Not too long ago, the Business Roundtable shocked both the business and the political communities when it revised its statement on corporate responsibility. The Roundtable, composed of the chief executive officers (CEOs) of 181 of the nation’s major corporations, stated that companies are responsible not only to their shareholders, but also to a broad array of what the group called “stakeholders,” including, in addition to shareholders: employees, customers, suppliers, and the communities in which they operate.
This is a major change. For decades, in fact ever since the Roundtable was founded, it has stressed only business’s responsibilities to shareholders, though it has also acknowledged obligations to law and decency. The Roundtable’s restatement was greeted with delight by the political left, who saw in it the conversion of powerful people to its way of thinking, while those on the right and free-market supporters warned about decision-making chaos and a loss of corporate efficiency.
Without taking sides –– left or right –– it might be useful for investors to use this incident to understand corporate decision-making generally. The relevant question is: “What might have motivated these CEOs to change their thinking?” There is, of course, the matter of principle. Perhaps this group of powerful men and women really did have a change of heart about the correct way to run a company –– there may actually have been such a “road-to-Damascus” moment. But because no one can look into the heart or soul of another, we must leave that possibility as just that –– a possibility. An investment analyst (and let’s include ourselves here) might also consider two other perspectives regarding the Roundtable’s change of heart:
- What corporate interests might this statement serve?
- What personal CEO interests might this statement serve?
On the first question, the statement may constitute a form of defense against the possibility of a Democratic victory in 2020, in particular Sen. Elizabeth Warren’s proposal to enact what she calls the Accountable Capitalism Act (ACA). Her proposal, should it become law, would have six basic provisions:
- Corporations with more than $1 billion in annual revenue would have to secure a federal charter. (Presently, most corporations are chartered by states.)
- The federal charter would obligate company directors and managers to consider the interests of employees, customers, and the communities where they operate, in addition to those of shareholders.
- Under the proposal, employees would choose 40% of corporate boards.
- Directors or corporate officers would be prohibited for five years from selling shares received in compensation.
- Corporations could not make political contributions until they secured the approval of 75% of their directors and shareholders.
- The federal government would have the power to revoke the charter of any corporation engaged in illegal activity.
Facing the prospect of such a fundamental change in corporate structures, these 181 CEOs may well have decided that publicly embracing some of these provisions might disarm more revolutionary action from Washington, should Warren win the White House. Holding up their newfound principles, they could claim there is no need for such a law and that they themselves could accomplish its main objectives with less compulsion or institutional change –– all of which, of course, would limit the power and influence of CEOs.
Given Sen. Warren’s statements to date, such a defense would be unlikely to succeed should she be elected and have a sympathetic Congress at her back. Still, for the CEOs, the Roundtable’ statement would be a low-risk response to the threat of a Warren White House. After all, they would hardly be bound by their own statement.
These 181 CEOs are not without personal interests in this matter. Corporate history shows that CEOs regularly put personal interests ahead of their obligations to their companies, its shareholders, and other stakeholders. There are at least two such interests:
- As I have noted, Senator Warren’s bill would not only disrupt corporate structures, it would also weaken the power and prerogatives of CEOs. They hardly want that, especially because the changes the senator envisions would make it more difficult for them to arrange friendly boards that would then endorse the lucrative pay packages to which most CEOs have grown accustomed. Thus they would be protecting themselves from job disruption and perhaps also a pay cut.
- And quite aside from Senator Warren’s ambitions, the Roundtable’s statement, if taken seriously, would significantly muddle the obligations of management accountability. These new additional stakeholders would each have their own agendas that could conflict with the aims of other stakeholders. This ambiguity has led several business leaders to question the wisdom of the new Roundtable commitment. Nonetheless, such ambiguity might have a distinct appeal to certain corporate leaders. Where a company has only a single objective, for instance shareholders, management can be held incompetent for any decision that hurts those shareholder interests. But where there are a multiplicity of interests, a decision that hurts shareholders could be justified in terms of the interests of another stakeholder. In other words, decision-makers would have a ready excuse for every move and thus could more easily avoid blame than they could in the past. That is an appealing prospect for any manager.
This view might seem too cynical for some readers. Perhaps it is. But such thinking is essential for any investor who wants a full perspective on corporate decision-making and public policy.