The ink had barely dried on the Business Roundtable’s recently released Statement on the Purpose of a Corporation – moving beyond shareholder primacy to embrace serving all stakeholders – before the skeptics began to pile on.
Those critics generally fall into two camps. Those who believe the statement goes too far, and represents a dereliction of fiduciary duty that deflects CEOs and boards from what they should be doing – creating value for shareholders. And those who believe it doesn’t go far enough, and that only government intervention and regulation can hold CEOs accountable for serving the interests of various stakeholders.
The Council of Institutional Investors was a prominent critic, sharing concerns about the weakening of management accountability and the concomitant impact on competitiveness and profitability. On the flip side, populists on both sides of the aisle dismissed the move as simply optics and politics with no meaningful teeth or action.
The range and depth of reaction to the Business Roundtable’s action is a testament to the importance of the issues at stake and the complexities facing businesses today. Our view is that stakeholder capitalism should be given a chance to work. Here are five reasons why:
Government and philanthropy cannot fix the crisis of capitalism on their own. The simple truth is that government and philanthropy cannot solve deep, systemic problems like inequality, the future of work, and climate change on their own. Markets need to be part of the solution. This is one of the central motivating forces behind the stakeholder model – the recognition that the shareholder primacy pathway is not getting the job done, and that private enterprise has a defining role to play in improving people’s lives and restoring faith in the American Dream. The 30 CEOs who signed a pledge this week at the G7 summit saying they’ll support “inclusive growth” recognize this too.
It serves fiduciary duty more effectively. Delaware law does not enshrine a principle of shareholder primacy or preclude a board of directors from considering the interests of other stakeholders. The fiduciary duty of the board is to promote the value of the corporation. Fulfillment of that duty is best served by considering the risks and opportunities relating to all stakeholders – including shareholders, employees, customers, suppliers, the environment, and communities. As leading scholars of corporate governance recently stated in a Harvard Law article on the subject, “it is a matter of basic common sense.”
Creating value for shareholders and other stakeholders is not a zero sum game. Years of research and data have shown that the companies that perform well in serving stakeholder needs – meaning, those that invest in workers, customers, communities, and the environment – generate better returns for investors. Companies that do best in balancing the interests of different stakeholders – particularly worker pay and treatment and environmental impact – also generate 6.4 percent higher return on equity relative to their peers, according to a recent analysis by JUST Capital. They also display higher net margins, higher operating margins, and higher valuation from investors. The top 20% of JUST-ranked companies outperformed the bottom 20% across all sectors by some 9% from November 2016 through March 2019. There are no guarantees, obviously, but the notion that balancing the needs of all stakeholders leads to lower returns is simply wrong.
Competition is enhanced, not reduced, by a focus on stakeholders. Investors aren’t the only ones to show a preference for companies that embrace stakeholder governance – consumers, employees, and job seekers do too. In a 2018 survey of nearly 9,000 Americans, JUST Capital found that 76% of working Americans would opt to work at a company that catered to a broader base of stakeholders, even if it paid less. Consumers are becoming increasingly motivated by factors that tie back to purpose-driven leadership. Our surveys indicate that 85% of respondents are willing to pay a little more to buy a product from a just company that serves stakeholders better. Clear competitive advantages in the race for ESG investment dollars, workplace talent and purpose-driven consumers await those best able to serve all stakeholders.
The market will hold companies to account, providing it has the necessary information. As stakeholder governance takes root and drives competitiveness and returns, so companies will be increasingly held to account by the market for their actions. Granted, availability of and access to information of this kind is still in its infancy. But as companies get better at disclosing their performance across the stakeholder landscape (including on worker pay and benefits, customer treatment, community investment, and environmental impact), and as standards emerge, so the market will get better at rewarding leaders and punishing laggards. Embracing transparency, and a culture of disclosure, will itself become a competitive advantage.
The motivations of the 181 CEOs who signed the Business Roundtable’s statement of purpose are aligned with most of those who would see markets help solve problems not exacerbate them. The incentives of the free market are exactly what will hold these CEOs – and surely many more to come – accountable for delivering on a more just and inclusive economy.