By: Shannon Gough
On August 19, 2019, the Business Roundtable, an association of CEOs of the leading companies in America, announced the release of a new Statement of Purpose of a Corporation, which supersedes previous statements and outlines a modern standard for corporate responsibility.[1] The Business Roundtable’s Statement emphasizes stakeholder primacy over shareholder primacy, which is fundamentally different from the way corporate purpose has traditionally been defined.[2] The Statement comes at a time of rapid societal transformation. With forces such as globalization and automation, climate change, income inequality, and populism having an increasingly significant impact on society, many people are seriously questioning the role of the corporation and concluding that corporations have duties not just to their shareholders, but to society at large.[3]
Critics of this revised corporate purpose say that this is not the direction American businesses should be headed.[4] At a symposium on the role of the general counsel at American University’s Washington College of Law in October 2019, Professor Charles M. Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, disagreed with the Business Roundtable’s decision to redefine the corporate purpose, noting that shareholders deserve primacy and that this reformation is unnecessary.[5] Recently, Bill Gates also cautioned those interested in reforming corporate purpose not to lose sight of the fact that the government has a role and responsibility to play which corporations cannot replace, and that profitability is necessary for a company to be able to do anything in the first place.[6]
As the debate about corporate purpose rages on, there is a genuine question as to what impact this change will have on the law. Without accompanying action or legal requirements, skeptics say this announcement is “meaningless.”[7] On the other hand, if these CEOs do follow through with their commitment to reform corporate purpose, how will the courts handle this shift? In response to the Business Roundtable, the Chief Justice of the Delaware Supreme Court noted that reforming corporate purpose to prioritize stakeholders over shareholders is likely problematic given current law.[8] In particular, state case law and statutes typically require that corporate directors act in the best interest of the corporation by foregoing personal interests (the duty of loyalty), and making reasonable and informed business judgments (the duty of care).[9] Without focusing on shareholders and profitability of the company first, this reformed corporate purpose may be at odds with current legal precedent.[10] However, for those companies incorporated in Delaware, legal commentators argue that this Statement does not in fact change a director’s fiduciary duties.[11]
The decision to take other stakeholders’ interests into account can be a way of focusing on shareholder value, which is in line with a director’s fiduciary duties, but it is cautioned by these commentators that this focus on stakeholders can only be a means to an end of increasing shareholder welfare.[12] In some ways this argument seems disingenuous. A better argument might be that by virtue of prioritizing stakeholders over shareholders and treating them as the ends rather than the means, the directors are able to do what is both economically and socially best for the company in the long run, thereby resulting in the most desirable outcome for shareholders.[13] This is not just theoretical either. In fact, many companies have already had huge financial success by prioritizing a corporate purpose beyond shareholders and profit maximization.[14] In the end, the debate over corporate purpose is a structural debate and a response to shifting societal priorities. If corporate purpose evolves, the law will also ultimately evolve to adapt with the changing times.
[1] Business Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’ (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
[2] See David Millon, Radical Shareholder Primacy, Harv. L. Sch. F. on Corp. Gov. and Fin. Reg. (Sept. 24, 2014), https://corpgov.law.harvard.edu/2014/09/24/radical-shareholder-primacy/; see also Business Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’ (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans (noting that shareholder primacy has been promoted by the roundtable since 1997).
[3] See Lynn S. Paine & Suraj Srinivasan, A Guide to the Big Ideas and Debates in Corporate Governance, Harv. Bus. Rev. (Oct. 14, 2019), https://hbr.org/2019/10/a-guide-to-the-big-ideas-and-debates-in-corporate-governance.
[4] See Kevin J. Delaney, Bill Gates on the Limitations of Corporate Purpose, Quartz at Work (Sept. 17, 2019), https://qz.com/work/1709936/bill-gates-on-the-limitations-of-corporate-purpose/.
[5] Symposium, Corporate Counsel as Business Leaders, 9 Am. U. Bus. L. R. (Oct. 7, 2019) (transcript on file with author).
[6] See Kevin J. Delaney, Bill Gates on the Limitations of Corporate Purpose, Quartz at Work (Sept. 17, 2019), https://qz.com/work/1709936/bill-gates-on-the-limitations-of-corporate-purpose/.
[7] See Paul Ericson, The Debate Over Corporate Purpose, Rochester Beacon (Sept. 17, 2019), https://rochesterbeacon.com/2019/09/17/the-debate-over-corporate-purpose/ (quoting Senator Elizabeth Warren’s response to the announcement).
[8] See Alex Kraus, INSIGHT: Shareholders to Stakeholders – The Business Roundtable Wants to Expand a Corporation’s Purpose, Bloomberg Law (Oct. 7, 2019), https://www.bloomberglaw.com/document/X5B5TKHK000000?bna_news_filter=corporate-law&jcsearch=BNA%25200000016d6e5cd673a16f7e7cc8270001#jcite.
[9] See id.
[10] See id.
[11] See Ropes & Gray, Business Roundtable Broadens Scope of a Corporation’s Purpose to Include Other Stakeholders, (Aug. 26, 2019), https://www.ropesgray.com/en/newsroom/alerts/2019/08/Business-Roundtable-Broadens-Scope-of-a-Corporations-Purpose-to-Include-Other-Stakeholders?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original.
[12] See id.
[13] See Jena McGregor, What to Watch for Now that CEOs Have Rewritten the Purpose of the Corporation, Wash. Post (Aug. 21, 2019),https://www.washingtonpost.com/business/2019/08/21/what-watch-now-that-ceos-have-rewritten-purpose-corporation/. But see Curt Welling, Capitalism is the Solution to America’s Challenges – not the Cause, MarketWatch (Oct. 14, 2019), https://www.marketwatch.com/story/capitalism-is-the-solution-to-corporate-americas-challenges-not-the-cause-2019-10-14 (arguing profit is the company’s most important objective).
[14] See Raja Palaniappan, A Radical New Sense of Corporate Purpose, Origin (Aug. 22, 2019), https://originmarkets.com/a-radical-new-sense-of-corporate-purpose/ (noting that Patagonia, Southwest Airlines, Merck, Toms and many other companies have shown that it is “actually good business to broaden the scope of a corporation’s purpose”).
