CEOs Say They Don’t Just Work for Shareholders. Do They Mean It?

By Matt Dallisson, 23/08/2019

The Business Roundtable’s statement on corporate purpose issued earlier this week is noteworthy both for its endorsement of inclusive prosperity as an ideal and for its rejection of maximizing shareholder returns as the sole corporate objective. Although echoing what many other groups and commentators have long been saying, the BRT’s about-face on its 1997 embrace of shareholder primacy took courage, and gaining consensus among nearly 200 CEOs of leading companies was surely not easy—though the new document in many respects resembles the group’s 1981 statement, which also acknowledged the importance of multiple constituencies for companies’ long-term success. Perhaps it is not surprising that the new statement also recalls Johnson & Johnson’s well-known credo given that J&J’s chairman and CEO Alex Gorsky headed the BRT drafting committee.

However, the real significance of this week’s statement will depend on whether—and how—it is translated into practice. As of now, there are at least four reasons to view the statement as more of a symbolic gesture than a harbinger of change in how corporate America functions.

For one thing, the statement itself suggests that it is meant as an updated description of how CEOs see their job rather than a call to action. According to the preamble, “the 1997 language on corporate purpose [which defined “generating economic returns to its owners” as a corporation’s principal objective] does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all of our stakeholders.” To be sure, the BRT’s commentary on the statement hints at its normative implications and Gorsky himself has characterized it as a “call to action,” but the language of the preamble suggests that it is little more than a new description of what CEOs already do—or believe they do. If that is the dominant interpretation among those who signed, its practical impact will certainly be limited.

For another, there is no mention of changes in corporate governance or management practice to implement the new stance. The power of the 1997 statement, which was issued under pressure from institutional investors according to the chair of the drafting committee with whom I spoke a few years ago, lay less in the words themselves and more in the extensive apparatus that was being put in place at the time to give those words teeth. This apparatus included, among other things, the expansion of shareholder rights and powers to make corporate takeovers easier, changes in shareholder voting to give shareholders more clout, a narrowing of the criteria for measuring corporate performance to focus on returns to shareholders, and changes in law and practice to tie executive compensation more closely to shareholder returns. Indeed, while companies use a variety of financial and operating metrics to measure performance, and a few use metrics related to safety, diversity, or the environment, the most widely used measure in the US today is Total Shareholder Return (TSR). In the absence of some changes in these governance arrangements or in the scorecard for measuring corporate performance, it is hard to see how the BRT statement can have much bite. No one knows this better than the CEOs who signed this document yet the topic is not mentioned.

Another reason to withhold judgment about the statement’s significance is the difficult issue of how the interests of various stakeholders are to be weighed and reconciled. The BRT’s 1981 statement notably spoke about balancing the “legitimate claims” of various constituents and the need for trade-offs at times, but this week’s statement is silent on the implications for managerial decision making. This is a thorny question and one that has vexed many who have given it serious thought. Surely, it can’t be the case that managers should (or can) satisfy the interests of all stakeholders all of the time. But how are those interests to be prioritized and mediated? Classical stakeholder theory does not answer this important question.

In work that I have done with my HBS colleague Joe Bower, we have argued that the interests of the company is the mediating device and that no stakeholder has fixed “primacy.” Rather the relative importance of various stakeholders’ claims can vary from time to time depending on the circumstances and needs of the company. At the same time, as I have also argued elsewhere, the interests of various stakeholders must be prioritized not only by their instrumental value to the company but by their intrinsic importance for human well-being. This is where ethical standards defining human rights and wrongs, and prohibited harms can be helpful. But this is a large topic that is not addressed at all by this week’s statement. Yet, understanding how the CEO signers prioritize these interests and resolve conflicts among them is crucial for assessing the statement’s significance and likely impact. If conflicts are to be resolved through the lens of shareholder returns, any change will be modest at best.

The small number of signatories from the investor community is yet another reason to take a “wait-and-see” attitude. By my count, only five of the signers head up firms that are primarily asset managers although, to be complete, five others, including BRT Chairman Jamie Dimon, represent diversified banks with large asset management groups. However, it would have been comforting to see more names of influential investors, especially from the hedge fund and private equity world. If corporate directors are to be believed, a key reason for their reluctance to make the kinds of investments alluded to in the new statement – in serving customers, developing employees, innovation, environmental protection, sustainable practices across the business—is capital markets pressures, especially from activist funds that buy significant blocks of shares for the sole purpose of driving up the company’s stock price by forcing a change in the company’s board, management, strategy, or financial structure. Rare is the activist hedge fund concerned about employee well-being, exceeding customer expectations, retiree pensions, sustainable supply chains, or innovations to solve the world’s pressing challenges. So long as directors who deviate from short-term value maximization are vulnerable to removal by impatient shareholders, they will be understandably reluctant to take the kinds of actions implied by the BRT statement and needed to achieve the inclusive prosperity it espouses.

Admittedly, it is unfair to expect the BRT’s statement to address all of these issues and we should bear in mind that it took more than three decades for the shareholder primacy doctrine to go from academic theory to embedded orthodoxy. (The seminal academic papers were written in the mid 1970s and the theory began working its way into practice in the 1980s.) However, If the BRT (or any other group) is serious about inclusive prosperity, sustainable capitalism, or any other significant change in how America does business, these are a few of the (many) issues that will have to be tackled.

For now, it is premature to say whether the BRT’s statement is the first step in a sustained effort or merely a one-off attempt to stem the rising tide of discontent with capitalism as it has come to be practiced in the US.