Was the Business Roundtable Statement Mostly for Show? – (3) Disregard of Legal Constraints

Today is the first anniversary of the Business Roundtable (BRT) statement on corporate purpose. The statement, which was described by the BRT as “moving away from shareholder primacy,” was heralded by observers as “an important shift… in corporate America” and a “sea change in terms of how the core purpose of business is defined.” However, in a recent Wall Street Journal op-ed, and in our study The Illusory Promise of Stakeholder Governance on which the op-ed was based, we present evidence that the statement was likely a mere public-relations move rather than a signal of a significant shift in how business operates.

This post focuses on the BRT’s disregard of legal constraints under state corporate law. The post is the third of a series, published around the BRT statement’s first anniversary, aimed at providing Forum readers with a brief account of each of the pieces of evidence on the expected consequences of the BRT statement that our study puts forward. (The first post, which focused on the lack of board approval, is available here. The second post, which focused on the corporate governance guidelines of signatory companies, is available here.)

Disregard of Legal Constraints

The BRT statement proposes a new purpose for public corporations, but it does not discuss or even acknowledge the fact that public companies are subject to different state corporate laws. These state corporate laws vary significantly with respect to the power of directors and executives to embrace stakeholderism. Most importantly, our review indicates that about 70% of the U.S. companies that joined the BRT statement are incorporated in Delaware, which is widely viewed as a state with strong shareholder-centric corporate law.

An article by Leo Strine, who served as the chief justice of the Delaware Supreme Court at the time of the publication of the BRT statement, concludes that “a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end,” and that Delaware corporations can consider stakeholder interests “only as a means of promoting stockholder welfare.” Similarly, at a recent roundtable on the subject of Delaware law’s approach to stakeholders, organized by Columbia Law School and Gibson Dunn, the consensus of the participants was in line with Chief Justice Strine’s above view.

The shareholder primacy approach of Delaware law is well summarized by then Chancellor William Chandler in the case of eBay Domestic Holdings, Inc. v. Newmark:

Having chosen a for-profit corporate form … directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of the stockholders. The “Inc.” after the company name has to mean at least that. Thus, I cannot accept as valid … a corporate policy that specifically, clearly and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders…

Given some expressed concerns about the compatibility of stakeholderism with Delaware law, Martin Lipton, a prominent supporter of stakeholderism, co-authored a client memorandum that purports to address “a number of questions [that] have been raised about the legal responsibilities of directors in … taking into account … [stakeholder] interests.” What is most interesting about the memorandum is not what it includes but what it does not. The memorandum cautiously avoids opining that taking into account stakeholder interests beyond what would be useful for shareholder value is permissible under Delaware law.

Therefore, it seems likely that Delaware corporations (and therefore a substantial majority of the companies joining the BRT statement) may not balance the interests of shareholders and stakeholders, or at least would face significant legal issues if they explicitly chose to do so. For present purposes, however, what is most important is that neither the BRT, nor the numerous Delaware companies that joined the BRT statement, acknowledged or addressed this legal issue.

This disregard of the issue is, once again, consistent with the view that the BRT statement was expected to be largely a public-relations move rather than a signal of a significant shift in how corporations treat stakeholders.