Will the companies bring value to all stakeholders?
In August 2019, in the Business Roundtable’s statement on the purpose of a company (the “BRT statement”), many CEOs of large companies announced their commitment to delivering value to all stakeholders and not just to shareholders. Some observers viewed this event as a milestone and the Declaration as reflecting a significant commitment to improving stakeholder treatment (the “Engagement Hypothesis”). Others, on the other hand, including us in previous work, viewed reporting as a public relations move with little practical impact on stakeholders (the “PR hypothesis”). Which hypothesis best explains the BRT statement?
In a forthcoming article, Will Corporations Deliver Value to All Stakeholders?, we investigate the implications of the BRT statement to determine whether membership represented a meaningful engagement or was primarily a public relations initiative.
Our analysis is based on a review of a wide range of corporate documents from the 128 U.S. public companies that joined the original BRT filing in August 2019 (the “BRT companies”). We have manually collected and analyzed more than six hundred corporate documents, which we make available to the public in an online archive, BRT Corporate Purpose Archive. The documents include governance guidelines, bylaws, proxy statements and SEC no-action letter requests, and cover the period through the end of August 2021, a full two years after the BRT filing was issued. (the “Two-Year Period”).
Our analysis of these documents provides considerable evidence inconsistent with the commitment hypothesis and in support of the PR hypothesis. These results, we believe, have important implications for the heated debate on stakeholder capitalism.
Below is a more detailed account of our analysis:
Part I discusses the importance of the BRT statement and the issue examined by our article for the broader debate on stakeholder governance. The statement was originally signed by 181 CEOs, including most of the nation’s top companies, and pledged to move away from shareholder primacy and deliver value to all stakeholders.
If the BRT statement were found to represent a meaningful engagement, this finding would lend support to the idea that management discretion can be relied upon to increase stakeholder welfare (“stakeholder “). On the other hand, if the BRT statement turns out to represent a simple public relations move, this conclusion would support the shareholding critics and their assertions that the shareholding promise is illusory and that it aims serve the interests of business leaders rather than those of stakeholders.
Part II begins the presentation of our empirical analysis by examining the corporate governance guidelines of BRT companies. The frequently updated governance framework is an official company document that details the main principles and procedures guiding the company’s corporate governance. These documents therefore make it possible to naturally find the official position of the company on the corporate purpose and the objectives that should guide the board of directors.
Nearly 100 BRT companies updated their governance guidelines after the BRT statement. However, almost none of them changed the wording describing their corporate purpose. Most strikingly, the majority of the updated guidelines reaffirmed an explicit commitment to shareholder primacy. In general, when we looked at all BRT company guidelines that were in place at the end of August 2021, whether or not they had been updated since the BRT statement, we found that a majority explicitly supported shareholder primacy.
Part III analyzes the response of 26 BRT companies to shareholder proposals regarding the companies’ implementation of the BRT Statement. Each company has consistently opposed these proposals and reacted to them by trying to exclude them from the ballot, recommending that shareholders vote against them, or both.
Our analysis indicates that, while the shareholder proposals were based on the premise that joining the BRT Statement was a meaningful commitment that would require changes in corporate governance and policies, none of the companies receiving a proposal did accepted this premise. On the contrary, a large majority of companies explicitly stated that their adherence to the BRT Statement did not require and should not lead to changes in their treatment of stakeholders.
Part IV examines the statutes of all 128 BRT Societies in force at the end of the Two Year Period. Articles of Association are legally binding documents setting out corporate governance principles and procedures. Although the articles of association commonly refer to shareholders a very large number of times, we found no relevant mention of stakeholders in general, or of stakeholder groups in particular, except for the articles of association of a BRT company. .
Part IV also examines the 2020 proxy statements of BRT companies to identify any mention of the BRT statement that BRT companies have chosen to include (except where they have been compelled to do so by a proposal of shareholder on the subject). Consistent with the PR hypothesis, we found that the majority of BRT companies chose not to mention the BRT statement at all in their proxy statements. Of the minority of companies that included such a statement, none described the BRT statement as representing a significant commitment that could require or result in significant changes, and several of them explicitly stated that no change of this type was required or expected.
Part V examines the principles and actual practices of BRT companies with respect to director compensation. The structure of director compensation is important in assessing the goals that companies want directors to pursue, both because compensation shapes directors’ incentives and because it sends a strong signal to them about the goals that the company considers important. We begin our review of director compensation with a review of the principles relating to director compensation contained in the BRT Corporate Governance Guidelines. We found that the majority of BRT company guidelines included an explicit requirement that directors hold company stock or be paid with company stock in order to align their interests with those of shareholders. In contrast, none of the BRT company guidelines included a requirement to tie directors’ compensation to a measure reflecting or relating to stakeholder interests.
Part V then examines the actual practice of director compensation in BRT companies. We have found that BRT companies generally link this compensation closely to stock value and avoid any link to stakeholder metrics. In particular, we found that in the year following the publication of the BRT statement, BRT companies generally paid a substantial portion of directors’ compensation in equity. In contrast, we found no instances where director compensation was tied to a stakeholder goal, either to incentivize directors to pursue such a goal or to signal its importance.
Finally, we present our conclusions. Overall, our findings are inconsistent with the commitment hypothesis and support the PR hypothesis. Thus, our findings challenge the promise of stakeholder governance that relies on the discretion of business leaders to serve stakeholders. These results indicate that business leaders’ promises to use their discretion to serve stakeholders, and reliance on the use of such discretion, may well not produce their purported stakeholder benefits. These findings also underpin and reinforce concerns that such stakeholder promises and the support expressed by business leaders to the stakeholder may be aimed at serving the private interests of business leaders rather than genuinely addressing growing concerns. concerning the treatment of stakeholders by companies.
Our study is available here, and the BRT Corporate Goals archive is available here.