Like the Commonsense Governance Principles (1.0 and 2.0), it’s not about what is being said, which we all know is nothing new (e.g., the J&J Credo was written in the 1943; my most recent boss at The Conference Board, Steve Odland, often says “‘CEO’ stands for ‘Customers, Employees, Owners’… in that order”), but rather who is saying it. A lot of us have been talking about stakeholder governance like broken records, but we have limited powers to convince the main actors to move.
It is partly a PR move by the CEO club known as the BRT, but there must have been a lot of debate among them over moving back to the stakeholder school of governance after however many years it was, and that’s a big deal. If you’ve ever tried to get on a CEO’s calendar for even 15 minutes, let alone a solid hour, you know these people are extremely booked up with matters probably more mission-critical than yours, so the fact a bunch of the most prominent ones sat down to think about and hash out a revised Statement when they really didn’t need to puts some significance behind its release. It’s good these CEOs are seeing corporate governance as something worth their time….Measure it. Show us how you are doing what you say you believe. If you have a goal, tell me how you are going to get there, and periodically report to me on your progress. If you can’t do it right now, try. Show, don’t tell. Put your money where your mouth is. Put up or shut up. Yada, yada yada. Seriously though, get creative. No excuses. That’s what you make the rest of us do, so let’s see you do the same thing. If that doesn’t happen, this glorious Statement is yet another well-written set of platitudes that critics will throw up all over and see as something for CEOs to hide behind when they deliver lousy financial performance and tell noisy shareholder advocates to pound sand….There are a lot of smart people who say stakeholder governance and shareholder primacy are basically the same thing, or at least present different paths that lead to the same place. Taking into account the interests of all of your stakeholders to the best of your ability based on available quantitative and qualitative data makes for good business decisions, which will maximize long-term shareholder value. This is true, but I don’t think maximizing shareholder value is the goal; it’s an outcome. Therein lies the difference.
“I felt that that pledge had all the moral weight of a New Year’s resolution and about the same odds of being fulfilled,” O’Toole said on the latest episode of Recode Decode with Kara Swisher. “It’s pretty easy to declare that you’re going to be good, moving forward … I actually believe that some of those CEOs really believed what they said and would really want to do it. But what my research shows is that they won’t and that they can’t.”
CII has welcomed BRT’s earlier focus on long-term value for shareholders, including recent BRT steps to combat excessive focus on the short-term, notably by discouraging company provision of quarterly earnings guidance. We do believe it is a challenge for boards and executives to keep their focus on the longer-term. But clearly companies with strong leadership have shown an ability to do so, particularly where they provide shareholders with thorough disclosure and clear articulation of long-term strategic vision.
Much of the discussion on “stakeholder” governance focuses on individual companies, and seems to downplay or ignore the role of markets. Shareholders have a very particular role in allocating (and re-allocating) equity capital. Public equity generally is highly liquid, and no doubt company managers often are frustrated by a sense that they are vulnerable to changes in company valuation that can be rapid, as investors reassess company prospects. While we appreciate that CEOs do not like to feel constrained and subject to market forces, nothing in the BRT statement will change this real-world dynamic of public equity markets.
We will have to wait and see whether the US Business Roundtable’s recent statement renouncing corporate governance based on shareholder primacy is merely a publicity stunt. If America’s most powerful CEOs really mean what they say, they will support sweeping legislative reforms.
Shareholders themselves thus have a responsibility to take a stakeholder primacy approach. Members of the Investor Alliance for Human Rights recognize this and are already doing the critical work of engaging with this responsibility in practical and meaningful ways. For instance, the 2019 proxy season ended in June with investors having voted on 177 shareholder resolutions addressing environmental and social concerns. And in March, investors with nearly US$2 trillion in assets under management called on: (1) all investors to set up and carry out robust due diligence processes to manage risks to people and the environment, and (2) all governments to support investor due diligence through better regulation of financial systems.
While it is critical that the BRT statement’s signatory CEOs follow through on their words, the pressure from financial markets will remain. For the system to meaningfully change, shareholders must accept their own responsibilities and be held accountable for their investment practices. This means a changing of the tide away from shareholder primacy and toward stakeholder primacy for all business actors. It also means going beyond shareholder advocacy efforts to a world in which all investors actively, holistically, and meaningfully engage with their responsibility to respect human rights. Conversations around the purpose of the corporation will, at least in the foreseeable future, continue to focus on shareholders. The key next step is ensuring that this focus is the right one — where investors are also accountable for their impacts on society and where they also put broader stakeholder interests first.
Why the skepticism? Perhaps because the statement provides no specifics regarding the actions that this group of CEOs will undertake to change the way society views them and their companies, or simply that talk is cheap.
I humbly suggest, as I have been doing for over 10 years, that while “Purpose” may be easy and convenient, it does not address the “real” problem facing CEOs nor should it be the Business Roundtable’s starting point. Instead, this group of almost 200 business leaders should first take a close look at their Principles, meaning their individual and collective ethical standards, and how they apply these principles to building trustworthy organizations. Acting with the right principles leads to the right decisions, and only then can societal trust be earned. “Purpose” through check the box practices and “one off” delegated programs will simply lead to increasing skepticism.
The Statement has an unambiguous defense of the free market system, noting it “is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” The new Statement is not an abandonment of capitalism, but a call to action to ensure the benefits of capitalism are shared more broadly….The new Statement could not be clearer that companies need to generate “long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.” What it pragmatically reflects is the reality that for corporations to be successful, durable and return value to shareholders, they need to consider the interests and meet the fair expectations of a wide range of stakeholders in addition to shareholders, including customers, employees and the communities in which they operate.