A year ago next week, the Business Roundtable made waves with its “Statement on the Purpose of a Corporation” — in which nearly 200 CEOs expressed a “fundamental commitment to all stakeholders.”
Some felt the statement pushed the theory of “shareholder primacy” aside — and we’ve been going around and around since then on whether this was simply a return to the BRT’s original position, whether it affects directors’ fiduciary duties, whether investors care and whether corporate practices align with the statement. Many have steadfastly emphasized that this is just a debate on semantics and that the BRT statement didn’t change anything about how management or boards actually function, since the promotion of other stakeholders can typically be justified as something that also benefits shareholders in the long run.
Consistent with that view, a forthcoming article from Harvard Law Prof Lucian Bebchuk and Roberto Tallarita, which was also the subject of a WSJ op-ed last week, found that very few signatories involved their boards in the decision to sign the statement. Here’s an excerpt:
To probe what corporate leaders have in mind, we sought to examine whether they treated joining the Business Roundtable statement as an important corporate decision. Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it.
We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors.
Bebchuck and Tallarita also looked at the corporate governance guidelines of the companies whose CEOs signed the BRT statement — and found that most of them reflect a “shareholder primacy” approach — e.g., stating that the business judgment of the board must be exercised in the long-term interest of shareholders.
I haven’t been in any of these c-suites or boardrooms, but I’d venture a guess that many had already been discussing long-termism and stakeholder governance prior to the BRT’s statement (even if they weren’t using those specific catchphrases) — with a view towards maximizing long-term shareholder value. Were the BRT commitments illusory, or just within the scope of those prior discussions? Either way, the absence of board involvement seems to indicate that no change to director fiduciary duties was intended.
An article from UCLA Law Prof Stephen Bainbridge agrees that the evidence is that most BRT members remain committed to shareholder value maximization — and suggests two possible reasons why the BRT publicly shifted its position:
First, the members may be engaged in puffery intended to attract certain stakeholders for the long-term benefit of the shareholders. Specifically, they may be looking to lower the company’s cost of labor by responding to perceived shifts in labor, lower the cost of capital by attracting certain investors, and increase sales by responding to perceived shifts in consumer market sentiment. They may also be trying to fend off regulation by progressive politicians. Second, some BRT members may crave a return to the days of imperial CEOS.
-Liz Dunshee, TheCorporateCounsel.net August 12, 2020
