- New principles may dilute accountability
- Stepping back from Rule 14A-8 rollback would increase Roundtable’s credibility
The Business Roundtable’s historic about-face on 19 August from its previous promotion of shareholder primacy as the main duty of corporations has environmental, social and governance (ESG) proponents cheering, but the Council of Institutional Investors (CII) sees it as the latest effort by business leaders to protect CEOs from shareholder pressure.
“I think it’s intended to fend off accountability to shareholders,” CII’s executive director, Ken Bertsch, told Activistmonitor. “At the same time, they’re trying to limit other people being able to raise social issues. In particular, they’re trying to limit the ability of shareholders to bring proposals on various social issues.”
The new Statement on the Purpose of a Corporation released this week, was signed by 181 CEOs who have committed to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. It’s a dramatic departure from every version of the document the Roundtable has issued since 1997, which have said corporations exist principally to serve shareholders.
A statement CII released said in part, “Accountability to everyone means accountability to no one.” The Business Roundtable has articulated its new commitment to stakeholder governance, but it actually resurrects an older policy view, CII noted, adding it works to diminish shareholder rights and proposes no new mechanisms to create board and management accountability to any other stakeholder group.
The danger of diluting accountability is valid because there is not yet a wide consensus on a framework to measure non-financial performance, Matteo Tonello, managing director of ESG at The Conference Board, a nonprofit business membership and research organization, said in an email.
“[A]nd the legal standards of fiduciary accountability defined by the courts often rely on the notion of shareholder interest and cannot easily be transferred to a broader nexus of stakeholder interests,” he said.
The Forum for Sustainable and Responsible Investment (US SIF) said it welcomes the overarching sentiment of the revised principles, which is for corporations to be better societal actors.
But “it would be more meaningful if there were actual action steps in the statement. What are these companies going to do on wages? On climate [risk mitigation] steps?” said US SIF’s policy director, Bryan McGannon.
Curtail efforts to rollback Rule 14A-8
Another way the Roundtable’s shift could gain more credibility would be by ending its support for rolling back shareholder rights and its attempts to water down the shareholder engagement process, McGannon said. The organization is actively pushing the Securities and Exchange Commission to revise Rule 14A-8 by increasing ownership and resubmission thresholds, which would make it harder to get shareholder proposals on proxy statements so they could be voted on by other investors, he added.
A statement by Andrew Behar, CEO of the nonprofit As You Sow, which promotes environmental and social corporate responsibility, pointed out the contradiction in the Business Roundtable’s adopting concepts that in recent years it has led efforts to deny shareholders the right to raise with companies.
“If the Roundtable’s new statement is to be taken seriously, we expect to see it withdraw its ongoing attempts to eliminate shareholders’ voices and welcome the engagements designed to implement these new practices,” the statement said. The test of the redefined purpose will be whether it compels companies to shift their policies and practices, including “empower[ing] corporate leaders to internalize costs that have led to environmental degradation,” the statement went on to say.
Tonello called the statement “quite meaningful, given what [the Business Roundtable] represents,” but said it’s hardly trailblazing given that the sentiments it expresses have been brewing for many years.
Among the contributing factors to the about-face on economist Milton Friedman’s profit maximization dogma, he said, are the rise of independent boards, the financial crisis of 2008 and the widening inequality that followed, and the emergence of social media, which provide a platform for stakeholder groups to voice their concerns and amplify their demand for corporate accountability.
Tonello also noted the development of frameworks for measuring and reporting ESG and other non-financial metrics of company performance, as well as the adoption of socially responsible investing strategies by mainstream institutional investors.
What’s the next step?
Kristin Bresnahan, executive director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, said she believes the new statement is sincere but is interested to see what steps the Roundtable takes to make it more concrete in the future. One option might be to gather board directors, as the Millstein Center does, to discuss and come to a consensus “around what are best practices about how employees are treated, best practices around the “E” and the “S”, how is this going to look going forward and how are companies going to implement these in their specific industries,” she said.
The Business Roundtable is not the first business member organization to acknowledge the need for companies to embrace the interests of a broader range of stakeholders.
The Conference Board, in its 2012 sustainability report, introduced benchmarks across more than 70 environmental and social performance metrics of public companies. In April 2019, it officially transformed its Governance Center into an ESG Center.
“We have been hearing from our members for many years about their efforts to cultivate a broader range of stakeholder relations and the understanding that to pursue those stakeholder interests is key to the long-term success of the company,” Tonello said.
The Roundtable’s expanded purpose of the corporation includes investing in employees by providing fair compensation, significant benefits, training and more inclusive workplaces, fair and ethical dealings with suppliers and respecting people in the communities where a company operates by protecting the environment.
Major financial media outlets have also expressed skepticism about how altruistic the Roundtable’s motivation is in redefining corporate purpose. The Wall Street Journal suggested it could be aimed at deflating the demands of activist investors, while the Financial Times said it could be perceived as a strategy to hamper ESG activism if it helps stave off regulation.
By David Bogoslaw