A one-page statement of corporate principles signed by the heads of more than 180 U.S. companies has created quite a furor in the ordinarily sedate and staid field of fiduciary law. The Statement on the Purpose of a Corporation issued by the Business Roundtable in August provides that while each of the individual companies serves its own corporate purpose, they “share a fundamental commitment to all of [their] stakeholders” (emphasis in original). In the Statement, the CEOs commit to deliver value to their customers, invest in their employees, deal fairly and ethically with suppliers, support the communities in which they work, and generate long-term value for shareholders as providers of capital. The Statement concludes by emphasizing that:
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.
So why all the fuss? The Business Roundtable has periodically issued principles of corporate governance since 1978, and each version since 1997 has endorsed principles of shareholder primacy. By broadening its vision to give equal attention to other stakeholders, the latest Statement suggests a new and different standard for corporate responsibility.
The Statement immediately prompted commentary from academics, business leaders, lawyers, and corporate governance experts across the ideological spectrum. Some, such as The New York Times’ Andrew Ross Sorkin, called it a significant and welcome shift to rethink the responsibility of corporations to society. Others argued that it was the role of government rather than corporations to address societal concerns.
Still others noted that the Statement characterized shareholders only as providers of capital and not as owners of the corporations, warning that in trying to serve all stakeholders equally, boards of directors would be sidetracked from serving the long term interests of the owners of companies, including pensions funds.
The Council of Institutional Investors (“CII”), whose members hold a collective $4 trillion in assets, warned that “accountability to everyone means accountability to no one” and articulated its position that boards and managers need to sustain a focus on long-term shareholder value. In order to achieve that long-term shareholder value, according to CII, “it is critical to respect stakeholders but also have a clear accountability to company owners.”
CII’s Chair and the Executive Director and Chief Investment Officer of the Florida State Board of Administration, Ashbel Williams, applauded the Roundtable for its intent, but said they “did not get the words quite right.” In a thoughtful commentary, Williams noted that it would have been preferable for the Roundtable to “say more clearly that the fair treatment for customers, employees, suppliers and communities is necessary to create sustainable, long-term shareholder value.”
Public pension plan trustees will recognize a parallel to their fiduciary duty of loyalty, established in state and common law, to act solely in the best interest of the members and beneficiaries of the plans, and the ongoing debate regarding the appropriate role of consideration of environmental, social and governance (“ESG”) factors in investment decision-making in light of that fiduciary duty. A public pension plan trustee must always act for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. This does not mean that ESG factors may never be taken into consideration; when ESG factors affect the economic merits of an investment analysis, for example, they may be integrated into investment decision-making in the same manner as more traditional financial measures of risk and return.
A corporate director likewise has a fiduciary duty to act in the best interests of the shareholders, not to further the interests of other constituencies. But as noted in an analysis by Morton Pierce published on the Harvard Law School Forum on Corporate Governance, “if directors feel that taking into account the views of employees, customers or suppliers on a given issue would further the interests of shareholders, they are currently empowered to do so.” Pierce notes that there is no need to change the basis for corporate decisions in order to consider other stakeholders in such a situation.
There will no doubt continue to be lively discussion regarding whether the Statement is merely symbolic or reflects a more significant cultural shift in the norms applicable to public corporations. Still, it is possible to read the Statement in a manner that can be reconciled with the principles of existing law on fiduciary duty, and the initial uproar may turn out to be overblown.