There has been a lot of reaction to the Business Roundtables “Statement on the Purpose of a Corporation” where 180 CEO’s signed a statement on companies being responsive and committed to delivering value not only to shareholders but to all stakeholders including customers, employees, suppliers, communities, and of course, shareholders. This included “embracing sustainable practices” across the businesses.
The Council of Institutional Investors echoed the worried sentiments of many and stated that “to achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.”
In a subsequent publication, leaders of the Business Roundtable further clarified and stated that the Statement on the Purpose of a Corporation is not meant to call for radical changes to corporate governance structures but rather to emphasize that for corporations to be successful and return value to shareholders they must also consider the interest of a broader range of stakeholders in addition to shareholders and “fully expects that shareholders will continue to hold companies accountable if they fail to generate long-term returns”.
The trend of a broader definition of stakeholders has been moving to the US from the UK and the EU. This broader definition of stakeholders is widely supported by the governance groups inside the major index funds and pension funds.
There are two very distinct groups within these passive (index) investor companies. One group is the internal governance group. The second group is the internal investment team.
- There is the investor group who had the same significant concerns as The Council of Institutional Investors where they clearly state the priority is the shareholders first and thereafter would consider the other constituencies (employees, vendors, customers, community.)
- The passive investment side of the pension funds and index funds are not necessarily as aligned and their view appears to be closer aligned to the reaction from Council of Institutional Investors who commented immediately that it hoped companies and boards wouldn’t take this as a signal not to listen to shareholders voicing concerns with proposals and engagements.
It is important to understand that the Business Roundtable often speaks in “corporate speak.” This is similar to how the US public often quizzically looked at former Chair of the Federal Reserve, Alan Greenspan’s public announcements and would think to themselves, “what did he just say?”, because Greenspan spoke in “Fed speak” which is similar to corporate speak and you need to be able to decode it.
Here is my assessment of the Business Roundtable announcement of the duty of loyalty being expanded to multiple constituencies:
- US companies want to be recognized and assert that they are ethically run, high integrity businesses who care about being good corporate citizens in their community and not polluting or doing damage.
Additionally, US businesses want to tell the public customers, employees, vendors, and communities (in addition to telling the shareholders) that they have a purpose, they care, and that they have a moral compass post the #MeToo movement. There is also an increased focus on diversity and inclusion and Environmental, Social, and Governance (ESG) values being adopted in companies.
Here is an example of how I interpret the Business Roundtable. They want to be good partners in the community, so for example if you manufacture a product that is complicated, it would be valuable to have a relationship with the local vocational school so you would have the ability to engage, recruit, hire, and train local apprentices. This is how I interpret what they mean by being conscious of being a good corporate citizen in the community. This is also good business.
- I do not interpret the Business Roundtable’s statement as being a good corporate citizen in the community means we are going to take the corporate profits to repair the local roads.
My belief is that the Business Roundtable has not “lost its way” and decided to encourage companies to redistribute corporate profits and radically change the way they compensate their employees or invest in their community infrastructure. I think it’s simply a matter of decoding and translating the “corporate speak” and not “over-reacting” to statements.