lucrative investments. Some have gone even further to suggest that the Business Roundtable’s August 19, 2019 press release is nothing more than propaganda—a public service announcement issued by the nation’s richest CEOs in response to the growing sense of discontentment many Americans harbor against large corporations and those who run them.
As criticism mounted following the Business Roundtable’s August 19, 2019 statement, the association issued a follow up blog post on August 25, 2019 addressing key questions raised and welcoming open discussion. The follow up rebuffed the idea that the statement was issued in response to the “socialism vs. capitalism” debate, stressing that the statement was “not an abandonment of capitalism, but a call to action to ensure the benefits of capitalism are shared more broadly.” Significantly, the Business Roundtable categorically denied support for “radical changes to corporate governance structures, which could have serious unintended consequences.” Moreover, the Business Roundtable noted that the statement was not a repudiation of shareholders’ interests, and that, while there is “no one-size-fits-all approach” to carrying out the statement’s goals, its members have already began increasing wages, investing in skills training, increasing access to education, and “promoting long-termism” or the process of moving away from providing quarterly earnings per share guidance.
More recently, Delaware Chief Justice Leo Strine recently echoed the Business Roundtable’s sentiment in a comprehensive research paper in which he lays out his “Fair and Sustainable Capitalism Proposal,” calling for widespread reform to the American corporate governance system in favor of “leveling the playing field for workers, consumers, and investors.” Whereas the Business Roundtable has said little about how its new policy should be implemented, Chief Justice Strine’s paper sets forth concrete steps for putting his proposal into effect and argues for federal agencies to create rules for institutional investors to lead the investing world toward more societally responsible practices—to make annual disclosures explaining how their voting policies and other stewardship practices take into account their ultimate beneficiaries’ specific investment objectives and horizons (such as saving for retirement or education) and how these policies and practices account for new information that the proposal would require corporations to disclose about employee, environmental, social, and governance matters.
The proposal is clearly aspirational. Seeing those concrete steps articulated makes obvious that the various constituencies required to implement them would have to make significant changes en masse to public and reasoned positions previously and currently taken.
Chief Justice Strine’s substantive proposal also lays bare the lack of substance supporting the Business Roundtable’s forward-thinking policy statement (or Chief Justice Strine’s proposal for robust legislative reforms) and casts doubt on whether the statement will lead to any real changes to the American corporate governance system. Many commentators argue that without any specifics as to how the Business Roundtable’s “fundamental commitment” to all stakeholders will be carried out, the statement is, in effect, toothless. Others question whether the signatories of the statement will attempt to effect the change they seek by supporting meaningful legislation, and, alternatively, whether they will continue to advance the same do-gooder rhetoric should the economy slip into a recession. Indeed, following the social activism of the 1960s, the 1970s saw a wave of social legislation, including the creation of the Environmental Protection Agency, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the Consumer Product Safety Commission. Whether a mere policy statement by the Business Roundtable will be enough to effect similar change remains to be seen