As of August 19, 2019, the Business Roundtable (“BRT”) made what some people see as a very important change in its fundamental statement about corporate governance and what some others see as a palliative to prevent legislation that would be far more burdensome. I think both things happened. The new statement is here.
I am a little bit steeped in this subject at the moment because it is an important part of the chapter on corporate governance of my new book Capitalism for Democrats that will come out in October. The book is a defense of what I call commonsense capitalism that embraces the need for regulation and a safety net, as well as competitive markets and informed consumers. Corporate governance is a key subject because one of the powerful charges against capitalism is that it emphasizes shareholder rights at the expense of the welfare of workers and communities.
The Business Roundtable, historically, has maintained the primacy of free markets and corporate focus on shareholder value. Indeed, it has done so in a fairly pure form, relating these concepts to the famous Milton Friedman speech of 1976, where he explained why they were the two bedrock tenets of corporate governance.
The new “stakeholder” statement is, at least on its face, a sea change. The “free markets” part of the statement remains, but the shareholder-only focus is gone-explicitly gone-replaced by a five-pronged listing of stakeholders.
The stakeholder listing seems peculiar to me in that it is far less clear than it might be.
The overarching idea is that the purpose of a corporation is to promote ‘An economy that serves all americans’. The new mantra is long-term value for shareholders while serving other stakeholders as well. The core of the statement is:
We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
- Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
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.
Obviously, this was drafted by a committee. It promises so much can mean so many different things to different people. But still, it is very different in tone from what one might call the corporate triumphalism that pre-dated the Great Recession. It is a statement that corporations have obligations to others besides shareholders. And it reflects, in many respects, the ethos of the Caux Principles and the concept of Moral Capitalism that has been knocking on the corporate door for a couple of decades. For details on the principles and the concept, see the Caux Roundtable for Moral Capitalism website and the book Moral Capitalism by Stephen Young.
Former Secretary of the Treasury Larry Summers, as reported by the Financial Times, responded: “I’m wary. I worry the Roundtable’s rhetorical embrace of stakeholders is in part a strategy for holding off necessary tax and regulatory reform.” Without an enforcement tool, Summers also said, the statement lacks teeth.
I agree with Summers’ reservations, despite the very real changes. And the evolution of thinking on subjects like these takes time.
But I also am sympathetic to the needs of the major corporations to avoid legislation like Senator and presidential candidate Elizabeth Warren’s Accountable Capitalism Act (that you can see on her website).
Under Senator Warren’s act, corporate boards would be required to have representatives of various “stakeholders” and the board as a whole would have responsibilities to those various stakeholders, including, most prominently, workers. Based in part on the German co-determination principle under which workers are represented on corporate boards, The Accountable Capitalism Act is a serious proposal that I think is seriously misguided. But that act is not on trial today. The point of raising it is to say that Larry Summers is right to see the BRT change of heart as being engendered in part by a desire to head off more Draconian proposals. (For a summary of the German corporate governance system, see this online source.)
The real need in the fairly near future is to find the teeth that Larry Summers says are lacking without hamstringing boards of directors that have to manage large, complex enterprises. My take, after many years of working with boards, is that, in fact, most boards have understood that in order to create long-term value for shareholders, they had to pay close attention to most of the other “stakeholders”. Successful corporate boards do, I believe, take account of employee, customer, and other interests in order for their corporation to succeed, but legal requirements to consider them all are very different from considerations based on benefit to the business.
An intermediate kind of “teeth” would be to require a reporting mechanism (that the SEC could adopt, I think, under its current authority) whereby each corporation had to make a statement about its principles annually.
University of Chicago Professor (and former Governor of the Central Bank of India) Raghuram Rajan seems to agree that this might be a useful idea. He wrote for Bloomberg on May 1, 2019:
“Given the considerable leeway corporate boards already have, it would be a step in the right direction for them to specify whose interests, including workers’, they are protecting. That would allow investors to better gauge the trade-offs a board will make. It would also give core stakeholders greater confidence to invest in the corporation. Most important in these populist times, corporate boards can also then avoid unnecessary political flak by identifying their core stakeholders-those who make financial or other long-term real investments in the firm. That would not just circumvent progressive critics, it would also be the right thing to do.”
For sure, consultants would love a disclosure and self-evaluation system. They would see a lucrative business both in designing loophole-ridden principles and in annually whitewashing half-hearted compliance. Every new requirement makes some set of lawyers, accountants, and consultants happy. But beyond token compliance, I think it is possible that progress gradually could be made. Forced to review the subject every year and to defend its conduct under the principles that it has adopted, a team management might be persuaded to move in the direction they have stated they believe in rather than having to defend some other business emphasis.
For me, the bottom line is that the BRT’s new statement is a big step forward in a process that should lead to a better understanding of the role of large businesses in American capitalism without imposing new legal obligations that will tend to make those businesses less efficient and less able to attract capital.