In light of the recent Business Roundtable (BRT) statement on corporate purpose and the debate surrounding it, companies and boards may want to reassess their engagement and outreach plans ahead of their 2020 annual meetings.
According to the BRT’s press release, its new “Statement on the Purpose of a Corporation” redefined the purpose of a corporation to promote “an economy that serves all Americans.” The 181 CEOs who signed it (including KPMG’s CEO) committed “to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders.”
While the concept of benefiting employees and other stakeholders is not new, the BRT Statement comes amid an environment marked by a growing sense of urgency around societal and environmental issues including climate change, income inequality, and human capital management. Institutional investors have set expectations for corporations to address these issues in the context of long-term value creation.
Reactions from the business and investor community have been mixed. Some view the BRT Statement as an important commitment to stakeholders by Corporate America, while others are skeptical. And some investors oppose it based on concerns that the Statement diminishes managerial accountability to shareholders. In its response to the Statement, the Council of Institutional Investors stated, “Accountability to everyone means accountability to no one.”
Legally, nothing has changed. As attorneys of Wachtell, Lipton, Rosen & Katz wrote, “The fiduciary duty of the board is to promote the value of the corporation. In fulfilling that duty, directors must exercise their business judgment in considering and reconciling the interests of various stakeholders—including shareholders, employees, customers, suppliers, the environment, and communities—and the attendant risks and opportunities for the corporation.”
Investors have always reacted to corporate decisions—positively when they like what a company has done and negatively if they believe a corporate decision is not in their best interests, long or short term. The BRT Statement simply highlights important stakeholder issues for a higher level of engagement.
That said, we can expect institutional investors and other stakeholders to probe management and boards for more information about how the company makes decisions impacting the five stakeholder groups identified in the BRT Statement—customers, employees, suppliers, communities, and shareholders—particularly when competing interests need to be reconciled.
Regardless of whether they agree with the Statement, companies should be prepared to articulate how their decisions and actions affect each of the five stakeholder groups in the context of long-term value creation. For example, how does a price increase align with the company’s commitment to customers? How does a plant closing align with the company’s commitment to employees and the local community?
Enhanced transparency and voluntary disclosure. Signatories should consider whether enhanced disclosures on the issues cited in the Statement are warranted. The SEC has proposed amendments to Regulation S-K that, if adopted, would require human capital management disclosure.
Performance targets and compensation incentives. In light of the commitments set forth in the BRT Statement, reassessment of performance targets and compensation incentives may be appropriate. How do we measure performance and success? What are the key drivers of long-term value?
Director engagement. Director engagement is already the norm, but expectations will be high for directors to be able to articulate for investors and other stakeholders how the company is meeting its commitments under the BRT Statement—and in particular, how it reconciles competing interests among stakeholders in a manner to produce long-term value.
Spotlight on a particular stakeholder: employees. Employee activism is in its early stages but is growing rapidly—and the Statement may accelerate the trend. Indeed, employee activists may use the Statement as part of their campaigns.
Corporate/government affairs. Expect the existing focus on lobbying and campaign contributions to intensify. Companies should understand how their lobbying and political spending, including trade association support, will be viewed by the various stakeholder groups.