A lot has been written about how nearly 200 chief executives, including the leaders of Apple, Ford, Walmart and Pepsi, issued an eyebrow-raising statement on the purpose of corporations recently. In a move that’s been both widely hailed and derided, the Business Roundtable, America’s most influential lobby group of corporate leaders, denounced its longstanding position that corporations exist principally to serve their shareholders.
“It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders,” wrote the Business Roundtable. “The American dream is alive, but fraying,” said Jamie Dimon, chair and CEO of JPMorgan Chase and chair of Business Roundtable.
There's no denying the shareholder-first mantra has led CEOs to prioritize share buybacks over productive investments and to squeeze out short-term profits by continually shaving off jobs, outsourcing production to ever-cheaper, underregulated pastures and whittling tax returns down to (in Amazon’s case) zero or close to it.
In walking away from the shareholder primacy model, Dimon and the Business Roundtable maintain that their “modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
But reception to the statement has been mixed. “Do CEOs mean what they say?” asked one media outlet. Others have accused them of purpose-washing, falsely embedding a higher purpose into branding exercises. Having climate action-obstructing Exxon Mobil and Chevron as signatories doesn’t help optics. Nor does having Johnson & Johnson’s CEO Alex Gorsky as the statement’s lead author just a week prior to J&J being found guilty of fuelling the opioid crisis.
One Globe and Mail op-ed suggested CEOs are turning against shareholders because “share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.” As law professor Katharina Pistor wrote, “For CEOs, the emergence of powerful shareholder blocs has changed the corporate-governance game,” adding, “Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that the best defence is a good offence.”
Kevin Thomas, CEO of the Toronto-based Shareholder Association for Research & Education doesn’t mince words. “I see this as the wolf in sheep’s clothing,” he said. He told Corporate Knights, “Sure, we can agree that shareholders are not the only or even the most important stakeholders.” But he added, “What the Business Roundtable is doing is mounting a massive lobbying campaign to limit shareholder rights, focusing particularly on stripping shareholders of our right to hold corporations accountable through shareholder proposals on issues like environmental and social responsibility.”
The problem, says Thomas, is the world they’re talking about is one where they’re “theoretically responsible to everyone but legally and practically accountable to no-one.”
In the short-term, the statement may be aimed at heading off regulatory proposals to legislate the end of shareholder supremacy, most notably from Senator Elizabeth Warren, a leading contender for the Democratic presidential nomination. This August, Senator Warren proposed an Accountable Capitalism Act that would require U.S. corporations with over $1 billion in revenue to obtain a federal charter of corporate citizenship requiring directors to consider the interests of all relevant stakeholders. This includes shareholders, customers, employees and the communities in which the company operates. The legislation would also require these companies to:
- Allow their workers to elect 40% of the membership of their board of directors
- Limit corporate executives’ ability to sell shares of stock that they receive as pay, instead requiring that such shares be held for at least five years after they were received and at least three years after a share buyback to disincentivize stock-based compensation in general as well as the use of share buybacks as a tactic for executives to maximize their own pay
- Require corporate political activity to be authorized specifically by both 75% of shareholders and 75% of board members (many of whom would be worker representatives under the full bill) to ensure that corporate political activity truly represents a consensus among stakeholders.
Global corporate governance expert Ed Waitzer, a senior lawyer who holds the Jarislowsky Dimma Mooney Chair in Corporate Governance and is a director of the Hennick Centre for Business and Law at Osgoode Hall Law School and Schulich School of Business at York University, has been tracking the evolution of corporate law for several decades. He sees the Business Roundtable statement as consistent with the global trajectory of the law to require powerful actors to treat stakeholders fairly.
However, he notes, “The U.S. is one of the few jurisdictions left in the modern capital markets world where the courts still interpret corporate law being that the best interests of the corporation means the best interests of shareholders.” In that sense, the U.S. business community is also stepping out ahead of the courts.
Waitzer adds, “It’s not surprising that the business community decided to put a marker acknowledging that corporate purpose extends to stakeholders beyond shareholders. It reflects an understanding by most senior business leaders that we have a sustainability problem—that the market system is no longer working for the vast majority despite it being a huge generator of wealth for those at the top.”
Words alone not enough
In the long-term, the Business Roundtable’s repudiation of shareholder supremacy should no doubt have important implications for the norms that govern corporate behaviour. But “words alone won’t make necessary system change happen,” wrote B Corporation movement founders. They invited the Roundtable to get B Corp certified (like Corporate Knights did in 2012) in a full-page ad in The New York Times. The ad was signed by the CEOs of B Corp-certified Ben & Jerry's, Patagonia, Seventh Generation and Dannon, among others.
In addition to booking a meeting with B Corporation representatives, CEOs may want to have a chat with Bob Eccles. For the past six years, Eccles, founding chairman of the Sustainability Accounting Standards Board, and Tim Youmans of Hermes Investment Management, have been working on a campaign to get every listed company’s board of directors to publish a “Statement of Purpose” by 2025 along with as many private ones as possible. The Statement of Purpose campaign, formally launched in August, calls for a company specific “Statement of Purpose” followed by “concrete actions and transparent reporting on what the company is doing to accomplish its purpose.”
A strong statement of purpose could include corporate commitments to, say, a science-based carbon-zero business plan, paying a fair share of taxes as well as a living wage to employees, for starters.
And, as Thomas suggests, ensuring board level accountability for the workforce, something that isn't normally considered part of a board’s mandate, would be a welcome addition. “Once directors are formally responsible for how the workforce is treated, then shareholders can use a legal mechanism — their votes — to hold them accountable."
The World Resources Institutes’ Eliot Metzger and Kevin Moss have further suggestions for that statement of purpose, including embracing circular economy models (designing for longevity and reuse) and “lobbying for climate-positive legislation.”
Moss says without these kinds of concrete commitments, the Roundtable’s new statement “shows 200 CEOs are stuck in yesteryear’s (corporate social responsibility).”
He may not be wrong, but neither is Rep. Joe Kennedy (D-Mass.) who called the statement, “A welcome step toward a more moral capitalism.”