By Amanda Gerut

The Business Roundtable ’s recent announcement that it believes the time has come to expand the purpose of a corporation sparked a flurry of reactions and discourse. After all, the Roundtable has been one of the staunchest defenders of the notion of shareholder primacy, and now the group says businesses instead should be run for the benefit of customers, suppliers, employees, shareholders, communities — all stakeholders, essentially.

What does the shift mean about the changing nature of business in the United States? And moreover, what does it mean for the way boards oversee their companies?

Some barely registered the change, considering it public relations, while others viewed it as the mark of a profound shift in the way the largest companies are running their businesses. At the same time, various experts and governance advisors from different schools of thought are “feuding” — as some news outlets have reported — over what this change signifies and the exact nature of meaningful corporate responsibility.

According to some, the debate will likely lead to significant change.

“Boards are used to a very historical way of being, which is that most of what they do or think and how they operate is behind closed doors,” says Coco Brown, CEO and founder of the Athena Alliance and a board advisor. “That’s just no longer true. They’re now being examined at a level that is really going to force them to wake up.”

The change made by the Roundtable, which is an association of CEOs that represents their interests in talks with legislators, has a range of implications for boards. At some companies, the change is in line with a transition that has been under way for the past decade and verifies a broader approach to governance involving multiple constituencies.

For other boards, however, this change among a bellwether group of companies means that directors will have to realign their thinking in areas such as risk oversight, company culture, labor relations and the importance of ensuring that supply chains and business strategies are sustainable.

That realignment will hit some boards squarely in the way they recruit and manage their own board composition, some sources say, and raises questions as to how companies will be held accountable for adhering to this standard.

Immediate Skepticism

The late-August announcement spurred heavy news coverage, including a Fortune magazine cover featuring Business Roundtable chairman and JP Morgan Chase & Co. CEO Jamie Dimon flanked by Johnson & Johnson CEO Alex Gorsky and IBM CEO Ginni Rometty. The cover story described the history leading to the roundtable’s change, including a summit of CEOs who met to discuss ways to solve global social problems, such as income inequality, through private sector intervention.

Yet the rollout, complete with statements of support from other large-cap CEOs, was met with skepticism, as Agenda reported. Indeed, the Roundtable itself recognized the wave of criticism and took to Medium to post a series of clarifications and responses to questions raised in light of the new framework.

Included among the many questions observers had was whether a group of the largest company CEOs, which includes the most highly paid executives, is equipped to address complex social issues, such as stagnating wages and rising income inequality. In addition, questions were raised as to how adept the CEOs — who may have presided over companies while the effects of climate change were exacerbated and gender pay gaps went unaddressed, for instance — could be in remedying such problems.

The Council of Institutional Investors, in response to questions about the roundtable’s change, said the new statement creates a system in which accountability to shareholders is muddied. It also comes at a time when the roundtable has appeared to make attempts to marginalize shareholders by limiting their ability to submit proposals, says Ken Bertsch, executive director of CII. The organization also published a write-up showing how the roundtable’s new statement on purpose could align with CII’s focus on long-term shareholder value.

CII’s position, however, sparked a strong reaction from Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz, who wrote, “The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided.” He also wrote that, if businesses fail to protect stakeholders, that only leaves the government to do so, which could ultimately lead to “state corporatism or socialism.”

Still, the dynamics of the moment show a push and pull among CEOs, boards and shareholders that has also added complexity to the philosophical change the roundtable has made.

Currently, large companies have the ear of the SEC and have sought more regulation on proxy advisory firms, which institutional investors say they rely on for research and vote recommendations. The change also comes at a time when engagement with shareholders has risen substantially in recent years and companies’ responding to shareholder concerns over issues has become the norm, which has created more — and a different kind of — work for companies to do. In an opinion column, Matt Levine of Bloomberg questioned whether CEOs were merely “fed up with shareholders.”

Betsy Atkins, a three-time CEO and veteran director currently serving on the boards of Covetrus, SL Green and Wynn Resorts, says she sees the recent announcement as an affirmation that American companies want to be viewed as having high integrity and strong business ethics. Companies want the public to see them as focused on ESG issues, diversity and inclusion, and #MeToo-related issues, she writes in an e-mail. Still, Atkins notes that she would also decode the statement as being PR for companies.

“I think that what we heard from the Business Roundtable was an example of corporate speak,” says Atkins. “We used to hear similar ‘Fed Speak’ from former [chair of the Federal Reserve Alan] Greenspan.”

‘Vastly Complicated’

Chris Cernich, managing partner of Strategic Governance Advisors points out that putting all stakeholders on equal footing creates its own set of issues. The roundtable’s change to the definition of corporate purpose doesn’t change the fact that just one class of stakeholders — shareholders — votes in director elections and provides capital. Employees provide labor and are paid regularly for it, he points out. Shareholders take on far more risk. How you treat both classes “equally” is not a simple prospect, says Cernich.

“They’ve introduced a lot of complexity into the purpose of the corporations they run,” he says. “It’s going to be vastly complicated. Some of the parts of running a corporation are already pretty difficult, but people agreed on where the fault lines were.”

Given that 181 CEOs signed the statement, companies that aren’t involved have to also consider these changes and what they mean, he adds. “Even companies that didn’t sign the statement are under the gun for it as well.”

Indeed, the challenge inherent in emphasizing the importance of all stakeholders was illustrated soon after the roundtable published its change, Cernich notes.

AT&T CEO Randall Stephenson signed the statement, published Aug. 19. A week later, 20,000 AT&T employees went on strike after the Communication Workers of America union accused the company of unfair labor practices during the course of contract negotiations. The Wall Street Journal reported that the union’s PR firm immediately pointed to Stephenson’s signing of the roundtable statement and questioned, “Was that all talk?”

“That’s exactly the challenge,” says Cernich. “What did you sign the company up for?”

At the same time, he says, “these big movements are never efficient” and people might be unhappy about how “messy” it is, but it could also ultimately lead companies in the right direction.

Indeed, Brown says the roundtable change represents a collection of voices in a coordinated response to the challenges of the modern era and should prompt board members to question whether the sentiment reflects their board and their operations or if it is directed at them as a company.

Boards will need to “take a step back” in order to have such a conversation, which could ultimately conclude that certain directors are no longer suited to oversee companies in this era. Addressing that challenge has been one of the biggest hurdles for boards, she says.

Plus, board members are often isolated in communities of other board members that are self-validating, she explains. The less a board member sees “what normal is” outside of that community, the harder it is to take in what it means to serve stakeholders rather than respecting the social norms under which directors with an eye to modernizing the board patiently wait for other board members to retire.

“The biggest barrier to innovation in the boardroom is the entrenched construction that says it’s a place to retire…and share the wisdom of your 40-year career,” says Brown. “That’s just no longer relevant, so the hardest work that the chair has and that the nominating and governance team has is to kick those people off.”

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