August 25, 2021

BRT’s “Stakeholder Capitalism” Turns Two: What’s Changed?

It’s hard to believe we’ve spent only two years analyzing the decision of 200 CEOs to sign the Business Roundtable’s “Statement on the Purpose of a Corporation” – and ostensibly change life as we know it. I don’t know about you, but it feels now like I was born thinking about corporate purpose. My mom read me bedtime stories about Milton Friedman & the BRT as a child, and I used the word “stakeholder” in my wedding vows. But alas – no – it really has been only two years.

To mark the anniversary, Harvard Law Profs Lucian Bebchuk and Roberto Tallarita released this analysis of “stakeholder” companies’ governance documents, proxy statements and other statements & actions – and highlighted their findings in this WSJ op-ed last week. Here are the big takeaways:

1. Examining the almost one-hundred BRT Companies that updated their corporate governance guidelines in the sixteen-month period between the release of the BRT Statement and the end of 2020, we find that they generally did not add any language that improves the status of stakeholders and, indeed, most of them chose to retain in their guidelines a commitment to shareholder primacy;

2. Reviewing all the corporate governance guidelines of BRT Companies that were in place as of the end of 2020, we find that most of them reflected a shareholder primacy approach, and an even larger majority did not include any mention of stakeholders in their discussion of corporate purpose;

3. Examining the over forty shareholder proposals regarding the implementation of the BRT Statement that were submitted to BRT Companies during the 2020 or 2021 proxy season, and the subsequent reactions of these companies, we find that none of these companies accepted that the BRT Statement required any changes to how they treat stakeholders, and most of them explicitly stated that their joining the BRT Statement did not require any such changes.

4. Reviewing all the corporate bylaws of the BRT Companies, we find that they generally reflect a shareholder-centered view;

5. Reviewing the 2020 proxy statements of the BRT Companies, we find that the great majority of these companies did not even mention their signing of the BRT Statement, and among the minority of companies that did mention it, none indicated that their endorsement required or was expected to result in any changes in the treatment of stakeholders;

6. We find that the BRT Companies continued to pay directors compensation that strongly aligns their interests with shareholder value. Furthermore, we document that the corporate governance guidelines of BRT Companies as of the end of 2020 commonly required such alignment of director compensation with stockholder value and generally avoided any support for linking such compensation to stakeholder interests.

Our findings support the view that the BRT Statement was mostly for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders. These findings support the view that pledges by corporate leaders to serve stakeholders would not materially benefit stakeholders, and that their main effect could be to insulate corporate leaders from shareholder oversight and deflect pressures for stakeholder-protecting regulation. Stakeholder governance that relies on the discretion of corporate leaders would not represent an effective way to address growing concerns about the effects corporations have on stakeholders.

Last year, Professors Bebchuk & Tallarita released findings that they said implied CEOs didn’t intend to change anything by signing the BRT Statement, and this additional research seems to point in the same direction. That’s actually consistent with what a lot of corporate governance folks have been saying since Day 1: the debate around this is mostly semantics, since what’s good for “stakeholders” can also benefit shareholders in the long run. Even shareholders seem to be on the “stakeholder” bandwagon at the moment, and it doesn’t seem like their initial concerns of executives using this Statement to insulate themselves have come to pass.

That said, I’m not sure that corporate governance guidelines and investor-focused proxy statements give a full picture of everything that companies have been doing during the last two years. A lot of companies are adding ESG metrics to executive pay programs, enhancing website sustainability reporting, and amending board committee charters to expressly assign responsibility for things like “human capital” oversight. In this Wachtell Lipton memo, Marty Lipton elaborates on all the corporate actions that Professor Bebchuk’s analysis arguably overlooks.

Whether these efforts have trickled down to benefit stakeholders is another question. Right now, it seems good for the bottom line to consider the interests of customers, employees & communities. Bebchuk & Tallarita believe it would be better for the government to protect stakeholders than to rely on corporations to consistently do so. As Ann Lipton reminded everyone in this Tweet, this whole debate is really about management power & accountability – not stakeholders.

Liz Dunshee