November 18, 2019
November 18, 2019
In what has been characterized as a “move[ment] away from shareholder primacy” and a “commitment to all stakeholders,” the Business Roundtable (BRT) released a new “Statement on the Purpose of a Corporation.” The new statement is, in many ways, a reversion to the BRT’s 1981 “Statement on Corporate Responsibility.” The 2019 statement supersedes the 1997 “Statement on Corporate Governance” which had declared that “the paramount duty of management and of boards of directors is to the corporation’s shareholders.”
None of this, of course, is news to the regular readers of the financial press. The new statement has received a tremendous amount of attention from investors, journalists, academics, and politicians. It will be carefully considered by public company management teams and boards of directors, even those not part of the BRT.
Despite all of that attention, at least three critical points seem to be underappreciated. They are worth pausing over.
First, despite the title of the statement, it is really not so much about “purpose” as it is about commitments to various corporate constituencies. A corporation’s purpose is typically to produce goods and/or services in the advancement of business goals often articulated in a mission statement. The purpose of the corporate form is to enhance the ability to gather the equity capital required for the production of those goods and/or services by promising limited liability to those capital providers. All of this takes place in the context of a capitalist economic system, the benefits of which the new statement references.
Second, the now somewhat discredited language of “primacy of shareholder interests” never meant that there weren’t duties to the other stakeholders. Nor did it imply that long-term shareholder interests could be served without meeting the fair expectations of the other stakeholders. The various commitments articulated in the statement represent what corporations were already obligated to do or what most found it in their enlightened self-interest to do when attending to building value for the shareholders. For example:
There is also a raft of protections for creditors—a stakeholder group that was not specifically called out in the statement.
There are of course duties to the shareholders, to whom the statement appropriately commits to seek to “generat[e] long-term value.” That commitment is enforced through generalized fiduciary duties. Unlike the other stakeholders, the shareholders generally are not protected by specific laws and regulations (other than securities laws). Moreover, shareholders receive value only if there is residual value left over after all of the other stakeholders have received their due. This is graphically illustrated on the right side of a corporate balance sheet—shareholders’ equity is at the bottom and can be negative.
Finally, the legal impact of the statement must be questioned.
The statement does not change the law. Generalized fiduciary duties are still owed only to the shareholders, and in some ways that is the practical meaning of the phrase “primacy of shareholder interests.” Even though some commentators have suggested that the statement establishes equivalent duties to all of the stakeholders to whom commitments are made, that is simply not the case. And, from the standpoint of corporate decision-making, thank goodness for that! Nor does the law stand in the way of fulfilling the commitments articulated in the statement: It has always been the case that corporate directors and officers can take actions of the types that are committed to in the statement… so long as there is any rational basis for concluding that those actions will ultimately redound to the benefit of the shareholders. That is the legal and economic underpinning for corporate social responsibility.
Thomas A. Cole is senior counsel and chair emeritus of the executive committee of Sidley Austin LLP. He teaches the seminar on corporate governance at The University of Chicago Law School. He is the author of CEO Leadership: Navigating the New Era in Corporate Governance, to be published in November by The University of Chicago Press. His colleagues advised the BRT in the development of the 2019 statement. The views expressed in this essay are not necessarily the views of Sidley or its clients.
For more thoughts on stakeholder primacy, check out NACD Directorship‘s November/December 2019 article, “The Primacy Debate: Voices For and Against.”