Saturday, August 24, 2019

Everything is About Stakeholders

Just after I posted my paper, Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure, arguing for a stakeholder-focused corporate disclosure system, the conversation about corporate obligations to noninvestor interests exploded.  That’s because the Business Roundtable released a new “statement on the purpose of a corporation” which Marie Kondo-ed the traditional focus on shareholder interests, in favor of, well:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.  

- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. - Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. 

The reception has been … mixed. 

There are two basic schools of thought.  The first is that the BR’s statement represents a real change going forward, either because it will drive business decisionmaking or, more subtly, because the fact that the BR felt it necessary to issue the statement at all illustrates a societal shift that has already occurred.

The second is that this is a public relations ploy to stave off more onerous business regulation

I posted about “stakeholder capitalism” a few weeks ago and how it often translates into a fairly naked attempt to avoid accountability to shareholders or anyone else.  Which is why the Council of Institutional Investors (CII) immediately issued its own statement decrying the BR’s attempt to disclaim any responsibility to shareholders as a unique constituency.

Right on cue, Martin Lipton* – who, as I discussed in my prior post on the subject, has a very long history of using appeals to stakeholders as a mechanism for shielding management decisions from scrutiny – posted a statement in support of the BR, in which he warned that failure to embrace its vision would bring about calamity:

The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided. The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake. It would lead to state corporatism or socialism.

The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability to use their voting power to influence the corporations in which they invest.

In other words, corporations have to appear to be good citizens to avoid being forced to be good citizens. At least he’s honest.

Meanwhile, the Wall Street Journal published its own view in which it agreed this is all fine for PR purposes but if anyone really means to pursue profits with anything less than religious devotion, that would be bad.

Let’s just say it’s an odd day when Martin Lipton is fighting both the CII and the WSJ editorial page.  Usually, the alignment would be more CII versus Lipton and the WSJ, because the reality is, CII members are all about protecting corporate stakeholders – after all, the CII is an organization of employee pension plans – they just, you know, want shareholders to be the ones making those decisions, not corporate managers.  And the WSJ and Lipton are very much in the opposite camp.  Indeed, the BR is currently fighting to make it harder for shareholders to introduce proposals that would force corporations to focus on – you guessed it – stakeholder interests, so this looks a lot less like an issue of what is best for society than about who should be the decisionmaker.

But there’s more.  First, not everyone’s on board with the BR’s statement; there are some notable absences from BR’s list of signatories.   Second, the BR’s statement puts it at odds with the Trump Administration, which seems to have formally declared shareholder wealth maximization as the only appropriate corporate purpose.  It also puts the BR at odds with SEC Commissioner Hester Peirce, who has done the same

So, what do we make of all of this?

Well, first and most obviously, abstract notions of corporate purpose – and the near-unenforceable fiduciary duties that follow – are likely to have very little direct influence on corporate behavior. But that doesn’t mean they’re entirely irrelevant, because they can impact the legal regime in which corporations operate.  As I discuss in What We Talk About When We Talk About Shareholder Primacy, it matters if the Trump Administration and the SEC think corporate purpose = shareholder wealth maximization, because that means they’ll develop legal rules to make it so, including defining “materiality” for securities law purposes to mean only matters relevant only to financial return, and prohibiting shareholders from pushing for greater accommodation of stakeholders.  And so far, the BR is fully on board with that agenda.

That said, the true drivers of corporate decisionmaking are real-world incentives that corporate managers have to favor one constituency or the other.  And because shareholders are the only constituency who get a vote, managers are particularly likely to attend to their concerns.  Which brings me to this op-ed by Chief Justice Strine and Antonio Weiss, published in Friday’s New York Times.  In it, they make an argument that Strine has often advanced, namely, that large mutual fund investors should vote for policies that protect the worker-beneficiaries of those funds, and thus force managers to accommodate their interests as employees and consumers.  (For recent academic commentary in that vein, see Nathan Atkinson here and Michal Barzuza, Quinn Curtis, & David Webber here.) 

