The Business Roundtable’s controversial new Statement on the Purpose of a Corporation (“Statement”) is a significant corporate governance development that requires thorough board discussion. The Statement will not only affect corporate purposes generally, but also have a very uncertain impact on the fiduciary obligations of the board of directors. The discussion of it should be led, in part, by the chief legal officer.
The Statement is grounded in traditional American principles of economic equality and opportunity: the right to “an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.” It reflects concerns that “the American Dream is alive, but fraying.” As such, it seeks to redefine corporate purpose away from concepts of shareholder primacy towards promotion of “[A]n economy that serves all Americans.”
In essence, the Statement is a commitment from its signatories (CEOs of 181 major corporations) to lead their companies for the benefit of ALL stakeholders: customers, employees, suppliers, communities, and shareholders. Specifically, they commit to (i) deliver value to customers; (ii) invest in employees; (iii) deal ethically and fairly with suppliers; (iv) support the communities in which they work; and (v) generate long term value for shareholders, “who provide the capital that allows companies to invest, grow in and innovate.”
As might be expected from an organization as prestigious as the Business Roundtable, the Statement has received widespread attention. It has served to turn up the long simmering debate about the role of corporations in addressing social and economic concerns and about the link between purpose and profits that has in part been championed over the last few years by several leaders of commerce, most notably Blackrock CEO Laurence Fink.
But the attention notwithstanding, the Statement’s impact on individual corporations and their governance is at best uncertain, and at worst suggestive of certain unanticipated consequences. Several points warrant specific consideration by boards and their executive leadership.
First, the Statement is not law. It does not carry the force of law, and does not mimic any current legislative proposal that is actively moving through the legislative process. Nor can it fairly be said to meet the standard for “best practice,” even though it endorses increasingly popular principles of corporate social responsibility.
Rather, the Statement is styled as a rollback of concepts of shareholder primacy that have appeared in prior versions of the Roundtable’s “Principles of Corporate Governance.” And because that document is highly regarded as a framework for effective governance, boards should take notice of the Statement. – but in context.
Second, the Statement provides no detail on how the Roundtable would expect corporations and their boards to implement its five separate elements. No roadmap is provided to a destination that reflects satisfaction of its objectives. Indeed, the Statement is barely 300 words.
Third, the Statement doesn’t acknowledge the possibility that many corporations are already engaged with some or all of these elements in their strategic planning, compensation policies, oversight of workforce culture, administration of corporate ethics and compliance, and sustainability practices. How can current practices be evaluated in the context of the Statement’s expectations of social responsibility?
Fourth, the Statement creates substantial uncertainty about the standards to which directors would be held in implementing its elements. While there is no suggestion that it would affect the business judgment rule, the Statement raises substantial questions as to whether it would affect application of the duties of loyalty and care. Will courts and regulators expect directors, in both their decisions and their oversight, to address the interests of all stakeholders and not just shareholders? And what are the director liability implications of such a fiduciary balancing act?
To many, the Statement is a welcome recognition that it is in the self interest of corporations to play a more significant role in addressing pressing social and economic issues. To others, it reflects the practical need to address the corporate social responsibility views of millennials as a critically influential consumer class. To still others, the Statement reflects an effort by Corporate America to self-regulate in advance of the 2020 elections, and the possibility of a progressive presidency.
But regardless of perspective, “it’s out there.” And the reality is that an increasing percentage of the public may (incorrectly) perceive the Statement as “best practice” – if not established law. After all, if the Business Roundtable proposes it, what else is there to say? Given all this, the most practical path forward will be a thoughtful board level conversation on corporate purposes generally; the extent of the corporation’s engagement to date with social responsibility principles; and how they are affected by the Statement and the social and economic concerns that prompted the Business Roundtable to act.
Any such conversation would be aided by the involvement of the chief legal counsel, who can speak to the uncertainties and unintended consequences arising from the Statement. From such a conversation can come a more informed organizational response to the governance, consumer, political, social, and economic themes that are embodied in the Statement.
This post comes to us from Michael W. Peregrine, a partner at the law firm of McDermott Will & Emery, who advises corporations, officers, and directors on corporate governance, fiduciary duties, and officer and director liability issues. His views do not necessarily reflect the views of the firm or its clients.