BRT Statement of Corporate Purpose: Debate Continues

A new WSJ op-ed: “‘Stakeholder’ Capitalism’ Seems Mostly for Show” (Lucian Bebchuk and Roberto Tallarita, Harvard Law School Program on Corporate Governance) posits that the corporate CEOs that signed onto the Business Roundtable’s (BRT) updated Statement of Purpose of a Corporation last year appear to have done so primarily to generate positive PR rather than to reflect real change in how their companies operate based on the fact that few signatory CEOs sought or obtained board approval or ratification. The conclusion rests on the theory that if CEOs believed that signing onto the updated statement was an “important corporate decision,” they would not have signed on without their board’s approval as a matter of good corporate governance. The assertion that few signatory CEOs sought or obtained board approval or ratification is based on responses to the authors’ inquiries from 48 companies, or approximately 27% of all CEO signatories, and the authors’ extrapolated expectation that the balance of companies that did not respond to their inquiry would have responded similarly.*

The op-ed theorizes: “The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. That may be because they believe their companies are already meeting the standard for taking care of stakeholders. But it still implies that they believed signing the statement wasn’t a major step for their businesses.” The op-ed seeks to further support its view about signatory CEOs taking action merely for appearances based on the authors’ review of the companies’ corporate governance guidelines, which purportedly commonly reflect a “shareholder primacy” approach.

As we reported last year, in response to the presumably unanticipated deluge of positive and negative commentary following the release of its updated statement, the BRT itself clarified in a Q&A format certain aspects of the statement that had generated confusion and angst among investors (see, e.g., CII) and others—indicating that the new language was in fact intended to more accurately reflect business principles that the BRT had espoused for many years, and was not intended to reflect movement toward a “stakeholder governance” model or to promote “radical changes to corporate governance structures,” as illustrated by these excerpts from the clarification:

The BRT’s clarification expressly reiterates the statement’s “unambiguous defense” of the free market system and companies’ accountability to shareholders for generating long-term returns, while articulating deep-rooted views that generating long-term value and a sustainable (over time) organization demands consideration of multiple stakeholder interests and expectations—not unlike the messages imparted by the BRT’s October 1981 “Statement on Corporate Responsibility.”

As such, based on the facts as presented by the BRT, subject to company-specific protocols and practices, it’s not surprising that the signatory CEOs generally would not have sought board approval to sign onto the updated statement. According to the BRT’s clarifying Q&A, the BRT CEOs were not intending with this statement to signal a significant shift in how they operate and strive to operate their businesses or a move toward a stakeholder governance model; rather, by their own accounts, they were merely espousing long-held, non-controversial, common sense principles that a successful business enterprise must consider various stakeholders in order to build and maximize the benefits of corporate value—a notion that they did not believe was accurately reflected in the organization’s immediately preceding (1997) “Statement on Corporate Governance.”

*The evidence in the op-ed is reportedly based on the authors’ study: “The Illusory Promise of Stakeholder Governance” (working draft) forthcoming in Cornell Law Review this December.