By Jena McGregor* – The Washington Post
The organization representing the nation’s most powerful chief executives is rewriting how it views the purpose of a corporation, updating its decades-old endorsement of the theory that shareholders’ interests should come above all else.
The new statement, released Monday by the Business Roundtable, suggests balancing the needs of a company’s various constituencies and comes at a time of widening income inequality, rising expectations from the public for corporate behavior and proposals from Democratic lawmakers that aim to revamp or even restructure American capitalism.
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” reads the statement from the organization, which is chaired by JPMorgan Chase CEO Jamie Dimon.
The group says its members “share a fundamental commitment to all of our stakeholders,” and commit to doing well by their customers, employees, suppliers and local communities. “Each of our stakeholders is essential,” the group adds. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
The new statement includes 181 signatures of the 192 current members of the Business Roundtable, which represents many of the biggest companies in the United States. While the statement represents at the very least a symbolic change in the group’s thinking, it was not clear how companies would change their practices in light of the new commitments, nor how any changes in behavior would be assessed or monitored.
Some companies that did not sign were not eligible to do so because an interim chief executive is in place or the company is transitioning between leaders. There were seven other CEOs who did not sign for various reasons: Roy Harvey at Alcoa, Stephen Schwarzman at Blackstone, Larry Culp at General Electric, Bernard Tyson at Kaiser Permanente, James Robo at NextEra Energy, Thomas Williams at Parker Hannifin and Michael Tipsord at State Farm. A Business Roundtable spokesperson noted that a non-signature does not necessarily mean the CEO does not support the statement.
The statement comes amid a growing national debate about the responsibilities of corporations as a time of stark economic inequality. A range of lawmakers have been trying to force companies to consider society’s larger goals when they do business or be penalized. Democratic presidential candidate Sen. Elizabeth Warren (Mass.) has proposed a plan that would require U.S. corporations to turn over part of their board of directors to members chosen by employees. Vermont Sen. Bernie Sanders, another 2020 hopeful, would prohibit corporations from buying back their own stock — a move that drives up share prices — unless they offer a certain level of pay and benefits for workers.
Some governance experts were critical of the new statement. “It limits accountability for these people to anyone, because if you have multiple stakes with whom you’re accountable, you’re always going to get it right on someone,” said Charles Elson, who directs the John L. Weinberg Center for Corporate Governance at the University of Delaware. “You can always make an argument that no matter what you’ve done, some stake will benefit. If your watch stops, it still gets the time right twice a day.”
Elson added that “to suggest that creating long-term shareholder value is somehow at odds with employee satisfaction and customer satisfaction is a completely flawed argument. Implicit in creating value for your investor is that the other stakes are comfortable with you. Every board knows that. Every CEO knows that.”
Others suggested that while it’s unclear what impact the statement will have, it’s notable coming from a group that has traditionally been cautious. “It really is quite significant,” said Peter Cappelli, a professor who studies labor economics at the University of Pennsylvania’s Wharton School. While “the entire Wall Street community is not going to roll over because of this,” he called it a “marker for change” and a “corrective.” “It sounds like what they’re describing is what was the standard view before the mid-1980s — before the shareholder value idea really started to spread.”
The new statement puts an official stamp on a more stakeholder-driven approach to governance that some CEOs have individually advocated for in recent years. It comes more than two decades after the lobbying group, in a 1997 document about corporate governance principles that it has periodically updated, took an explicitly shareholder-first stance. “The Business Roundtable wishes to emphasize that the principal objective of a business enterprise is to generate economic returns to its owners,” it wrote.
That concept — often known as “shareholder primacy,” or a corporation’s duty to maximize shareholder value — grew to prominence in the mid-1980s and has since became a widely accepted governance norm, one that critics say has driven a fixation on short-term results and helped balloon the size of CEO pay packages, fueled by outsized stock awards.
Even in more recent guidelines, the idea that maximizing shareholder value should be the primary goal of a corporation has been backed by the Business Roundtable, albeit less explicitly. In its 2016 document, the group says management’s goal is “producing sustainable long-term value creation” and calls for compensation committees to “incentivize the creation of long-term value.” While it also suggests the board “may consider the interests of all of the company’s constituencies,” it advocated doing so when it “contributes in a direct and meaningful way to building long-term value creation.”
The new statement comes as the gap between the compensation growth of corporate executives and American workers has grown at staggering rates. An analysis released Aug. 14 by the Economic Policy Institute, a left-leaning think tank, found that chief executive compensation had grown 940 percent since 1978, by one measure, while typical worker compensation had risen just 12 percent over the same period.
Elson, the corporate governance professor, noted the statement was problematic coming from high-earning CEOs. “They talk about their great concern for the workers — well they’re the ones who’ve paid themselves so astronomically and created these pay gaps that are so dramatic,” said Elson. “I’d like each of them to volunteer to cut their own salaries by two-thirds and give it back to employees if that’s the way they feel.” (An email to the Business Roundtable about Elson’s comments was not immediately returned.)
Meanwhile, corporations are facing increasing pressure — whether from customers, employees or public groups — to take stands on issues that impact society at large. Tech companies have had employees push back against contracts with immigration and border control agencies. Walmart has faced calls to stop selling guns after a recent mass shooting in one of its stores and senior corporate leaders have been increasingly vocal on social issuesranging from racism to LGBTQ rights as consumers increasingly look to spend money with companies that share their views.
Indeed, the new statement is, in a sense, a return to the past for the powerful lobbying group. In its 1981 statement about corporate responsibility, the organization said “corporations operate within a web of complex, often competing relationships which demand the attention of corporate managers.”
It went on to list the same stakeholders as the new statement does, saying that “balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concerns of other constituencies also must have the appropriate attention.” August 19
* Contributing writer for the business section of The Washington Post, chronicling the changes in power, trends at the office and business ideas that shape organizations today.