Now, Strine has made this argument before – I posted about one iteration here – and as I pointed out at the time, Strine has also long argued that managers have fiduciary duties to shareholders alone.  So there’s some tension in his argument that mutual funds should advocate for corporate policies that, at least according to formal (if not practical) Delaware law, cannot be advanced to the extent they favor employee interests over those of investors.  The op-ed, though, squares that circle by equating protections for workers and the environment with the long-term best interests of the corporation itself (and thus, by extension, its investors).

(The op-ed also makes the odd argument that there are too many meaningless items on the corporate ballot.  Which is unexpected because most of the non-critical items are, like, proposals that deal with corporate social responsibility, which is what the op-ed just said funds should advocate for, so, I’m confused.)

Now, the claim that long-term corporate interests are identical to those of society as a whole is an ancient way of papering over the very real conflicting interests of different stakeholders.  As an example, Larry Fink’s famed letter about corporate purpose gets a lot of attention as advancing a stakeholder-primacy view, but the letter actually said that accommodating stakeholders was in the long-term interest of business, and therefore is better for investors.

That’s the (purported) thinking behind the new Long-Term Stock Exchange (LTSE), which just received SEC approval of its listing standards.  Among other things, the standards require that listed companies have policies that are “consistent with” the notion that they should “consider a broader group of stakeholders and the critical role they play in one another’s success,” and requires listed companies to “adopt and publish a Long-Term Stakeholder policy explaining how the issuer operates its business to consider all of the stakeholders critical to its long-term success.”

Now, I say “purported” here because – going back to where all this began – arguments about managers accommodating corporate stakeholders are frequently code for “activist shareholders leave us alone,” which has little to do with corporate well-being and everything to do with management entrenchment.  Still, we’ll see how the LTSE works out – whether it attracts listings, investors, and (most critically) whether LTSE-listed companies insist their long-term policies were merely puffery as soon as they find themselves in the crosshairs of a securities fraud lawsuit.

Where does that leave us?

In my view, the hypothesized alignment between shareholder and stakeholder interests is ... complicated.  This is my argument in Not Everything is About Investors: corporate profit-seeking is only aligned with the interests of society writ large if corporations pay a price for inflicting harms on non-shareholder constituencies.  Which is why I think disclosure for non-shareholder audiences, while not a cure-all, is important: it helps society extract that price so that corporate managers are incentivized to act in society’s best interest as an inherent aspect of profit-seeking.


That was a lot.

In closing, I’ll just describe one particular colloquy that occurred at Tulane’s Corporate Law Institute earlier this year.  One panel was devoted to corporate social responsibility, and the panelists included Strine and Myron Steele, former chief justice of the Delaware Supreme Court. 

The moderator of the panel turned to Steele and asked him directly, is it ever permissible for a board of directors to decide that they will prioritize the needs of employees over earning a higher profit?  And Steele said, well, if the board sits down, and carefully studies the issue, and decides that prioritizing employees is in the best interests of the company’s long-term profitability, then yes, the board can make that decision.

And the moderator asked again, okay, but what if there’s a tradeoff between prioritizing employees and earning profits?  Can the board choose to favor employees?

And Steele said, if the board studies the issue, documents its process, and comes to a reasoned determination that it’s better for the corporation’s long-term prosperity if benefits are conferred on employees, then yes, that’s permissible.

So.  There you have it.

*yeah, I have to keep saying – no relation

Ann Lipton | Permalink


I took CJ Strine's comments about too many votes to be regarding Say-on-Pay, about which Strine has said a lot:

"Having a say on pay vote at each corporation every third or fourth year not only would be more consistent with the appropriate contractual term, it would also allow for more thoughtful voting by institutional investors. Because a third to a quarter of firms would have their arrangements come up for a vote every year, institutions could concentrate their deliberative resources more effectively"

“ We take away [boards’] ability to think long term because we put in place Say on Pay. We don’t do Say on Pay every four years or five years, where you would really have a long-term pay plan, we do it every year as a vote on generalized outrage.”

“The capacity of investors to think carefully about how to vote currently is overwhelmed by having annual say on pay votes at almost all listed companies.”

