The Newly Revised Role of A Corporation

ATTORNEY: TAMAR A. WEINRIB
POMERANTZ MONITOR NOVEMBER/DECEMBER 2019

The Business Roundtable, a lobbying group of CEOs formed to promote pro-business interests, recently issued a statement “modernizing its principles on the role of a corporation.” Upending the decades long, widely accepted view that the goal of a corporation is to increase shareholder value, nearly two hundred chief executive officers of some of the largest U.S. corporations recognized in that statement that investors are but one spoke on the wheel of a corporation’s success. Since 1978, the Roundtable had periodically issued “Principles of Corporate Governance” stating that the primary purpose of a corporation is serving its shareholders. Indeed, Milton Friedman, the University of Chicago economist who is the doctrine’s most revered figure, famously wrote in The New York Times in 1970 that “the social responsibility of business is to increase its profits.”

Now, 181 of the Roundtable’s 193 members, including Marry Barra of General Motors, Jeff Bezos of Amazon, and Tim Cook of Apple, have revised that stated purpose to “ensure more inclusive prosperity” by encouraging companies to “build long term value by investing in their employees and communities.” This includes new corporate ideals such as compensating employees fairly, providing adequate training and education, fostering diversity, dealing ethically with suppliers, and supporting communities. Both in its initial statement and a subsequent publication responding to questions and criticism, the Roundtable emphasized that the statement is not a “repudiation of shareholder interests in favor of political and social goals.”

The primacy of shareholder interests was solidified in the 1980s, in an era of hostile corporate takeovers. In many of those cases, boards of directors, seeking to protect their positions, justified their rejection of buyout offers that looked favorable to shareholders by hiding behind other interests, such as protecting employees from post-takeover layoffs. In a series of landmark decisions, the Delaware courts enshrined the notion that once a company is for sale, “maximizing shareholder value” has to be the most important consideration.

In addition to other pro-corporation endeavors, in 1975 the Roundtable helped defeat anti-trust legislation; in 1977 it helped defeat a plan for a consumer protection agency and successfully blocked labor law reform; and in 1985 it successfully lobbied for a reduction in corporate taxes. The current shift in corporate purpose acknowledges the integral role large corporations need to play in effectuating change on issues like climate change and water and resource scarcity. The timing of this acknowledgment is not accidental. Large corporations have increasingly come under attack for their failures to protect societal interest—including health, environment, and consumer privacy—while chasing profits. For example, a judge recently fined Johnson & Johnson $572 million for contributing to the opioid crisis in Oklahoma. ExxonMobil has been criticized for the years it spent challenging climate science and slowing global action. Facebook has been heavily criticized for sharing its users’ data with other companies without consent.

 While laudable in theory, the Roundtable’s new corporate purpose statement is wholly devoid of actionable content. Words, however lofty, are insignificant without concrete change. Critics worry that the statement promotes managerial confusion as to how to balance and prioritize goals that are at times conflicting—employees versus community versus stakeholder value. Indeed, the Council of Institutional Investors responded to the Roundtable’s statement by declaring that “accountability to everyone means accountability to no one.” Moreover, instituting new policies to effectuate the new corporate purpose would mean overhauling entire business models for some businesses— rendering it unlikely such corporations would practice what they’ve just begun to preach. In addition, notably missing from the Roundtable’s statement is any mention of other major corporate issues such as exorbitant executive compensation, which dwarfs median employee pay by many multiples. Treasury Secretary Steve Mnuchin has declared, “I wouldn’t have signed it,” calling the statement a “simple answer” that “does not fully explore the issues.” Another vocal critic stated, “how can you tell people who had confidence in you and devoted their hard-earned money to you that they are last in line?”

Interestingly, Chief Financial Officers do not seem to share their CEOs’ view that change is necessary. In a CNBC CFO survey, almost 100% of CFOs rated their companies at least “above average” in delivering value to customers, investing in their employees, supporting communities and dealing with suppliers.” 96% also rated their companies “above average” in delivering long-term value to shareholders.