Two years ago, the Business Roundtable released its “Purpose of a Corporation” statement, expressing a “fundamental commitment” to deliver value to all company stakeholders – not just shareholders. Today, as the global economy struggles to emerge from a terrible pandemic and move forward, how does this statement apply?
The Business Roundtables’s (BRT) statement conveying a commitment of 181 chief executives of prominent American companies to deliver value to their respective stakeholders, consisting of customers, employees, suppliers, communities and shareholders, has drawn varying reactions from different quarters. In my view, the statement is an acknowledgment and recognition from these business leaders that:
- Delivering superior financial results alone is no longer good enough. This is a message institutional investors and asset managers overseeing trillions of dollars in sustainable, responsible and impact-investing assets have conveyed to America’s CEOs and their boards in recent years, pointing to the need for more emphasis on environmental, social and governance (ESG) matters and turning down the volume on myopic short-termism behavior.
- Government activism is on the rise. With changing social norms and ever-rising expectations from multiple stakeholders, more Americans, particularly those who are younger or fall into various minority groups, view capitalism as failing to address present-day environmental and social challenges. Accordingly, proponents of governmental intervention are proposing significant taxpayer-funded alternatives to address these challenges. Furthermore, the Securities and Exchange Commission (SEC) is showing signs of “weaponizing” ESG reporting as a tool for creating the transparency that would increase the pace of change on the ESG fronts in the marketplace.
- Formidable political gridlock does not offer solutions. Current and foreseeable political realities raise serious doubts as to whether the public sector can lead effectively in addressing inequality, climate change, water and resource scarcity and other 21st-century issues.
- The status of international affairs adds to the uncertainty. Geopolitical issues are forcing their way into the strategic calculus being debated in the C-suite and boardroom as companies revisit old assumptions about doing business in and sourcing critical materials and components from certain markets, countries and regions.
The above matters are not just American issues. They are global concerns, requiring systemic efforts and expansive cooperation in both the private and public sectors.
Bottom line, the Business Roundtable statement conveys that leaders perceive the 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 other institutions should worry about. The implied intent of the statement is that the private sector should contribute to addressing these concerns in the context of sustainable development. This theme is one that institutional investors support and the SEC is likely to facilitate.
But Does It Matter?
Not everyone was impressed by the statement. Some viewed it as a way of stiff-arming activists and critics of capitalism. Others note that companies continue to lobby against environmental and social issues, raising skepticism about the true commitment level underpinning the statement. Still others assert that few of the 181 CEOs checked with their boards in advance of signing the statement, implicitly suggesting that the statement can’t be that important if the CEO’s boards didn’t sign off on it.
One of the challenges in evaluating whether the BRT statement really matters is that more than a few companies may believe that the statement merely codifies what they’re already doing (i.e., the current state is fine “as is”). This belief is understandable, as there is an abundance of “running room” for interpreting whether the appropriate stakeholder interests are being served adequately. Unfortunately, this continues to be the case due to the lack of uniform, generally accepted global standards for identifying those interests and measuring progress toward addressing them. The reality is that the statement is one of intentions, and progressing from intention to buy-in, ownership and accountability takes time.
But the lack of comparable global reporting standards offering sufficient transparency to investors and the market for the purposes of assessing the adequacy of what companies are doing is the proverbial ball and chain that hampers progress. Without it, 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. Comparable 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 and capital flows are impacted accordingly.
SEC Chair Gary Gensler conveyed his understanding of this obstacle in his remarks during a recent webinar:
“What might such disclosures look like? First, I believe they should be consistent and comparable. The consistency with which issuers report information leads to comparability between companies, today and over time. It’s sort of like the Olympics. Fans can compare athletes across heats, countries and generations. It’s not like some sprinters run a 100-meter dash and others run 90 meters. Investors today are asking for that ability to compare companies with each other. Generally, I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability. When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.”
And that is what we have today – a wide range of disclosure practices. Until the rigor of consistency and comparability is imposed in the market, it will be difficult to evaluate whether the BRT statement is precipitating meaningful action.
Another factor is that the BRT statement does not alter the reality that shareholders own the company and the board of directors and the CEO act on their behalf. From a practical standpoint, the statement must be applied in that context. The good news is that this shouldn’t be hard to do. Treating customers, employees and suppliers right and sustaining the communities in which the company operates are solid long-term plays for shareholders provided that acceptable financial performance is delivered concurrently.
As for independent directors, the board’s fiduciary responsibility to shareholders cannot be ignored. For example, in the United States under Delaware law (where many companies are incorporated), directors have a fiduciary duty to act in the best interests of the shareholders. Thus, it is imperative that directors and the CEOs they select be on the same page as to how they are discharging this responsibility to act on behalf of the shareholders as they consider the respective interests of other stakeholders. This question of accountability and balancing diverse interests can be tricky.
A careful read of the BRT statement makes a few points clear. First, each company “serves its own corporate purpose,” so there is an explicit acknowledgement that not all companies are alike. Second, 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. These commitments should be viewed not as mutually exclusive, but rather as integrated (i.e., they are integral to generating sustainable long-term shareholder value). Therefore, boards and their CEOs must rationalize the balancing of stakeholder interests in this manner because, by law, the board cannot ignore the primacy of shareholder interests.
Final Thoughts: The Emphasis on Purpose
It is encouraging to see the emphasis on rethinking the purpose of the corporation, as it recognizes that organizations must attract three things to succeed: customers, talent and capital. Over recent years, all three have expressed a preference for companies contributing to a positive environmental and social impact over those that don’t:
- Clearly, customers want quality, convenience and value for money, but they have become more conscious of choosing environmental and social impact when the option is available to them.
- Talent seeks opportunity, compensation and flexibility, but environmental and social impact – along with culture – can be a difference maker in choosing and remaining loyal to an employer.
- Sources of capital demand an attractive risk/reward trade-off, but they are also recognizing the long-term benefit of investing in effectively governed companies delivering a positive environmental and social impact.
This is why I believe that companies embracing a purpose that balances the needs of shareholder interests with the interests of employees, the communities in which they operate and other stakeholders are more likely to possess the resilience to adapt than organizations focused solely on maximizing profits. Their performance and focus are more likely to engender the confidence of long-term investors, attract mission-critical talent and build trust with customers and suppliers. Consistent and comparable ESG reporting will only sharpen this focus. ESG metrics, as well as traditional performance targets around financial performance, the customer experience, human capital management and innovation, offer a balanced family of measures that ensure the organization’s path is set in the right direction.
The takeaway for boards and executive management is clear: Think more broadly about stakeholder interests as they serve the long-term interests of shareholders. Make sure your ESG reporting tells a compelling story that attracts equity and debt capital at a reasonable cost. Finally, prepare for increased accountability stemming from a regime promoting consistent and comparable ESG reporting.