Dueling Memos

Dueling Memos

Who knew a platitude salad could be so controversial?

The Business Roundtable (BRT) created a media storm with its new “Statement on the Purpose of a Corporation“. Some are using it as an opportunity to rehash the ills of corporate stewardship in America. Others note the hollow promises made. “Delivering value to our customers” is my personal favorite — as if this business principle is evident only if you are a member of the lobby group representing the CEOs of America’s largest corporations. But the most interesting response came within the Beltway. The Council of Institutional Investors (CII) put out its own press release opposing this apparent shift to “stakeholder capitalism”.

The heart of the disagreement can be summed up by two statements. CII states “It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.” The BRT proclaims “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”

CII wants the managers of its companies to focus exclusively on shareholder welfare and leave social justice to the state. Meanwhile, the BRT is afraid of government interference. This “new purpose” is being promulgated well ahead of the 2020 national election.

Both perspectives have merit. The CII is making a normative declaration — the government should be responsible for ensuring justice through the exercise of laws and regulations. But it hasn’t done the job to the satisfaction of most.

And the risk of the government pendulum swinging back hard against the interests of shareholders and executives is growing. This is why the BRT is claiming the free-market system, where customers, suppliers, employees, and shareholders vote with dollars or their feet, can best deliver just outcomes for all stakeholders — no government oversight required!

The BRT view suffers from the dynamics of bargaining power. A small number of large businesses and wealthy individuals enjoy the upper hand. A citizen may be more dependent on their charity than he is on the rewards brought to him by the “invisible hand”. Although socially responsible investors and advocacy groups can act as counterweights, they lack the enforcement toolkit available to government.

Another interesting debate thread is the legality of an explicit stakeholder approach. Delaware State Supreme Court Justice Leo Strine authored a paper in 2015 that makes clear his belief in the limits placed on directors by Delaware corporate law — more than two-thirds of Fortune 500 companies are incorporated in the state. He states, “In the corporate republic, no constituency other than stockholders is given any power.” Strine views this as a signal of the intent of corporate law in Delaware that leaves no room for directors to subordinate the long-term interests of shareholders to any other constituency.

But some corporate lawyers believe the business judgment rule will still protect directors who choose to balance the interests of all stakeholders. This matter will be decided in the courtroom.

The debate of stakeholder vs. shareholder capitalism is in some ways artificial. All shareholders are community residents and citizens. And customers. Most are employees or business owners. An individual’s interests vary, but through the lens of a corporation many fall into multiple stakeholder groups.

The real issue is roughly half of the population does not own stock of any kind. A system that effectively tilts against those without capital is untenable in the long run. Corporate governance that addresses the negative externalities of capitalism is more likely to prosper, or at least survive the threat of an encroaching state.

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