Business Roundtable's misguided decision to put shareholders last. An unpleasant déjà vu.
By Charles M. Elson
There is nothing really new about the Business Roundtable's Statement on the “Purpose of the Corporation.” It is simply the return of the groups historic and misguided support for stakeholder governance.
Why misguided? Because it was the stakeholder approach, so lauded years ago by Corporate America, that led to the awful corporate results which in turn sparked the large institutional investors, led by the public pension funds, to press for the dramatic corporate governance reforms of the past twenty-five years.
Before examining the problems with stakeholder governance, it is important to state out front that a shareholder primacy model does not mean the diminution of the other stakeholders in a corporation. To create the long-term value that the shareholders deserve, a company must deal appropriately and respectfully with the other stakes.
Even Al Dunlap, who was an anathema to the stakeholder community (and whom I made the motion to fire as a Sunbeam director) stated:
“for shareholders to do well, we need employees who care about the company, work hard, and feel they are being treated right. It is important to treat employees well…because it is good business…Stakeholders benefit when the shareholders benefit. If a company performs well and its shareholders make money, then the community benefits because it taxes people, and employees benefit because the company is successful.”
There are three distinct problems with the stakeholder theory espoused by the Business Roundtable members with regards to the recent “purpose” statement:
• First, having a manager accountable equally to multiple stakes, as evident from a reading of the group's statement, diminishes dramatically a manager's accountability and performance. If you are accountable to everyone, then you are accountable to no one. Even a broken watch gets the time right twice a day. The pole-star of long-term shareholder value creates an appropriate metric for boards and the public to evaluate a manger's performance, and this ultimately increases accountability and the odds of a successful, thriving business for which all in society will benefit. In this respect, the statement appears a bit self-serving on the part of its signatories.
• Second, the Business Roundtable's placement of shareholders last on the list of corporate stakeholders is troubling. Shareholders come last in preference in bankruptcy and are protected by fiduciary duties primarily for that reason, and placing them last on the BRT's priority list, even if simply symbolic, sends the wrong message. If an equity-holder believes they are last in line in corporate priorities, they simply will not invest or opt to become a debtholder instead, which would be a death-blow for starting new, risky, but potentially societally valuable entities. That was the original logic for shareholder primacy.
• Additionally, and perhaps the most troubling, was the description of shareholders by the BRT as merely “providers of capital.” This is a bit like calling your parents mere “genetic contributors” to your existence. It is disrespectful and, frankly, wrong. People who invest in you deserve your appreciation and respect. If you fail them, they lose everything. You are not simply takers of their capital, but have a deeper and more fundamental obligation to them.
That is partly where fiduciary duties came from. But the bigger question is who are the shareholders today? They are not Wall Street titans, but the working men and women of America — firefighters, teachers, police officers and the millions of others who have invested their hard-earned salaries in thousands of pension and mutual funds.
If the Business Roundtable's goal was to protect other “stakes,” they have utterly failed by “deep-sixing” the very members of those stakes who they claim obligated to protect. And, the lack of accountability created by this approach will lead to poor corporate results and the diminishment of ordinary peoples' ability to retire happily as they deserve.
For a business to be successful in the long-term (as are most shareholders), the other stakeholders must be focused upon and treated fairly. But to elevate their needs as the corporation's primary reason for existence will ultimately make all of us miserable. The lesson for boards is simple. The shareholders elected you and you are legally responsible to them. Never forget this. I am not arguing for “short-termism” or ignoring the important needs of those various contributors to the corporate entity.
I have the feeling that ultimately those who signed that statement will regret what they have done. When results flounder and good companies find themselves in troubling straits, the investors, who include all of us, will in the final result hold each of them accountable.
Charles Elson is director for Encompass Health and Blue Bell Creameries; the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware; and a member of Directors & Boards editorial advisory board.