October 30, 2019

A Roundtable Statement Without a Point? New Views on Corporate Purpose Miss the Mark

Herschel Joseph, an associate attorney in Gould & Ratner’s Corporate Practice, shares his views on why a recently released position on a company’s obligations isn’t all that it’s been sold as.

Many parts of the business world felt a seismic shift this past August, as the venerable Business Roundtable, a nonprofit group comprising CEOs of major U.S. corporations, released a new statement on the Purposes of Corporation, upending its previous position released more than two decades ago. Unfortunately, this sweeping new statement is long on platitudes and short on specifics.

In a nutshell, the new Roundtable statement contended that the success of numerous stakeholders in corporations was essential “for the future success of our companies,” and identified such stakeholders as employees, customers, suppliers, shareholders and communities.

Back in 1997, the Roundtable had issued a Purposes of Corporation that stated, “The paramount duty of management and of boards of directors is to the corporation and stockholders.” The stark contrast between the Roundtable’s old and new statements has led to largely positive reviews from news outlets, including Fortune, the Washington Post and the Wall Street Journal. Such reviews, however, are premature and at best present a rose-colored view of the intention of the drafters of the new statement.

Wither the Shareholders

The Business Roundtable’s 2019 Statement rings hollow because it contains basic misconceptions regarding the creation and distribution of value by a corporation among the stakeholders listed.

Corporations across the industry spectrum use various performance indicators to measure value produced for the business, customers and other stakeholders. Balancing these competing interests is an exercise corporations are constantly forced to undertake.

The new statement, however, falsely implies that corporations can somehow achieve success for each stakeholder without negatively impacting the success of one or more of the others. This, according to a Bloomberg opinion piece by Prof. Alfred Rappaport of Northwestern University’s Kellogg School of Business, is false:

“Consider the basic decision of setting the price for a product. In the short run, lower prices benefit customers (better value) and suppliers (increased demand), but could be costly for employees (less wage growth) and shareholders (lower profit). Higher prices may be good for employees and shareholders in the short run, but bad for customers and suppliers. Companies that charge too much will lose customers…”

Even assuming that a happy medium exists at which a corporation could contribute to the success of each listed shareholder, the new statement does not detail who takes precedent, chronologically, when corporate resources are limited. It would be hard to imagine a scenario whereby a corporation would promote the interests of a supplier or a defined community over those of shareholders.

Not Enough To Move the Needle

Another oft-cited criticism of the new statement is what it lacks: any guidelines, timeframes or other specific recommendations on how businesses are to implement it.

Generalities riddle the new statement. The signatories committed to “all of our stakeholders … [we are] dedicated to serving as good partners to the other companies … [to] supporting the communities in which we work.” Transparency is also another commitment the new statement includes, without any salient details on what should be made clear and how.

The lack of specificity in the new statement is problematic for three primary reasons:

  1. Without any defined measurement criteria each corporation can claim to have contributed to or be in the process of contributing to or increasing the value of specific stakeholders without the need to provide any tangible proof of such commitments.
  2. There is no timeframe whereby corporations, at the very least, must present a plan explaining how they plan to contribute to the success of each identified stakeholder.
  3. The lack of specifics regarding how and when scarce resources should be used by or apportioned to the various stakeholders allows for executives to hide poor decision making – resulting in lower than expected profits – by claiming that initiatives dedicated to increasing the value of stakeholders beyond shareholders are to blame.

What Now?

The Business Roundtable’s new statement on Purposes of Corporations, while seemingly well intentioned, was a clear effort to appease shareholders and the public’s desire for socially acceptable work practices.

Its failings, however, illustrate its signatories’ disregard for any measurable change regarding how they approach the well-being of the stakeholders listed. Without tangible commitments, substantial changes in the way corporations treat their obligations and responsibilities will prove as evasive as the new statement itself.

Do you agree or disagree with Herschel? Please don’t hesitate to contact him or any of the attorneys in Gould & Ratner’s Corporate Practice with questions or for more information.