It turns out that those of us who have been cynical about the Business Roundtable statement on the purpose of the corporation (see the Limited Responsibility Company and What’s the Purpose of Purpose?) were right. There is strong evidence that the statement is words merely, with no intent for action.
“we show that the statement is largely a rhetorical public relations move rather than the harbinger of meaningful change”
These are the conclusions of a forthcoming article in Cornell Law Review by the dazzling Harvard law professor Lucian Bebchuk and his colleague Roberto Tallarita, flagged through an op-ed in the Wall Street Journal earlier this month. They start with the assertion that the Business Roundtable statement is “remarkably vague as to the nature and content of the commitment that is being made” and conclude that there is no real underlying commitment at all.
The most concrete evidence of this that Bebchuk and Tallarita bring is to have asked the 173 companies who signed the BRT statement what was the highest authority in the organisation that approved the signing of the statement. Only 48 corporates replied, and of those 47 stated that the CEO had approved the signing without the involvement of the board. Only a single company said that it had taken the decision for board approval. Yet the academics note that this should be no personal assertion, but rather a top-level decision about how the company is to operate going forwards. The statement explicitly says that signatories “commit to lead their companies for the benefit of all stakeholders”, and it is expressed as a full redefinition of the corporation.
In spite of these words, signatories seem to assume that nothing has changed: “two of the companies that responded to our survey stated that joining the BRT statement reflected an affirmation that the company’s past practices have been consistent with the principles of the BRT statement rather than an expectation that the company would make major changes in its future treatment of stakeholders”. Furthermore, a third company, JP Morgan, asserted that it has always operated in accord with the statement and will continue to do so.
So nothing has changed, and the statement does not have meaningful effect in spite of the fanfare with which it was introduced. This is reflected, Bebchuk and Tallarita note, in a lack of change to board corporate governance guidelines, which continue to focus exclusively on shareholder interests. It also reflects the ongoing focus on shareholder interests in executive pay. At least in the sample of signatories the academics considered, there is no reference to stakeholder interests as a driver of executive pay. “With strong incentives to care about shareholder value, and little incentive to care about stakeholder interests, CEOs are discouraged from making any decisions that would benefit or protect stakeholders beyond what would be necessary for shareholder value maximization.”
The lack of admission that there are trade-offs between stakeholder interests is a fundamental flaw in the statement, according to Bebchuk and Tallarita. They single out the wording that “while we acknowledge that different stakeholders may have competing interests in the short term, it is important to recognize that the interests of all stakeholders are inseparable in the long term.” Bluntly, Bebchuk and Tallarita say, “This is at best a naïve misunderstanding or, more realistically, a mischaracterization of economic reality.” In practice, they argue it will mean that shareholder value drivers will continue to predominate.
The academics argue that there needs to be clarity on how to approach the challenge of balancing different stakeholder interests in decision-making. The only way through this challenge conceptually is to give decision-makers broad discretion to exercise judgment, they say (this blog argues that this needs to be done using the lens of fairness). For a UK lawyer, the model of enlightened shareholder value is a helpful frame for exercising that discretion, however Bebchuk and Tallarita tend to see that as not very different from shareholder primacy. I am not sure many UK boards, especially now they are obliged to report against their directors’ duties to consider stakeholder interests under s172 of the Companies Act, would agree with that assessment.
While the question of enlightened shareholder value is open to ongoing debate, the Bebchuk and Tallarita conclusion does not seem to be. There are fine words in the Business Roundtable’s statement and grandiose expectations for its meaning, but those who signed it do not see it as changing anything:
“corporate leaders don’t contemplate a significant change in corporate strategy…Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value”
‘Stakeholder’ capitalism seems mostly for show, Lucian Bebchuk, Roberto Tallarita, Wall Street Journal, August 6 2020
The Illusory Promise of Stakeholder Governance, Lucian Bebchuk, Roberto Tallarita, forthcoming Cornell Law Review, December 2020
Statement on the Purpose of a Corporation, Business Roundtable, August 2019