AUG. 21, 2019
Will BRT Statement Help to Change Corporate Behavior?
The statement released this week by the Business Roundtable, signed by 181 chief executives of some of the world’s top companies, is notable in that it acknowledges the increased responsibilities corporations have as they face unprecedented scrutiny not just from shareholders, but also employees, customers, activists and governments.
But the statement leaves unanswered many questions that will have to be addressed, and ultimately the companies will be judged by their actions and whether they genuinely make decisions based on more than bottom-line considerations.
The statement outlined five commitments:
- Deliver value to customers;
- Investing in employees;
- Dealing fairly and ethically with suppliers;
- Supporting communities where they work; and
- Generating long-term value for shareholders
This is mainly about the Business Roundtable formally catching up to what has been happening for a while, said Alison Taylor, managing director of BSR, an organization focused on corporate sustainability and governance.
“The big turning point was Larry Fink’s 2016 CEO letter, which made similar points about providing value to all stakeholders,” said Taylor. “Potential employees and the general public care a lot more about corporate purpose and values than they used to, and want to see corporate behavior reflect this.”
While the statement itself, by definition, is cautious and carefully worded, Taylor said it represents “a dramatic shift to officially move away from an exclusive focus on shareholder value” that will set up debates and dialogues between shareholders and corporate management.
“Shareholders might complain about a decision, and management respond with a point about stakeholder, societal or long-term value,” she said. “These debates have no easy way to get resolved today.”
While the statement is a bit terse and barren, Andrea Bonime-Blanc, founder and CEO of GEC Risk Advisory, said it should be viewed as a “message sent across the bow” that CEOs finally recognize while they’ve done really well for themselves and their shareholders, “they acknowledge the existence of other stakeholders and the impact they have on business."
The statement is a belated recognition millennial employees and customers are putting companies and their CEOs under the microscope for a variety of key issues, said Bonime-Blanc. These include income inequality; not sharing new technologies with authoritarian regimes, and not allowing powerful people to get away with multimillion #MeToo-related severance packages, among others.
Two areas stand out for lacking detail, said Taylor. There is no explicit mention of climate change, and the sections on workers “developing new skills for a rapidly changing world” lacks specifics.
“The lack of commentary on values and ethics seems odd; ethics is only mentioned in the context of supplier relationships, not fundamental principles,” she said. “This likely is a result of resistance and concern from corporate general counsels.”
The Roundtable may be trying to avoid shareholder clashes by framing the discussion in terms of business providing societal and/or long-term value, instead of saying companies should make decisions not to pursue business opportunities on ethical grounds, said Taylor.
“This is a very important distinction and aligns with ‘shared value’ concepts in sustainability, which argue that doing the right thing for society creates greater shareholder value over the long term,” she said.
But while shared value remains a dominant concept in sustainability, it avoids many of today’s trickier management decisions, said Taylor. "Most notably how to respond to intensifying employee pressure over specific commercial decisions--think of Google in China, or Wayfair employees protesting the commercial relationship with migrant detention centers,” she said. “The world has already moved on and this statement does not address these key 2019 dynamics.”
That said, Taylor thinks the statement “moves the parameters of the debate about the role of business," and gets issues onto the table that before couldn't be discussed. Still, there remain questions about how companies will actually execute. While the statement makes it sound as if balancing the interests of shareholders with other stakeholders is simple, nothing could be more complicated, she said.
“If you don’t have short-term shareholder value as the sole clear reference point, how do you balance and navigate across this array of stakeholder interests? Using what criteria? The issue to watch for me is employee activism,” said Taylor. “A newly empowered employee base calling for one set of actions may quickly clash with shareholders calling for another, with corporate management caught in the middle.”
Bonime-Blanc said, as with anything considered “intangible”--ethics, values, reputation--CEOs predisposed to doing the right thing and being more stakeholder-savvy, will integrate the issues, risks and opportunities of a broader set of stakeholders.
“CEOs who aren’t ‘woke’ in this way will have done the equivalent of ‘greenwashing’ by signing this statement, i.e., they engaged in a stakeholder marketing exercise,” said Bonime-Blanc.
“Besides powerful stakeholders like regulators, the only actors who can hold these CEO’s feet to the fire are boards – while I wouldn’t hold my breath too hard, I do finally see some green shoots of hope in the boardroom" on considering environmental, social, governance and technology issues, and a broader range of stakeholder perspectives of late.
On the flip side, executives at publicly traded companies have a fiduciary duty to do what is best for shareholders, and it’s possible lawsuits could be filed to challenge any actions a company takes that works against maximizing shareholder value, even if there is a long-term societal value.
“Mischievous shareholders could use this BRT document to accuse CEOs of worrying about things beyond increasing the value of their shares, a fiduciary responsibility,” Axios reported.
The Council of Institutional Investors reacted by saying the Roundtable statement “undercuts notions of managerial accountability to shareholders.” The Value Edge Advisors blog questioned what the Roundtable was looking to achieve, saying it may be an effort to preserve compensation levels because CEOs “do not think stock-based metrics will support current levels of compensation in a likely recession, and they want something less quantifiable.
“Everything will depend on how specifically and quantifiably they describe their stakeholder goals, and especially how their compensation is tied to those goals,” Value Edge said.