Richards Kibbe & Orbe Discusses Limited Legal Implications of Business Roundtable Statement

The Statement on the Purpose of a Corporation by the Business Roundtable, a one-page document signed by nearly all the organization’s member CEOs,[1] has been dramatically portrayed by the media (with the BRT’s encouragement) as a new commitment by American public companies to pursue a vision sometimes known as “stakeholder capitalism”—a model of corporate governance that explicitly recognizes the interests of non-shareholder constituencies like employees, customers, suppliers, public interest groups and local communities.  This announcement of new concern for stakeholders is in turn portrayed as corporate America’s long-overdue abandonment of a myopic, shareholder-centric governance orthodoxy attributed to Milton Friedman and his 20th century intellectual heirs.[2]

It is true that the BRT has never previously focused so deliberately and unreservedly on stakeholders as central to the corporate mission, and in this sense the Statement indeed breaks new rhetorical ground.[3]  However, much of the media reaction to the Statement appears misguided from a legal perspective in at least two important ways.  First, some commentary seems to suggest that corporations and their boards of directors now will have formal duties to non-shareholder constituencies.[4]  Second, and implicit in that suggestion, is the idea that until now, corporate directors effectively have been prohibited from considering the welfare of anyone other than shareholders and, in that context, have been required to maximize short-term profits.[5]

Both of those thoughts are wrong.  We elaborate below by reference to the law of Delaware, where most U.S. public companies are organized.

  • Shareholders are the only constituency to which directors owe fiduciary duties and the only constituency wielding corporate law powers. Delaware corporate law is and remains resolutely shareholder-centric.  Numerous court decisions stand for the principle that shareholders are the sole constituency, beyond the corporation itself, to which directors owe their fiduciary duties of care and loyalty.[6]  Directors are in effect the agents of those who hold the residual claim on the corporation’s value—the common stockholders—and thus owe their duties to the corporation for that group’s ultimate benefit.[7]  And apart from director duties, the entire structure of Delaware corporate law focuses power on shareholders.  They are the only constituency that can vote for directors; approve charter amendments; vote on significant proposed corporate transactions; and bring derivative lawsuits against the board.  It remains true that under Delaware law, shareholders are the unique recipients of directors’ fiduciary duties and the unique wielders of constituent rights.  No pronouncement by the BRT or any other organization regarding the importance of stakeholders alters this fundamental state of affairs.
  • But boards of course may consider the interests of other constituencies in discharging their duties to the corporation and shareholders. At the same time—and crucially—the fact that Delaware directors owe their duties to shareholders normally does not prohibit a board from giving serious weight to the interests of other constituencies.[8]  That is, there is no requirement that boards must seek to maximize shareholder wealth without regard to (or at the expense of) other constituencies, and there is ample scope to imagine situations where attending to other stakeholder interests is in fact instrumental to advancing the goal of shareholder welfare.  It is reasonable to suppose that in most cases, a company that sold deficient products to its customers, mistreated its suppliers, neglected its workers or antagonized its communities (and their lawmakers) eventually would suffer reduced profits and thus ultimately harm its shareholders.  In this sense there often should be little practical tension between the Delaware law of director duties and the BRT’s announced commitment to “deliver value to all” stakeholders.
  • Furthering shareholder value need not mean maximizing short-term profits. Some of the commentary around the Statement appears to conflate shareholder value maximization with short-term profit maximization.  That is a mistake.  Other than in the limited context of a Revlon transaction—where the company is up for sale and the board is therefore charged with getting the best price—there is no notion under Delaware law that fiduciary duties to shareholders require directors to favor immediate shareholder returns at the expense of deploying corporate resources for longer-term gain.[9]  The freedom of directors to act in what they consider shareholders’ long-term interest is implicit in the Delaware business judgment rule, a judicial doctrine that shields disinterested, properly informed directors from liability for business decisions with which shareholders may disagree, as long as the directors acted in the good-faith belief that the decision was in the corporation’s best interest.

Delaware law certainly permits boards to consider stakeholder interests and take a long-term view on how best to maximize corporate wealth.  At the same time, it is clear that shareholders are the only constituency with a claim on Delaware boards’ fiduciary duties.  Any evolution of corporate behavior in light of the BRT’s Statement will have to occur within the guardrails set by that reality.

