Topics:   Corporate Social Responsibility,ESG,Investor Relations

Topics:   Corporate Social Responsibility,ESG,Investor Relations

August 4, 2020

One Year Later: Does the Business Roundtable Statement Matter?

August 4, 2020

A year ago, 181 chief executives of prominent American companies signed a statement committing to deliver value to all company stakeholders—customers, employees, suppliers, communities, and shareholders. Redefining the purpose of the corporation, this statement from the Business Roundtable has drawn varying reactions in the marketplace. It is an acknowledgment from these business leaders that delivering superior financial results isn’t good enough, government activism is on the rise, formidable political gridlock does not offer solutions, and international tensions add uncertainty. These matters are not just American issues, but global concerns that require systemic thinking and expansive cooperation across both the private and public sectors.

The bottom line: More and more people perceive that corporations’ traditional focus on shareholder interests and maximizing profits is not fit for purpose if it functions in a vacuum that places environmental and social concerns in a category of issues belonging to other institutions.

One of the challenges in evaluating whether the statement really matters is that more than a few companies believe it merely codifies what they are already doing. This belief is understandable given the lack of uniform, global standards for identifying appropriate stakeholder interests and measuring progress toward addressing them. Therefore, there is ample opportunity for discretion in interpreting whether these interests are addressed adequately. The reality is that the statement is one of intention—and progressing from intention to buy-in, ownership, action, and accountability takes time.

Note that the statement indicates that each company “serves its own corporate purpose,” so there is an explicit recognition that not all companies are alike. That said, each company “share[s] a fundamental commitment to all… stakeholders,” specifically to deliver value to customers, invest in employees, deal fairly and ethically with suppliers, support communities in which the company works, and generate long-term value for shareholders.

In the United States under the law in Delaware (where many companies are incorporated), directors have a fiduciary duty to act in the best interests of shareholders. This question of balancing accountability with diverse interests can thus be tricky. The Business Roundtable’s statement does not alter the reality that shareholders own the company, and that the board and CEO act on their behalf. From a practical standpoint, the statement must be applied in that context. The good news is that this isn’t hard to do. Treating customers, employees, and suppliers right and sustaining the communities in which the company operates are solid, long-term plays which benefit shareholders, provided that acceptable financial performance is delivered concurrently.

These commitments should not be viewed as mutually exclusive, but rather as integrated—meaning they are integral to generating sustainable, long-term shareholder value. Thus, boards and their CEOs must rationalize the balancing of stakeholder interests in this manner because, by law, the board cannot ignore the primacy of shareholders’ interests.

What hampers progress, however, is the lack of global reporting standards offering sufficient comparability and transparency to investors and the market for assessing the adequacy of what companies are doing. Without such standards, skepticism regarding the corporate community’s commitment to action is likely to remain high in an environment where reasonable people differ as to what the appropriate level of commitment entails.

But comparable environmental, social, and governance (ESG) reporting offers a glimpse beyond current profitability to longer-term factors that may be more critical to sustainable success. It also depicts how management is considering—as well as balancing—the diverse interests of relevant stakeholders. Armed with such reporting, investors can decide whether to remain invested in the corporation or redirect their capital elsewhere.

Many are rethinking the corporation’s purpose amid the recognition that to succeed, organizations must attract three things: customers, talent, and investors. In recent years, all three have expressed a preference for companies that contribute a positive environmental and social impact over those that do not. Companies balancing the needs of shareholder interests with the interests of other stakeholders are more likely to possess the resilience to adapt to changing market realities than organizations focused solely on maximizing profits. ESG metrics, as well as traditional performance targets around financial results, the customer experience, innovation, and human capital management, offer a balanced family of measures that set the organization’s path in the right direction.

Future-ready boards are best equipped to set this tone of balance. Such boards are likely to do the following:

  • Engage in big-picture, out-of-the-box, bold, and disruptive strategic thinking.
  • Constructively challenge the CEO and management team and maintain a long-term focus.
  • Foster diversity in skills, experiences, and perspectives in the boardroom, C-suite, and management ranks.
  • Think and act digitally.
  • Focus on innovation performance.
  • Nurture a flexible, adaptive, resilient, ethical, and trust-based culture.
  • Ensure that appropriate sustainability objectives are defined and tied to financial results.
  • Communicate to shareholders a cogent story that addresses multiple stakeholder interests.

