Mark Hillsdon analyses whether the Business Roundtable’s statement ditching shareholder primacy marks a seismic shift or is instead self-serving PR
Public trust in capitalism, corporations and the CEOs that run them continues to decline. Alongside the traditional bug bears of executive pay and tax efficiencies, the charge of greenwash has raised its ugly head again, too, with growing expectations that businesses must come up with a meaningful, long-term response to the climate emergency, not just words.
To help find solutions to some of the misgivings in which capitalism is mired, new ways to define corporate purpose are being put forward, ideas that place a greater primacy on companies working for the good of all stakeholders, not just those with a share portfolio.
In August, this profit-led status quo was jolted when the Business Roundtable (BRT), a group made up of 200 of the biggest names in global business, from Apple and Amazon, Siemens and Pfizer, pushed out a statement that they had decided to change the definition of the “purpose of a corporation”.
Few have questioned the enormity of a move which, on paper at least, represents the final curtain for the concept of shareholder primacy
No longer would it be solely about making money for its shareholders, they said, but instead the purpose should benefit all stakeholders – employees, communities and the environment.
Several commentators pointed out that the group had made a similar proclamation in 1981, stating that “by giving enlightened consideration to balancing the legitimate claims of all its constituents (our italics) a corporation will best serve the interest of the shareholders.”
However, by 1997 the message had been lost, as the same group coined the concept of shareholder primacy, when it announced that “the principal objective of a business enterprise is to generate economic returns to its owners”.
You sense that this time around, such an about-face won’t be so readily accepted.
While reaction to the announcement was mixed, few have questioned the enormity of a move which, on paper at least, represents the final curtain for the concept of shareholder primacy. It’s a huge call for global capitalism but without becoming mandatory and legally binding, does it risk being filed as just another piece of self-serving PR?
The B Corporation movement, a group of around 3,000 companies, including major names such as Patagonia and Danone, reacted swiftly to the statement, with a full-page advert in The New York Times pointing out that the idea of maximising value, not just profits, was exactly what they were already preaching, and calling on the Business Roundtable to join them and “work together to make real change happen”.
In particular what we are focusing on is the notion that corporate purpose should be at the heart of company law
As Katie Hill, chair of the management board at B Lab Europe, says: “As many of the companies are global employers with controlling market share … their expanded vision of a company’s purpose opens up the potential for business to leap forward in creating a more equitable and respectful prosperity for all.”
But how prepared are these businesses to take that leap and change their corporate purpose?
According to Colin Mayer, a professor of management studies at the University of Oxford’s Said Business School, it hasn’t always been this way, and it is only over the last half century that corporate purpose has come to be equated solely with profit. (See Shareholder primacy is dead. Now we need to restore trust in the corporation)
The shift came on the back of ever more aggressive tactics and manoeuvrings in the market which, says Mayer, “gave rise to a pre-occupation amongst boards of directors with their financial performance and ensuring that their share prices avoid the threat of interventions that come from hostile takeover markets or from hedge funds.”
In turn, he continues, this has led to a growing number of social, political and environmental problems, the consequences, of which “have been an ever-increasing amount of regulation of businesses and decline in trust in society about the way in which businesses are operating.”
Mayer is also the academic lead for the Future of the Corporation programme; long-term research into the role of business in society, being conducted by the British Academy. A report on the second phase of the research will be published later in November and will set out a number of principles that Mayer believes are key to reforming business around the world.
The idea of shareholder primacy is no longer sacrosanct
“In particular what we are focusing on is the notion that corporate purpose should be at the heart of company law, and that the directors of companies should have a duty not simply to uphold the interests of their shareholders, but to state and promote corporate purposes.”
Mayer said the Business Roundtable statement showed that there is a growing appetite for this notion of purpose being at the heart of business. “And what companies are really doing now is to look for the mechanisms by which, in practice, they can bring this about.”
Richard Roberts, from the consultancy Volans, which helps businesses to address key sustainability issues, was also buoyed by the BRT statement, seeing it as an opportunity to push forward with stakeholder capitalism.
“Even if that statement was intended purely as PR... I think it is still a significant indicator that the zeitgeist is shifting,” he says. “The idea of shareholder primacy is no longer sacrosanct… I would love to see some of those 181 companies becoming a Benefit Corporation on the back of this statement.”
It’s a topical subject in the US, he explains, with Senator Elizabeth Warren currently trying to push through an Accountable Capitalism Act, one element of which is that all large corporations, with revenue of over $1bn, would have to be re-chartered as a Benefit Corporation. “That would be a transformative step,” he adds.
Of course, Roberts doesn’t believe things will change overnight, or even that the majority of the signatories have any intention of changing.
As we shift to an economy where financial value creation is more aligned with social and environmental value, a lot of the big players will struggle to evolve
“I think there is a certain amount of complacency within that group and that assumption that ‘they're already on it’,” he says. Many businesses look at the balance sheet, see healthy profits and presume they are already doing a good job looking after all their stakeholders. “It's a case of: ‘we're doing well, so we must be doing good’,” he says.
“Of course, there will be blockers in the business community,” he continues. “As we shift to an economy where financial value creation is much more well aligned with social and environmental value creation, a lot of the big players will struggle to evolve and adapt to that world … but that doesn't also mean that there can't be lots of companies... that stand up and actively champion reform.”
Volans is working on its own project looking at the future of capitalism called Tomorrow’s Capitalism Inquiry, with the initial findings set to be released in January.
The new report will ask what the corporate leadership agenda for the 2020s needs to look like, what it really means for a company to be an effective agent of system change, and how businesses need to shift to a regenerative economy, using what they do to help restore natural ecosystems and create a more inclusive and just society.