Posted by: StrineSays | Aug 24, 2019 6:59:33 AM

Fair enough, but that's not what the op-ed says, which is presumably intended for an audience beyond people who focus on Strine specifically. If they wanted to single out say on pay it would have been easy enough to do; instead, the op-ed talks about mini-referendums in general. So I'm not sure if the authors mean something broader.

Posted by: Ann Lipton | Aug 24, 2019 7:32:51 AM

Thinking more about it, Strine has discussed how extensive voting makes directors more responsive to the market. In early/mid-2000s, Strine was similarly dismissive of precatory proposals as “an invention of the SEC” and “a pretend polity” that “don’t even exist under substantive corporate law.”

His “Wolves Bite” YLJ article sets out what he may be thinking with that line in the op-ed, which are proposals he has discussed in more detail elsewhere: (1) non-annual say on pay votes and (2) fee/equity thresholds for making precatory proposals.

“Even though fund managers may believe the number of votes is wasteful and not good for them or their investors, they remain silent and go along with those, to be discussed, who press for corporations to be governed on a direct democracy, corporate California model—where there is always an opportunity for immediate market sentiments to be heard and where there is no attempt to establish a rational system of periodic votes on issues like executive compensation or to ensure that certain stockholders with trifling amounts of equity do not burden corporate performance with constant precatory proposals, which involve no cost to them and great cost to corporations.”

Recent interviews with this topic:

“When you subject the boards of directors to the immediate whims of the marketplace...votes on everything, and the market puts pressures on them, that’s going to have an effect.”

“The institutional investors have driven...the move towards more of what I call Corporate California—direct democracy....Having say-on-pay votes every year, the use of precatory proposals to change corporate governance. We’ve increased the number of directors who are responsive to the market, but at the same time subjected them to an environment that is more of a direct democracy.”

In 2007, Strine proposed eliminating precatory proposals entirely in favor of bylaws, although I assume that this is a dead letter proposal post-AFSCME.

“Consistent with the objective of implementing a responsible and efficient system of accountability, the costly precatory proposal process could be brought to a long-overdue halt. Instead of a pretend polity, stockholders would do real things. If they have a proposal to make, it would be in the form of a bylaw with real effect. . . . In a real corporate republic with a vibrant election process, proxy access for stockholders seeking to propose bylaws, and strong voting power for stockholders over important transactions, where management is also disciplined by an active market for corporate control, there would be little justification for the continued cost of throwing pizzas at corporate boards every year.”

Posted by: StrineSays | Aug 25, 2019 7:16:21 AM

I'm honestly not sure how this all squares with his desire for mutual funds to exert more control, especially w/r/t ESG type matters. It's possible his thinking has evolved (I'd say likely after Citizens United, actually). And the op-ed was jointly written; I don't know Antonio Weiss's views.

Anyhoo, he may be retiring from the bench but I'm sure he'll continue to comment one way or another and we may see more specification.

Posted by: Ann Lipton | Aug 25, 2019 8:24:14 AM

My initial thought is that accomplishing the five bullet points in the statement can still be accomplished through the lens of shareholder wealth maximization (SWM). If so, nice statement, but no real change in approach to the governance of public companies. Of course, that would be a good thing.

There is so much beyond a CEO's control that keeps her focused on SWM. For example, the fiduciary duties required by corporate law, the possibility of being taken over, and hedge fund activism. Also, all those markets (capital, product, etc.) that forces the company to be as efficient as possible. So, a focus on SWM is going to happen whether people like it or not. I think that is what Myron is talking about.

So, the question becomes, what was the point? I agree with Shane Goodwin that it is probably "virtue signalling" with the objective of keeping the next administration off the backs of our largest public companies. I guess it is worth a try.

Posted by: Bernard S. Sharfman | Aug 26, 2019 1:18:09 PM

I saw at least one interview where a CEO said basically, yes, this statement is not inconsistent with SWM. But I think the statement itself was definitely not trying to say "protect our stakeholders to serve our shareholders" - it wanted to convey a stakeholder orientation. As to why the BR wanted to do that ... well, I tend to read a "please leave us alone" subtext.

Posted by: Ann Lipton | Aug 26, 2019 3:14:47 PM

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