By doing the above, directors position themselves to think more broadly about stakeholder interests as they work with and through the CEO to oversee the company’s affairs and also serve the long-term interests of shareholders.

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Jim DeLoach August 07, 2020

Thank you, Ken, for your thoughtful comments and feedback and the time you took to share them. I agree with your analysis and with your lead point that the pursuit of profits is an effective organizing principle. All of us have seen that principle validated again and again throughout our respective careers. Simply stated, profits and the market acceptance they evidence are a powerful clarifier for any business.

That said, I'm struggling a bit trying to determine where we differ in our views. My blog states: "Treating customers, employees, and suppliers right and sustaining the communities in which the company operates are solid, long-term plays which benefit shareholders, provided that acceptable financial performance is delivered concurrently.” I would suggest that that sentence would aptly summarize your thinking in the last three sentences of your comments. In addition, my suggestions at the end of the blog for a "future ready board" were followed by a summation that the board must position itself to "think more broadly about stakeholder interests as it works with and through the CEO to oversee the company’s affairs and also serve the long-term interests of shareholders."

The reason I refer to Delaware is that it IS the law to which many directors in the U.S. are bound. More than a few directors, lawyers and fellow governance experts in my network have pointed that out to me as we discussed the Business Roundtable Statement. Therefore, there is a need for balancing stakeholder priorities in the context of the legal standard established by Delaware law — and my blog attempts to make that point. The argument over shareholder primacy versus stakeholder interests has raged for over five decades in this country. From where I sit and to your point about placing stakeholder interests on "an equal plane" with shareholders, attempts to reconcile the two may tend to get bit nuanced. Accordingly, every CEO and his or her board must rationalize where the balance is because, however management strikes that balance, it must serve the long-term interests of the corporation and its shareholders.

I have no doubt this debate will continue. I also see powerful market forces driving the private sector to reject short-termism and take a longer term view. But, as I have said many times before and as I stated in the above blog, a broader focus on stakeholder interests is not "sustainable" without acceptable profitability.

Thank you again, Ken, for your comments.

Jim DeLoach August 07, 2020

Thank you, Judy, for your feedback and comment. I too read nonfiction and am a history buff. I like to read about how men and women overcame and navigated through difficult situations and challenges. I also like to read about men and women who I regard as effective leaders to understand what contributed most to their success and to the success of the organizations they led (or lead). Given the works you cited, you might like ALL THE DEVILS ARE HERE: THE HIDDEN HISTORY OF THE FINANCIAL CRISIS by McLean and Nocera. It is a compelling read about how close the global economy was to the precipice. If you like that one, try BOOMERANG: TRAVELS IN THE NEW THIRD WORLD by Michael Lewis.

Ken Traub August 06, 2020

Jim DeLoach's essay includes thoughtful and constructive suggestions but it loses its credibility in its contortions to try to justify the validity of the Business Roundtable's new Statement of Purpose issued last year. The relevance of shareholder primacy is not just because Delaware and other state laws say so, but it is the most effective organizing principle to guide managers as they seek to balance the inevitable trade-offs facing any business. Of course, every manager should seek to create satisfied and loyal customers, employees, suppliers and other constituents and that should be consistent with the manager's duty to the corporation and its shareholders. But if we put customers, employees, suppliers and community on an equal plane with shareholders, it will be unclear how to make decisions and balance trade-offs for the best interests of the corporation. For instance, a manager can create more loyal customers by lowering sales prices or adding features for free and can create happier employees by increasing their wages or reducing the expectations for their performance, but it is the responsibility of management to determine the optimal mix in balancing the interest of all constituents for the best long-term interests of the corporation. Likewise, company management that is not respectful of the interests of customers, employees, suppliers and its community, will ultimately alienate those constituents as well as investors to the detriment of the company and its shareholders. Consequently, shareholder primacy should not be viewed as looking out solely for the interests of shareholders at the expense of other constituents, but it is the most effective organizing discipline to enable an appropriate evaluation and management of the myriad of competing interests for the long-term benefit of the corporation. All of the company’s stakeholders ultimately benefit from appropriately focused and disciplined management that prioritizes the long-term success of the company.

Judy August 04, 2020

Jim: You are so right! The purpose of the corporation looms large, especially for smaller and private companies, or nonprofits. And there is no faking purpose (or ethics…or is there? I just finished DARK TOWERS by David Enrich…more chilling than John Carreyrou's BAD BLOOD…and deeply reported. Thank you as always for contributing. What are you reading when you're not writing?