The Business Roundtable packed a lot into its headline-grabbing 300-word statement Monday, listing the various stakeholders chief executives should commit to serving, acknowledging Americans deserve “a life of meaning and dignity” and ditching more than two decades of dogma that shareholders should always come before everything else.
But the statement also offered sparse detail on how those commitments would change behavior in the future, what shifts in policy or practices the public should now expect or how success in a stakeholder-driven approach to capitalism might be measured.
Presidential candidates, commentators and others all called on CEOs to explain how they would meet the commitments of the statement, in which the group representing nearly 200 chief executives of large companies updated how it views the purpose of a corporation.
“I’m pleased, but I’m also like, okay, this was a long time coming,” said Raj Sisodia, a professor at Babson College and co-author, with Whole Foods Market co-founder John Mackey, of the book “Conscious Capitalism.” Such statements of purpose, he said, have to go “beyond nice words. How do we implement this in practice?”
Socially responsible investment firms, academics who study corporate leadership and labor economists from left-leaning think tanks all said they would be looking for varying signs that would help answer that question — and reassure them the new statement would be backed up by more change.
“We’re thrilled these people are saying these things, but we’ve received a lot of questions about, ‘Is this real, or is this PR?’ ” said John Streur, president and CEO of Calvert Research and Management, a socially responsible investment subsidiary of Eaton Vance that manages $17.1 billion in assets. “Leadership is about taking real action. We’d love to see them follow through.”
The statement, which comes amid rising income inequality, shifting expectations from the public regarding corporate behavior and a political climate that is increasingly hostile to big business, sparked questions over where the statement left shareholders. The Council of Institutional Investors (CII), an association of pension funds, endowments and foundations, said it “respectfully disagree[d]” with the statement, suggesting it “undercuts notions of managerial accountability to shareholders,” and that it’s the government’s job to make decisions in society’s best interest.
In response, the well-known corporate lawyer Martin Lipton, a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, said that the CII’s view is “misguided.” “Shareholder primacy was ill-conceived in the first place and has utterly failed to provide for the needs of all stakeholders,” Lipton wrote as part of a broader statement. “The alternative is state corporatism in the form of legislation like Senator Warren’s Accountable Capitalism Act. Not many members of the CII would prefer that.”
One concrete thing boards should do, said Jonas Kron, director of shareholder advocacy at Trillium Asset Management, a socially responsible investment firm, would be to dramatically increase how much of CEOs’ compensation is tied to goals outside of financial metrics.
While a growing number of companies do consider things such as worker safety, diversity or “sustainability” in the formula for executives’ pay, the weighting they typically receive is “infinitesimal” compared to the weight given to financial metrics such as total shareholder return or return on invested capital, Kron said.
“It’s always a very small portion, and there’s always an enormous amount of discretion” in how the board considers such environmental or social metrics. Currently, “it’s not clear if CEOs will suffer any measurable consequences” in their pay if they don’t account for other stakeholders, Kron said.
Calvert’s Streur and several others said they would be watching for companies to offer the same level of rigorous data reporting and transparency they do with financial metrics to other figures, such as employee diversity, gender pay data or greenhouse gas reduction targets. While some companies provide some of this data — whether in sustainability reports or following external pressure — many others choose not to release it, experts said.
“Imagine if you had regular financial statements for a company’s impact on the environment, for its labor standards, audited by external sources — and not being truthful had the same penalties,” said Neil Malhotra, a professor at Stanford’s Graduate School of Business who directs the school’s Center for Social Innovation. “This is only a meaningful statement if it’s about a clear trade-off.”
Some companies already choose to have such data monitored by an outside party. Companies that want to be certified as a B Corp, a certification given out by the nonprofit B Lab to companies such as Patagonia or New Belgium Brewing that do well by various stakeholders, must meet a list of standards related to their social and environmental performance, accountability and transparency. All companies that are B Corps must also make changes to become legally accountable to all stakeholders in their corporate governance documents, said Andrew Kassoy, B Lab’s co-founder and a former private equity partner.
Kassoy thinks the Business Roundtable’s statement will make it easier for some companies to consider becoming a B Corp, noting that his organization has been in discussions with several large multinational public companies about making the change. “Some of those public companies could say we’re going to put into action what we’re saying by actually changing our corporate governance,” he said.
Others will be watching for how companies deal with their employees, given the statement’s commitment to compensating and supporting workers. Lawrence Mishel, a distinguished fellow at the Economic Policy Institute, a left-leaning think tank, said he would be looking for a shift in how big corporate CEOs are willing to engage with unions and work with employees toward a new system of collective bargaining.
“What would be really my most hopeful moment would be if these CEOs expressed a recognition of the importance of worker voice and their own workers to be able to bargain collectively,” Mishel said.
A spokeswoman for the Business Roundtable said it expects to continue recently added advocacy efforts around policies on economic opportunity, such as increasing the federal minimum wage. She said the new statement was intended to reorient the group’s language “in a way that’s more consistent with how our CEOs think companies should operate. But there’s no way this statement can address every issue.”
She also pointed to a Tuesday LinkedIn post from Johnson & Johnson CEO Alex Gorsky, who wrote that the new statement “isn’t an achievement, it’s a call to action.” The announcement also included a link to examples of ways member CEOs’ companies had already invested in their employees and supported their communities and education.
Such changes are systemic, and some experts said they’ll be looking for changes outside of corporations themselves. (Indeed, the Roundtable’s statement urges investors to “support companies that build long-term value by investing in their employees.”) Judith Samuelson, executive director of the Aspen Institute’s Business and Society Program, said in an email that one thing she would be watching is how shareholder value is taught in business schools’ finance classrooms, and whether “the acid test of firm value” continues to be shareholder value. “We monitor, and hope to assess if there is greater change over time, about what students are learning about the purpose of the firm.”
Roger Martin, the former dean of the University of Toronto’s business school and a strategy adviser to CEOs, also believes that leading business schools could have a role in helping to come up with a “toolbox for CEOs to change their decision-making processes to adhere to the new statement,” he wrote in an email. While most CEOs have been taught how to make decisions that contribute to earnings per share growth or return on equity, they don’t necessarily have decision-making tools for balancing the needs of different stakeholders. “It is that kind of infrastructure that is needed to support a real, lasting and positive change,” Martin said.
For Joseph Bower, a Harvard Business School professor and co-author of “Capitalism at Risk: Rethinking the Role of Business,” people have long been drawn to the idea of “shareholder primacy” because of the seeming simplicity. “It’s much easier to assess a corporation if you have these formulaic views as to what the corporation is and who owns it and how it should behave,” he said. While he says he’s “just delighted this whole thing is beginning to unravel, what we’re left with is [the] question: Then how do we assess companies?”
It depends widely on the company, Bower said, and can be very difficult for outsiders to do. But he said he’d be looking for shifts in how companies think about their overall strategy — getting into businesses that help with climate change, focusing on wages and working conditions for employees, and considering the levels of executive pay.
“More Costcos,” he said, offering a shorthand illustration of a successful stakeholder approach. The retailer is known for paying relatively higher wages and benefits to employees while maintaining generally high customer satisfaction and still returning value to shareholders.
“Shareholder value should be a result, not a goal,” Bower said, “a result of a business serving its customers, serving its employees, serving its communities. And if they do that well, shareholders will do fine.”