By Rose Ors
In collaboration with Amelia Miazad, Founding Director & Senior Research Fellow, Business in Society Institute, Berkeley Law
This past August, the Business Roundtable (Roundtable) announced the adoption of a new “Statement on the Purpose of a Corporation.” Breaking with Milton Friedman’s corporate governance orthodoxy, 181 CEOs from some of the biggest U.S. companies changed the definition of the purpose of a corporation to include not just shareholders but stakeholders: customers, employees, suppliers, communities, and the environment. It states, in part, “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.” The statement replaces the Roundtable’s 1997 “Statement on Corporate Governance” which asserted shareholder primacy.
Rose Ors spoke with Susan (“Suz”) Mac Cormac, Morrison & Foerster Partner & Chair of the Energy and Social Enterprise and Impact Investing Practice, about the forces that prompted the change and its real and potential impact.
Rose Ors: What are the key factors that prompted the Roundtable’s action?
Suz Mac Cormac: I think there are three principal factors that have created a perfect storm. One factor is the growing realization by CEOs and boards of directors across almost all industries of the tie between environmental, social, and governance factors (ESG) and shareholder value. Key ESG issues include climate change, artificial intelligence, cybersecurity, data privacy, #MeToo, and diversity.
Another factor is shareholder pressure. Some asset managers have been aware of the profound financial and societal risks related to climate change for a number of years. One way they have demonstrated this awareness is through their proxy voting. For example, the 2018 proxy season was a record year for shareholder support for environmental and social shareholder proposals, particularly climate-related proposals. The 2019 proxy season showcased companies using proxy disclosures to spotlight their approach to corporate sustainability.
A third factor is employee activism, a factor most prominent in tech companies. In the last few years, employees from Google and other large technology companies have publicly challenged their companies’ business practices with petitions, walkouts, and strikes. Employee ire was directed to a host of issues ranging from the handling of sexual harassment claims to the use of technology to support a regime’s censorship policy. Although other industries were not as hard hit, the current race for talent requires that companies maintain a reputation for doing the right thing in the eyes of their current employees and prospective candidates.
So, I think the CEOs and the Roundtable felt pressure to make a statement that would signal they are paying attention to these various voices.
Rose Ors: The Roundtable’s pronouncement is not legally binding. What’s going to give it some teeth?
Suz Mac Cormac: An important first step would be for a board of directors to adopt a “Statement of Purpose” that delineates why the company exists and identifies the stakeholders that are critical to its long-term success. Such an explicit pronouncement would signal a genuine acknowledgment by the board and the C-suite that ESG factors are material to the continued success of the company. It also puts the company’s shareholders on notice that this is part of the company’s strategy.
Another step towards giving some teeth to the Roundtable’s declaration is for public companies to include in their Securities and Exchange Commission (SEC) reports—the 10K and 10Q— the material risks ESG factors pose to the operations and financial results of their companies. Why? Because for investors to make informed investment decisions, they need far more than boilerplate language on ESG issues that may have a real impact on a company’s long-term prospects and valuation.
A further step is to shift the fiduciary duties of a corporation by having the company convert into a new corporate form. I am a fan of California’s Social Purpose Corporation and its progeny sister form, Delaware’s Public Benefit Corporation. Under either governance structure, a corporation is required to pursue a public good as well as profits. I will note that these forms are often erroneously referred to as “B Corps.”
Rose Ors: What is the likelihood that C corps would adopt a Statement of Purpose?
Suz Mac Cormac: Although not yet a movement, there is definitely a significant move in this direction. Currently, what we have are different schools of fish swimming in the same pond and mostly heading in this direction. One school is composed of impact investors. Another school includes shareholders and shareholder activists. Then there are the corporate lawyers who advise public companies. Other schools include employees, investors, and consumers. What is even more impactful is that some schools are coordinating on a relay to get there faster. When they all come together, it will become a movement with a capital M.
Rose Ors: What are some examples?
Suz Mac Cormac: On the investment side, there are funds like TPG, KKR, and Carlyle, all of whom are focused on investing in companies that have a positive social and environmental impact. On the public company side, you have companies like Unilever and Nestlé, who believe that conducting their business in a sustainable manner is good for their bottom line. You have employees at Google, Amazon, and Salesforce who are exerting pressure at the board level.
Rose Ors: How does this ensuing movement square with the fact that 60% of the Fortune 500 companies are incorporated in Delaware where the shareholder primacy rule is alive and well?
Suz Mac Cormac: There is nothing under Delaware law—statute or judicial—that prevents for-profit Delaware corporations from considering social issues as long as their actions are aimed to ensure continued and sustainable corporate growth. Certain corporate governance circles have long argued—persuasively so—that corporations are more likely able to achieve long-term value for shareholders when they consider the needs of their customers, employees, and other key stakeholders. The same is true of long-term and institutional investors. I believe that the failure by public companies to act on ESG is not due to legal constraints, but financial market forces: stock options, tax breaks, and quarterly reporting.
Rose Ors: On the heels of the Roundtable announcement, a group of CEOs whose companies are Certified B Corporations took out a full-page ad in the Sunday New York Times encouraging more public companies to switch from C corps to public benefit corporations (PBC). How likely is that to happen in any meaningful way?
Suz Mac Cormac: I think the ad is confusing because many of the signatories are PBC wholly owned subsidiaries of traditional Delaware corporations. That note aside, the Roundtable’s new position on the purpose of a corporation is another step forward in the conversation on the best way for corporations to be good citizens. What conversion to a PBC does make consideration of shareholder agreed ESG factors mandatory as opposed to permissive. Further, the PBC explicitly serves to protect the board of directors and management from shareholder reprisal for making long-term business decisions that, in the short-term, cause a short-term stock price drop. For example, under a C corp governance structure, the board of directors and management of an oil company may be constrained from making significant capital expenditures on renewable energy because, in the short term, it could negatively impact its stock price. The company will likely be sued. If the company was a PBC, the board and the C-suite would be free from such constraint if its charter included protection of the environment. Shareholder profit is critically important; only now so are the concepts of purpose, accountability, and transparency to all corporate stakeholders, not just shareholders.
Rose Ors: Do you see more corporate lawyers advising clients to change governance structure? Or having directors adopt a statement of purpose?
Suz Mac Cormac: I think I and many of my colleagues would advise our clients who are C corps to adopt a Statement of Purpose. But even more importantly, I would advise my clients to pay close attention to ESG factors that may impact their companies’ bottom line in the long run. Why? Because your employees care, because your customers care, and because your shareholders care and not caring will affect your earnings.
The bottom line is that each company can walk a different path to get to the same place— really start factoring in ESG goals that can materially affect its operations.
Rose Ors: One final question. Jamie Dimon, the CEO of JPMorgan Chase and the Roundtable’s chairman, said he hopes that the Roundtable’s new definition of corporate purpose “will help to set a new standard for corporate leadership.” Absent a change in corporate governance structures, what does this new leadership look like?
Suz Mac Cormac: A more educated group of leaders is an important start. CEOs are becoming more educated on ESG. But of equal importance, if not more so, is the ability to look at your company as an integrated whole. Failure to do so leads to leadership dissonance. This is the dilemma facing Jamie Dimon and many other CEOs. Corporate leaders must reconcile their support for climate change solutions by providing financing or technology or services to coal companies and Big Oil. For meaningful change to happen, this dissonance should be a thing of the past.