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There is nothing really new about the Business Roundtables Statement on the Purpose of the Corporation. It is simply the return of the groups historic and misguided support for stakeholder governance.
Why misguided? Because it was the stakeholder approach so lauded years ago by Corporate America, that led to the awful corporate results which in turn sparked the large institutional investors, led by the public pension funds, to press for the dramatic corporate governance reforms of the past twenty-five years.
Before examining the problems with stakeholder governance, it is important to state out front that a shareholder primacy model does not mean the diminution of the other stakeholders in a corporation. To create the long-term value that the shareholders deserve, a company must deal appropriately and respectfully with the other stakes.
Even Al Dunlap, who was an anathema to the stakeholder community (and whom I made the motion to fire as a Sunbeam director) stated:
for shareholders to do well, we need employees who care about the company, work hard, and feel they are being treated right. It is important to treat employees well, because it is good business. Stakeholders benefit when the shareholders benefit. If a company performs well and its shareholders make money, then the community benefits because it taxes people, and employees benefit because the company is successful.
There are three distinct problems with the stakeholder theory espoused by the Business Roundtable members with regards to the recent purpose statement:
That is partly where fiduciary duties came from. But the bigger question is who are the shareholders today? They are not Wall Street titans, but the working men and women of America firefighters, teachers, police officers and the millions of others who have invested their hard-earned salaries in thousands of pension and mutual funds.
If the Business Roundtables goal was to protect other stakes, they have utterly failed by deep-sixing the very members of those stakes who they claim obligated to protect. And, the lack of accountability created by this approach will lead to poor corporate results and the diminishment of ordinary peoples ability to retire happily as they deserve.
The lesson for boards is simple. The shareholders elected you and you are legally responsible to them. Never forget this. I am not arguing for short-termism or ignoring the important needs of those various contributors to the corporate entity.
For a business to be successful in the long-term (as are most shareholders), the other stakes must be focused upon and treated fairly. But to elevate their needs as the corporations primary reason for existence will ultimately make all of us miserable.
I have the feeling that ultimately those who signed that statement will regret what they have done. When results flounder and good companies find themselves in troubling straits, the investors, who include all of us, will in the final result hold each of them accountable.
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(This article originally appeared in Directors & Boards third quarter 2019 journal)
Charles Elson is director for Encompass Health and Blue Bell Creameries; the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware; and a member of Directors & Boards editorial advisory board.