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In the latest installment of the Salzburg Questions for Corporate Governance, John Cannon, a partner at Shearman & Sterling, reflects on the impact of the BRT Statement in light of recent events
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
In August 2019, Business Roundtable, the self-described "association of chief executive officers of America's leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy," issued a new "Statement on the Purpose of a Corporation" (the "BRT Statement"). According to the press release accompanying the BRT Statement, the statement was "signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders."
The BRT Statement caused quite a stir. It appeared to repudiate the "shareholder primacy" model of corporate purpose in favor of a "stakeholder" or "constituency" model, in which the corporation is run for the benefit of multiple constituencies. Shareholder primacy has been long espoused in the Anglo-American business world and – as most judges, corporate lawyers, and legal academics [1] would assert – is mandated by the corporation law of Delaware [2]. Even before the COVID-19 pandemic arose to test the signatories' commitment to the BRT Statement, many questioned what the statement meant.
Cynics (or perhaps realists), including this author, doubt whether the BRT Statement represented a full-hearted commitment to stakeholder-focused corporate governance, and view it instead principally as a strategic move (akin to Bismarck's adoption of social insurance to avoid socialism). From this perspective, the BRT Statement likely reflects an underlying belief by the signatories that:
The crucible of the COVID-19 pandemic, at best, has delivered an ambiguous verdict as to the sincerity and strength of the signatories' commitment to running their corporations for the benefit of all stakeholder constituencies. Some signatory corporations have taken actions to mitigate the effect of the pandemic and the associated economic crisis on employees, customers, and other constituencies. Others, however, have quickly implemented furloughs, involuntary pay cuts and layoffs to lessen the adverse impact of the crisis on the bottom line and the economic interest of shareholders as residual claimants. In fact, as reported by The Washington Post in May, a number of signatories continued paying dividends as they furloughed employees.
Facing a dire reality, companies in those industries most affected by the pandemic - including retail, travel operators, restaurants, and hotels – have been forced to take actions that hurt many constituencies to survive and, if possible, stave off bankruptcy. Nevertheless, notwithstanding their best efforts, many companies have still been forced into reorganization, and their shareholders may face a wipeout.
Regardless of whether the BRT Statement really signaled a change in corporate purpose, the current crisis – including the Black Lives Matter and other social justice movements reinvigorated by the shocking murder of George Floyd – has illustrated once more how powerful mass movements and progressive policy advocates can be in this era of social media campaigns, advertiser boycotts and "cancel culture," where personal and corporate reputations and brands cultivated over decades can collapse almost overnight.
That reality existed before COVID-19 and Black Lives Matter – and the BRT Statement was in part a response to it - but the current crises have only focused additional attention on a number of systemic issues, including income inequality, racial discrimination, the inadequacy of our social safety net and health care system, climate change, supply chain insecurity and our crumbling infrastructure, that will bring additional pressure to bear on corporations, and counteract collective action problems.
Consequently, in most circumstances (i.e., outside of the mergers and acquisitions or failing business contexts), it is in the self-interest of large for-profit corporations and their shareholders to conduct themselves in a manner consistent – or at least perceived to be consistent - with the BRT Statement. Although addressing systemic issues cannot be accomplished without government action, corporate conduct consistent with the BRT Statement also may limit the extent to which corporations become subject to mandatory regulatory restrictions that could damage their profitability.
In sum: While the BRT Statement may not change the corporation law of Delaware or represent a real rejection of shareholder primacy, it is likely to be a reasonably accurate predictor of how successful corporations will conduct themselves in the coming years.
[1] Section 2.01 (“The Objective of the Corporation”) of Preliminary Draft No. 1 (January 31, 2020) of the American Law Institute’s first Restatement of the Law of Corporate Governance, states “the objective of a business corporation is to promote the value of the corporation for the benefit of its shareholders, within the boundaries set by law.” The draft continues by stating that, “in doing so, a corporation may have regard to” other considerations, including the impact on other stakeholders.
[2] According to the Delaware Division of Corporations’ 2019 Annual Report Statistics (https://corpfiles.delaware.gov/Annual-Reports/Division-of-Corporations-2019-Annual-Report.pdf), 67.8% of the companies in the Fortune 500 are incorporated in Delaware.
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John Cannon is a partner in the Compensation Governance and Employment Retirement Income Security Act (ERISA) Group of Shearman & Sterling LLP, and co-chair of the firm's Corporate Governance Advisory Group. He is an inaugural fellow of the American College of Governance Counsel and a member of the American Law Institute, and is a frequent speaker to boards of directors, professional groups, and law students on executive compensation and corporate governance matters as well as the international regulation of pay in the financial services industry. In his practice, John focuses on all aspects of corporate governance and executive compensation and benefits, including state corporation, securities, banking, bankruptcy, employment and tax laws, and the ERISA. John has extensive experience in advising corporations and boards of directors on management succession, shareholder engagement, compliance with Dodd-Frank and Sarbanes-Oxley, and the employee issues raised in the mergers and acquisitions context, including in cross-border transactions. He received a J.D. from the New York University School of Law and an A.B. from Harvard College. John is a Fellow of Salzburg Global Seminar and a member of the advisory committee for the Salzburg Global Corporate Governance Forum.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter