In a press release issued today, the Business Roundtable announced the adoption of a new Statement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs. What’s newsworthy here is that the Statement “moves away from shareholder primacy” as a guiding principle and outlines in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. Yup, that Business Roundtable. According to the press release, the Business Roundtable has had a long-standing practice of issuing Principles of Corporate Governance. Since 1997, those Principles have advocated the theory of “shareholder primacy—that corporations exist principally to serve shareholders” — and relegated the interests of any other stakeholders to positions that were strictly “derivative of the duty to stockholders.” The new Statement supersedes previous statements and “more accurately reflects [the Business Roundtable’s] commitment to a free market economy that serves all Americans. This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” Fasten your seatbelts, disciples of Milton Friedman; it’s going to be a bumpy night.
According to Jamie Dimon, Chair of the Business Roundtable and CEO of JPMorgan Chase, “The American dream is alive, but fraying….Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” The former CEO of Vanguard, also quoted in the press release, welcomed “this thoughtful statement by Business Roundtable CEOs on the Purpose of a Corporation. By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone—investors, employees, communities, suppliers and customers.” According to the WSJ, seven CEOs declined to sign the Statement, and the Council of Institutional Investors also opposed the Statement, contending that it “gives CEOs cover to dodge shareholder oversight.”
Reproduced below is the new Statement from the Business Roundtable:
“Statement on the Purpose of a Corporation
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
“Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
- Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
As noted in this article from Fortune, the “new statement is 300 words long, and shareholders aren’t mentioned until word 250.” According to the author, the shift in perspective is “the result of a yearlong reexamination that began with a testy dinner attended by a group of journalistic critics and involving a comprehensive survey of CEOs, academics, NGOs, and political leaders.” These discussions raised a fundamental question about “how well capitalism is serving society.”
That question may have its origins in the 2008 financial crisis, which “shook the foundations of the sprawling market economy and bared some of its uglier consequences: an enormous and widening gulf between the über-rich and the working poor, between the ample rewards of capital and the stagnating wages of labor, between the protected few and the vulnerable many. Compounding these inequities, moreover, was a sweep of disruptive business technologies that began to come of age in the wake of the crisis—from digitization to robotics to A.I.—and that made vulnerable workers feel ever more so.” The crisis triggered a strong reaction against the system of capitalism in some quarters, especially among the younger generation.
In December 2016, the article continues,
“Fortune assembled roughly 100 big-company CEOs in Rome, at the encouragement of Pope Francis, and spent a day in working-group deliberations on how the private sector could address global social problems. The group…proposed ways that business could help reach the billions of people in the world who lacked basic financial services; support the effort to fight climate change; expand training programs for those whose jobs were threatened by technological change; and provide basic community health services to the half-billion people who had no access to care…. But the backdrop for the conversation…was never far from mind—and remains so today: More and more CEOs worry that public support for the system in which they’ve operated is in danger of disappearing.”
The author suggests that the Business Roundtable’s new perspective has been driven by a shift in public sentiment—“as many Americans (64%) say that a company’s ‘primary purpose’ should include ‘making the world better’ as say it should include ‘making money for shareholders’”—as well as pressure from employees, especially younger workers.
According to a poll conducted by Fortune in March, 41% of Fortune 500 CEOs agreed that “solving social problems should be ‘part of [their] core business strategy.’ (Seven percent, it’s worth noting, still stick to the Friedman view that they should ‘mainly focus on making profits and not be distracted by social goals.’)” CEOs and others were coining new terms such as “compassionate capitalism” and “inclusive capitalism”—as the author phrased it: capitalism “was desperately in need of a modifier.”
Needless to say, some are skeptical of the change in corporate attitude and see it as, perhaps, just a kind of virtue-signaling. The article cites, for example, Anand Giridharadas, author of the book Winners Take All: The Elite Charade of Changing the World, who told the article’s author that he could
“‘absolutely see the change….It has become socially unacceptable as a company or a rich person not to be doing good. CEOs are asking the question: ‘What can I do to make the world better?’ But what many are failing to do is ask: ‘What have I done that may be drowning out any of the do-gooding I’m doing?’ He cites the 2017 tax bill, supported by the Business Roundtable, as an example. The lion’s share of the benefits, he argues, ended up in the hands of the top 1%, increasing the income inequality underlying many social problems. ‘What I see are well-meaning activities that are virtuous side hustles,…while key activities of their business are relatively undisturbed … Many of the companies are focused on doing more good but less attentive to doing less harm.’”
Nevertheless, the article’s author maintains, with government in a state of paralysis, “the new social consciousness of business surely should be seen as a step in the right direction,” with business leadership “filling the leadership vacuum.”
And now the norm is changing. So the question that is teed up by the Statement is this: what will all of these companies actually do to fulfill the commitments set forth in the Statement?