“Can we leverage the progressive voice of business much more effectively, in order to champion the political and structural reforms we know are needed to deliver a sustainable economy?” Roberts asks.
Before the findings are published, there are some relatively easy things that businesses can do in the short term to signal their intent and start to win back public trust, he continues.
Companies should lstart to pare back the growing gap between CEOs’ salaries and the average take-home pay of an employee
First, they should look at renumeration and incentives, and start to pare back the growing gap between CEOs’ salaries and the average take-home pay of an employee. They can also start to better align shareholder interests with those of employees, by making employees shareholders too, while a commitment to procure goods and services locally would support the communities in which they operate.
Diverting money from share buybacks, when companies repurchase shares from shareholders, is another option. Instead, the money could be used on projects that create multiple benefits for multiple stakeholders, such as energy efficiency measures that reduce environmental impacts.
Volans also suggests that businesses should look at breaking up oligopolies and avoiding legal but unethical tax schemes, and that they should find the courage to look at their business models and change things which, although profitable, may be harmful to the health and wellbeing of some stakeholders.
And even if the CEOs themselves don't become the agents of change, adds Robert, changes like these can empower people within businesses to start challenging what the company is actually doing.
In June, the professional body Accountancy Europe released its take on reforming capitalism with the publication of “10 ideas to make corporate governance a driver of a sustainable economy”. It aims to show how to embed environmental, social and governance (ESG) criteria into the day-to-day running of business and has at its heart the twin ideas that boards must recognise their public interest responsibility and commit to making the business sustainable, while policymakers and regulators need to focus on better outcomes rather than more rules.
As Olivier Boutellis-Taft, CEO of Accountancy Europe, says: “We must leverage the power of markets to make the global economy sustainable before it is too late. This means companies need to transform their business models: defining the corporate governance framework is the best tool to do so.
We have to totally re-invent the way in which we do business
“It's no longer viable to just keep making money by increasing sales,” he says. “We have to totally re-invent the way in which we do business.”
Consuming less and moving to a more circular model is crucial, he argues. There needs to be a shift from selling more and more goods that use increasingly scarce resources, and also an end to artificial tactics like planned obsolescence and constant new models and updates. Instead, businesses need to look to make money “by increasing internal efficiencies, recycling... repairing; it’s a total change of logic.”
Whether or not there’s an appetite for change is immaterial, he adds. “Soon it's going to be a necessity.”
Unsurprisingly, Boutellis-Taft believes that accountants, with their objectivity and independence, have a major role to play as change makers within businesses, helping to redefine corporate purpose.
“The role of accountants has always been to measure, to report, and to assure,” he says. “If you want to change something, if you want to take action, then you need information and you need this information to be reliable.”
The role of regulators also needs to be re-thought, he says. “Legislation and regulation are one thing [but] what is important is proper enforcement.” Accountancy Europe advocates a new European regulatory framework for corporate governance, in which policymakers become strategic enablers of change.
Speaking at the launch of the report, Sebastien Godinot, an economist at WWF, said: “It is time for Europe to go to a due diligence regulation on sustainability impacts of large corporates. It is a “no regret” option: corporate leaders already integrating ESG issues outperform their peers, and it will contribute to reaching sustainability targets. We don’t have time anymore for voluntary initiatives.”
It is time for Europe to go to a due diligence regulation on sustainability impacts of large corporates. We don’t have time anymore for voluntary initiatives
Within Europe, among emerging regulations around corporate governance is a planned taxonomy system to fight greenwash that will establish which products or services are truly green and help the environment. The system would help to underpin initiatives such as green bonds and the EU’s planned eco-label for financial products.
Particularly aimed at non-professional investors, the labels would help to overcome the lack of well-defined standards to ensure companies are being honest about any green claims they make.
In the UK, a new Corporate Governance Code, several years in the making, came into effect last January. Administered by the Financial Reporting Council (FRC), it focuses on the role that boards have in engaging with their workforce to better understand their views. It also tasks boards with creating a culture that aligns company values with strategy, and to assess how they can preserve value over the long-term, with an emphasis that the boardroom needs to contain the right mix of skills and experience.
There is a strong emphasis on succession planning, and limiting board membership to nine years, while also promoting diversity. The thorny problem of remuneration is also covered although, tellingly, there are no plans to make the code voluntary. Listed companies that don’t comply must explain to shareholders why they aren’t doing so, and whether they are part of any other scheme.
“Purposeful businesses can really make a major contribution to enhancing individuals' and society's wellbeing and welfare,” says Mayer, and this, he continues, will help them rebuild trust by showing that they exist to assist, not to exploit.
“Corporate purpose should be a profitable solution to the problems of people and planet... and they [businesses] should not profit from producing problems.
“If companies are really committed to that, and demonstrate what they are going to deliver on it, then it is a very powerful vehicle for creating, sustaining and restoring trust in our society.”
We have a window of opportunity within which to prove that a full stakeholder-oriented version of capitalism can deliver on the line of societal progress
And if they don’t? “Their whole licence to operate comes into question and they find themselves tied up in ever-increasing regulatory knots,” he says.
If we don't get this right, adds Roberts, not only will the climate crisis continue to escalate, but so will inequality and mass migration, there will be huge disruption to supply chains and a shift to more extreme politics.
“We have a window of opportunity within which to prove that a full stakeholder-oriented version of capitalism can deliver on the line of societal progress that we all want, and can help us deal with the big crises we face,” he says.
Mark Hillsdon is a Manchester-based freelance writer who writes on business and sustainability for Ethical Corporation, The Guardian, and a range of nature-based titles including CountryFile and BBC Wildlife.
This article is part of the in-depth Inclusive Capitalism briefing. See also:stakeholders Business Roundtable B corp B Lab Europe Colin Mayer Future of the Corporation Volans pay inequality Accountancy Europe