What’s happening? Pledges by corporate leaders to serve a wider pool of stakeholders beyond merely their shareholders have done nothing to actually benefit these wider communities, according to research from Lucian Bebchuk and Roberto Tallarita at Harvard Law School.  The research was based on a selection of corporate documents from firms that signed the Business Roundtable’s revised Statement on the Purpose of a Corporation in 2019. (SSRN)

What’s the background? The Business Roundtable is a Washington-based association comprising CEOs of the largest US companies. In 2019, these CEOs signed a statement on the purpose of a corporation that moved beyond the idea of businesses existing merely to serve the interests of shareholders, and emphasised a commitment to all stakeholders – customers, employees, suppliers, communities and the environment.

This was big news at a time capitalism was under fire in the US for driving increasing levels of inequality. The statement has subsequently been followed up by the Roundtable advocating market efforts to address climate change.

So, has all this resulted in a friendlier form of capitalism, less focused on shareholder primacy and more on the needs of society at large? Bebchuk and Tallarita say that no, it hasn’t.

Their paper argues there is no evidence of any updates to corporate governance guidelines in the documents investigated, that firms are still focused on putting shareholders first, and that directors are still primarily incentivised based on returns to shareholders. They argue the main reason for signing was to insulate corporate leaders from shareholder oversight, with no material advantage for stakeholders.

So signing the pledge was all for show? Perhaps not. In response to the research, corporate adviser Martin Lipton penned a strongly worded rebuttal that called the methodology behind the findings “a farce”, as it was based on hand-picked documents that don’t necessarily reflect what is happening on the ground in these corporate entities. Essentially, Bebchuk and Tallarita are looking in the wrong place, says Lipton.

He points to examples such as JPMorgan’s commitments to minority communities, General Motors’ work on gender equality and Nike’s efforts to promote circular supply chains to argue that corporations are moving to provide value to a broader stakeholder base. And then there are the likes of asset managers, such as BlackRock, which are voting against board directors firms that are failing to act on climate change.

A line in the sand – Regardless of where the truth lies, the fact CEOs of the world’s largest companies have put their names behind a statement that says that acting solely in the short-term interests of shareholders is not good for long-term value creation marks a turning point, and one that these entities can be challenged on time and time again to make sure they stick to an agreed purpose that is more beneficial for society at large.

Also, potentially in isolation of the BRT statement, broader trends around ESG practices, investment and regulation, which are in their nature designed to benefit stakeholders, are not going away. (Their effectiveness in actually doing this is worth a whole other article – it’s important that actions undertaken actually deliver.)

Statement or no statement, corporates will have to go with this flow or get left behind.

Lateral thought – Integral to the above ideas is not just which parts of society are served, but also over what timescale. It’s been pointed out in this thoughtful piece that benefits for shareholders or stakeholders do not have to be considered in silos or in isolation from each other. Meeting long-term shareholder value necessitates investing in stakeholders.