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Counsel to Shearman & Sterling LLP reflects on the Business Roundtable's latest Statement on the Purpose of a Corporation
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
On August 19, 2019, the Business Roundtable (BR) issued a Statement on the Purpose of a Corporation signed by the CEOs of 181 significant companies. The statement said companies owe a fundamental commitment to a company’s stakeholders (customers, employees, suppliers, communities in which the company works) and shareholders. A number of commentators have said that the statement marks a significant departure from the traditional view of the purpose of the corporation. They read the statement as authorizing companies to take action which benefits employees, customers, or the community even though that may not enhance long-term shareholder value – even detract from it.
The overwhelming American legal view, as reflected in Delaware law, is that the objective of a business corporation is to enhance the long-term value of the corporation for the benefit of shareholders. [1]
Are the BR statement and Delaware law necessarily contradictory? Larry Fink, the CEO of BlackRock and a signer of the BR statement, has, for a number of years been urging corporate executives to take stakeholder interests into account. But his letters can be fairly read as saying that if corporations do not, they risk loss of long-term value. Thus, paying attention to stakeholders is important for value enhancement and, therefore, consistent with Delaware law.
Can the BR statement be read in the same way? I think it probably can, although many commentators on the statement think it cannot. However, what has always worried me as a director is how I calculate the economic value to the corporation of taking action, which may be costly today, but in the long run will enhance the company’s reputation and, therefore, profitability. Does the board have to go through an exercise which quantifies the long-term value and compares it to the cost? Do boards do that? Or do they just think that there is a rational relationship between the proposed action and long-term value and that their decision on whether or not to take action (as long as properly articulated) will be protected under the business judgment rule?
Does it matter how the purpose of the corporation is articulated? As a practical matter, I am not sure. In many states, corporations are governed by constituency statutes. For example, in Pennsylvania directors are told that in considering the best interests of the corporation, they may consider the impact of any action on various stakeholders including employees and communities where the company is located. It is specifically provided that the interests of none of the groups (including shareholders) shall be regarded as dominant or controlling. I am not aware of any difference in the behavior of boards of companies incorporated in a constituency state like Pennsylvania or Delaware, except perhaps in defending the company against a hostile tender offer.
Conceptually, however, I think we may be at a significant point. And, in time, that can have important practical consequences.
Let me pose a situation to ponder. The board of Company A has a proposal to outsource the work of a plant in a US community whose workers are predominantly 55 or older. Outsourcing the work to young people in X, a very poor country, would save substantial amounts of money and provide good work to people, many of whom are unemployed and many of whose families suffer from malnutrition. Company A has had good experience in outsourcing work to a different factory in X. The plant to which the work would be outsourced is outfitted with solar panels and would provide power in an environmentally friendly fashion. The US plant relies on oil heating and cannot practicably be converted to solar heating.
If we looked just at long-term economic returns, there is a relatively clear metric, and probably the answer would be to outsource. If we look at the impact on stakeholders, the answer is not clear. How should one weigh the impact of outsourcing on new foreign employees and current US employees? How should the more friendly environmental impact be weighed? Who should make these judgments? Is it the board? Should the BR statement be read as a way to bolster the power of the board as decision maker by making their decisions essentially unreviewable?
If it is, should the board continue to be elected exclusively by shareholders? In deciding how to vote, won’t shareholders look to how their stock is doing? Would that bring back as a dominant factor the shareholder gain perspective? Management and directors are typically compensated to a significant extent in stock to align them with shareholder interests. Would that have to be rethought in a world where stakeholder interests are of equal value to shareholder interests?
Or should stakeholders have places on the board? Which stakeholders? How will voting be organized? Senator Elizabeth Warren has authored legislation which would have 40% of the board selected by employees. How should representatives of the community be chosen? Or representatives of customers? How much weight should each of these stakeholders have on the board?
These difficult questions lead me to read the BR statement as not seeking to depart from the traditional Delaware articulation of the law governing the purpose of the corporation. The value of the BR statement is in reminding boards that the impact of corporate action (or non-action) on employees, customers, and the community can significantly effect corporate value, particularly long-term value.
[1] In its Principles of Corporate Governance, published in 1992, the American Law Institute stated that the purpose of the corporation is to enhance corporate profit and shareholder gain. It then goes on to say that the corporation may (even if it doesn’t enhance profitability) take into account ethical considerations reasonably regarded as appropriate to the responsible conduct of business and may devote a reasonable amount of resources to humanitarian, educational, and philanthropic purposes. The Principles reflect the law and also what the Institute thought a desirable direction for the development of the law. The American Law Institute has just launched a Restatement of the Law of Corporate Governance. It will confine itself to what the law is.
Robert H. Mundheim is of counsel to Shearman & Sterling LLP and formerly executive vice president and general counsel of Salomon Inc. Prior to joining Salomon Inc., he was co-chairman of the New York law firm of Fried, Frank, Harris, Shriver & Jacobson. He served as University Professor of Law and Finance at the University of Pennsylvania Law School, where he had taught since 1965, and was dean of the law school for seven and a half years. Among his other professional activities, Bob has been general counsel to the United States Treasury Department (1977-1980), special counsel to the United States Securities and Exchange Commission (1962-1963), and vice chairman, governor-at-large, and a member of the Executive Committee of the National Association of Securities Dealers (1988-1991). He is currently a director of Gogo LLC. He was chairman of the Board of Directors of Quadra Realty Trust, a director of eCollege, Benjamin Moore, Commerce Clearing House, Arnhold & S. Bleichroeder Holdings Inc., Union Capital Corporation, Weeden Inc., and First Pennsylvania Bank, and a member of the Supervisory Board of Hypo Real Estate Holding AG. Bob is a member of the Board of Trustees of New School University and of the Curtis Institute of Music, and a Trustee of the American College of Governance Counsel. He is an emeritus member of the Council of the American Law Institute. He served as a member of the American Bar Association Task Force on Corporate Responsibility and has been a faculty member of the Vanderbilt Directors’ College, the Duke Directors’ Education Institute, and the Stanford Directors’ College. He was the president of the American Academy in Berlin and received the Officer’s Cross of the Order of Merit of the Federal Republic of Germany. He holds an M.A. (honorary) from the University of Pennsylvania, an LL.B. (magna cum laude) from Harvard University Law School, and a B.A. (magna cum laude) from Harvard College. Bob is a member of the Board of Directors of Salzburg Global Seminar.
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