It’s been a little over a year since the Business Roundtable (BRT) issued its much-ballyhooed statement on corporate purpose. Many of the commentators who welcomed it rapturously predicted the statement would usher in a new era of corporate social responsibility (CSR), with corporations tackling a range of social problems such as climate change and racism. After a year in which society and business have faced unprecedented problems, it seems fair to ask whether corporations have really embraced the BRT’s vision of corporate purpose.
The BRT is an association of about 200 chief executive officers of large American corporations. The group periodically issues policy statements on issues of concern to big business and since 1978 the BRT has issued statements on “Principles of Corporate Governance,” which purport to summarize law and best practice in this area. Since 1997, all versions of those statements had embraced the view that corporations exist primarily to serve their shareholders. In August 2019, however, the BRT issued a new statement renouncing its longstanding embrace of shareholder wealth maximization in favor of a much broader conception of corporate purpose, which posits that corporations should commit to delivering value to all of the corporation’s stakeholders.
At the time, there was plenty of reason to think the new statement was merely greenwashing, which is dictionary-defined as an effort “to make people believe that” a business “is doing more to protect the environment than it really is.” Environmental advocate Leyla Acaroglu quips that “greenwashing is to corporations as tree hugging is to individuals who say they care about the environment” and dismisses it as “a symbolic reference that has little actual outcomes.”
Why do companies engage in greenwashing? Survey data suggests that Millennials prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. Accordingly, there is an increasingly widely held view in the business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon, but even such heartland companies as Walmart are embracing socially progressive stances, despite the risk of alienating their Red State customer base.
Some rather compelling evidence that the BRT statement was tantamount to greenwashing comes from a May 2020 study by economists Aneesh Raghunandan and Shivara Rajgopal. They compared the social performance of firms whose CEOs signed the statement to that of peer firms in the same industry whose CEOs had not signed the statement. They found that signatory companies committed environmental and labor-related compliance violations more often (and paid more in compliance penalties) than their non-signatory peers. Signatories spent more money on lobbying policymakers and received more in targeted government subsidies, both of which are regarded as antisocial by CSR advocates. CEOs of signatory firms received higher abnormal compensation and their firms had a smaller proportion of independent directors on the board, both of which are regarded as poor corporate governance by proponents of environmental, social and governance (ESG) reforms. In sum, the signatory firms had considerable perceived disagreeable behaviors that needed washing away.
Further evidence that the BRT statement was mostly greenwashing comes from surveys by legal scholars Lucian Bebchuk and Roberto Tallarita. They found that most CEOs who signed the statement had not gotten approval to do so from their companies’ board of directors, which one would expect in the event of a major shift in corporate policy and purpose. They also found that the corporate governance guidelines of a sample of signatory firms had not been modified to reflect the statement’s emphasis on social responsibility and stakeholders. To the contrary, as they pointed out, “explicit endorsements of shareholder primacy can be found in the corporate governance guidelines of the two companies whose CEOs played a key leadership role in the BRT’s adoption of its statement.”
Has anything changed?
Relevant law certainly has not changed. In Delaware, where more than half of American public companies are incorporated and whose law therefore governs their internal affairs, Chancellor William Chandler’s decision in eBay Domestic Holdings Inc. v. Newmark still forbids executives from using their corporations as a “vehicle for purely philanthropic ends.” Accordingly, “a corporate policy that specifically, clearly and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” remains illegal under Delaware law.
As for corporate behavior, shareholder proposals calling for CSR and ESG reforms continued to fail. In the 2020 proxy season, proposals related to corporate environmental issues received average support levels of less than 29% of the shares voted on them. Proposals related to diversity, equity and inclusion issues received barely 24%. In sum, there is little evidence that shareholders are actively demanding the sort of changes the BRT statement advocates.
One also finds little evidence of a dramatic shift in corporate purpose when one looks at the composition of corporate boards. Sherman & Sterling’s 2020 corporate governance survey reported that the percentage of directors who are women remains largely unchanged at around 30%. Only 26% of the surveyed companies included a social purpose in their corporate governance guidelines. None of the top 100 companies surveyed had committed to nominating a specific percentage or number of diverse board members.
In an open letter to the CEOs of the signatory firms, management academic Bob Eccles pointed out that the logical next step would have been for their boards to “publish a statement explaining the specific purpose of your company,” but “not a single one of your boards has published such a statement.” Bebchuk and Tallarita’s argument that boards are not even talking the talk, let alone walking the walk, remains valid.
In September 2020, consultancy KKS Advisors issued a study, “COVID-19 and Inequality: A Test of Corporate Purpose,” which pointed out that, following an initial dip, stock prices have performed remarkably well during the pandemic. Yet corporations laid off millions of employees. No BRT signatory firm has converted into a public benefit corporation, which provides an alternative to the traditional business corporation and allows firms to devote much more attention to a social purpose.
The critics who accused the BRT of greenwashing appear to have been right.
Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law, UCLA School of Law. In 2008, he was named by Directorship magazine to its list of the 100 most influential people in the field of corporate governance.