ENDNOTES

[1] The Statement is available at https://opportunity.businessroundtable.org/wp-content/uploads/2019/08/Business-Roundtable-Statement-on-the-Purpose-of-a-Corporation-with-Signatures.pdf.

[2] Of course, some commentators are more skeptical about the BRT’s motives, and have suggested that the Statement is a publicity stunt meant to curry favor with a future progressive President or to ward off legislative pressure.

[3] The BRT historically has articulated its views on corporate governance in its Principles of Corporate Governance, a document originally issued in 1978 and periodically updated since.  The Principles traditionally were clearly shareholder-centric; the 1997 version began with the statement that “the principal objective of a business enterprise is to generate economic returns to its owners.”   By the time of their most recent update in 2016, the Principles had evolved to make reference to non-shareholder constituencies—but only in the last of eight enumerated governance principles and only in a qualified way: “In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.”

[4] See, e.g., Peter Gasca, In This Single Statement, CEOs From the Largest U.S. Corporations Just Changed the Purpose of Business, INC., Aug. 20, 2019, available at https://www.inc.com/peter-gasca/in-this-single-statement-ceos-from-largest-us-corporations-just-changed-purpose-of-business.html (“[A]s almost 200 of the top corporations around the US are formally prioritizing the needs of all stakeholders over the singular need of shareholders, we will see a lot of changes.”); Jay Coen Gilbert, Andrew Kassoy and Bart Houlahan, Don’t believe the Business Roundtable has changed until its CEOs’ actions match their words, FAST COMPANY, Aug. 22, 2019, available at https://www.fastcompany.com/90393303/dont-believe-the-business-roundtable-has-changed-until-its-ceos-actions-match-their-words (“if businesses . . . do not demonstrate material progress in this direction, they risk more than losing the public trust—they risk losing their license to operate.”).

[5] See, e.g., Jordan Weissmann, America’s Most Powerful CEOs Say They No Longer Only Care About Shareholder Value, SLATE, Aug. 21, 2019, available at https://slate.com/business/2019/08/ceos-shareholder-value-investors-business-roundtable.html (“The idea that a corporation’s only real responsibility is to its shareholders has dominated American capitalism since the 1980s, when it leapt from the conservative corners of academia to the boardroom.”)

[6] See, e.g., N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“The directors of Delaware corporations have ‘the legal responsibility to manage the business of the corporation for the benefit of its shareholder[] owners.’”) (quoting Malone v. Brincat, 722 A.2d 5, 9 (Del. 1998); Frederick Hsu Living Trust v. ODN Hldg. Corp., 2017 WL 1437308, at *17 (Del. Ch. Apr. 24, 2017) (“In the standard Delaware formulation, fiduciary duties run not only to the corporation, but rather ‘to the corporation and its shareholders.’”) (internal quotation omitted); eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 35 (Del. Ch. 2010) (“Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duties under Delaware law.”).

[7] See, e.g.,  In re Trados Inc. S’holder Litig., 73 A.3d 17, 40-41 (Del. Ch. 2013) (“[T]he standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for its residual claimants, the ultimate beneficiaries of the firm’s value, not for the benefit of its contractual claimants.”).

[8] In the seminal case of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court held that when a company was up for auction, the board’s duty became that of extracting the highest available price from competing bidders.  At the same time, however, the court noted that outside the auction context, “[a] board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”  Id. at 182.

[9] See, e.g., Paramount Communications, Inc. v. Time Incorporated, 571 A.2d 1140, 1150 (Del. 1989) (“[Absent a limited set of circumstances as defined under Revlon, a board of directors, while always required to act in an informed manner, is not under any per se duty to maximize value in the short term. . . .”); Air Products and Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48, 112 (Del. Ch. 2011) (“When a company is not in Revlon mode, a board of directors is not under any per se duty to maximize shareholder value in the short term . . . .”) (internal quotation omitted); Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986) (“It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders. . . .”) (emphasis added).

This post comes to us from Richards Kibbe & Orbe LLP. It is based on the firm’s memorandum, “THE LIMITED LEGAL IMPLICATIONS OF THE BUSINESS ROUNDTABLE’S ‘STATEMENT ON THE PURPOSE OF A CORPORATION’,” dated August 26, 2019.