August 20, 2019

Battle Lines Being Drawn! BRT Brushes “Shareholder Primacy” Aside

Yesterday, the Business Roundtable got a ton of press by issuing this statement with its view that the “purpose” of a corporation should be changed so that “shareholder primacy” is a thing of the past. Nearly 200 CEOs signed onto the BRT’s statement. Bye-bye Milton Friedman’s decades-old theory to “maximize value for shareholders.” How many of you will need to cover your tattoo of that phrase?

Shifting from shareholder primacy would be quite a change in focus for management & boards – from one devoted primarily to shareholders to one that would be a mix of stakeholders, including employees, customers, suppliers, the environment, communities and shareholders. Under the BRT’s new formulation, companies say they’ll consider the competing interests of the stakeholders (presuming they’re not conflicted). While most state corporate law already allows for this in some form, things like promoting employee welfare at the short-term expense of shareholders are typically justified by boards & management as something that will also improve long-term shareholder value (some shareholders are more amenable to that than others).

Elizabeth Warren loves the idea – she proposed legislation along these lines last year. But understandably, large shareholders aren’t happy about the BRT’s move – here’s a statement from the Council of Institutional Investors.

We’re posting memos in our “Director Duties” Practice Area. And here’s a WSJ article – and Cydney Posner has some nice analysis in her Cooley blog.

Directors, How Well Do You Really Know the Shareholders You Represent?

Here’s a pretty interesting story by David Shaw in “Directors & Boards.” Here’s the intro:

A few years back, I was at a non-business cocktail party, chatting with someone I had just met. It was a great conversation, as I recall, until I learned that he was a board member of a company in which I held stock, and I shared that fact with him. My holdings were small, comparatively, but large enough to be very relevant to me. This may have been a wonderful opportunity for this board member to ask some questions of me, get my opinions — you know, get to know one of the owners. The other parts of our conversation had been vigorous and interesting.

You can guess what happened, of course. The conversation died out quickly, and drinks needed refilling. And we didn’t speak again that night, or any other time. Fully understanding the desires and goals of shareholders is a key to good company governance, and in this regard directors at publicly traded companies can take a lesson or two from their private company counterparts, especially when it comes to the growing conversations around environmental, social and governance (ESG) issues.

Transcript: “Current Developments in Capital Raising”

We’ve posted the transcript for our recent webcast: “Current Developments in Capital Raising.”

Broc Romanek