Blog No. 233. Corporations: The Business Roundtable and Senator Warren

In August, the Business Roundtable issued a “Statement on the Purpose of a Corporation” signed by 180 CEOs. It provided in part that:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

–Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

–Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

–Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

–Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

–Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Although the Statement on its face might not seem exceptional, it drew more than normal attention and discussion in the media. It did so because, as the Roundtable explained in a press release, it was a conscious departure from previous statements that had “endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders.” According to the release, the new statement “outlines a modern standard for corporate responsibility.” Under the modern standard, it appears that shareholders are only one of a corporation’s “stakeholders” and, indeed, not necessarily even primus inter pares.

The Statement received a mixed reception. Some hailed it as a constructive acceptance of a broadened corporate responsibility. Rep. Joe Kennedy (D-Mass.) called it “a welcome step toward a more moral capitalism,” while the U.S. Chamber of Commerce said it “agreed wholeheartedly with the renewed focus.” Many others had the view of Robert Samuelson in the Washington Post, “This is mostly a public relations exercise, designed to pre-empt more federal regulation.” So far as that goes, the Wall Street Journal was unimpressed:

[T]hese CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them.

Lawrence Summers writing in the Washington Post, gave the Statement what might be described as one and a half cheers. After saying, “Certainly the recognition by leading chief executives that they need to look beyond the narrow metric of their stock price is to be welcomed,” Summers went on to raise several practical questions as to whether and how the new standard would be implemented. It appeared that no one had a clear idea, even by way of hypothetical example, of what difference the statement might have on any particular corporate actions going forward. After all, as the Wall Street Journal observed, “To be successful, any company must serve its customers, adequately reward its employees, cultivate the loyalty of suppliers, and maintain good relations with the communities where it operates.”

It is also worth noting that despite claims to the contrary, nothing in current law requires corporations to maximize profits. Lynn Stout of the Cornell Law School recently provided a clear summary of the law:

There is a common belief that corporate directors have a legal duty to maximize corporate profits and “shareholder value” — even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: “Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.”

If the Statement contemplated substantive changes, it is fair to ask whom the signers saw as their primary audience. Other CEOs? Shareholders? The public? Government in general, and perhaps Senator and presidential candidate, Elizabeth Warren in particular? As a legal matter, shareholders are the owners of corporations; hence, if a corporation’s purpose is to be redefined, it must be done at their command or with their approval. It is likely that most shareholders endorsed the principle expressed in prior Roundtable statements, following the philosophy expounded by Milton Friedman in an influential 1970 essay:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

Is Friedmanism now obsolete, as some have suggested? If so, it is shareholders who must decide that, unless the death blow is delivered by legislative fiats from government, federal or state. It is unlikely that investors, individual or institutional, are likely to embrace a broad program of corporate “social responsibility.” Even if some lessening of corporate profits were acceptable, they would want to know how much of a lessening might be involved. Moreover, shareholders at large are likely to have differing views of just what the exercise of social responsibility calls for in reacting to a particular situation or issue. Finally, the metrics of assessing corporate attempts to exercise social responsibility are difficult to imagine. (The metrics of shareholder value, earnings per share and share price are, as every investor knows, imperfect, but they are readily available and familiar tools.)

Abolition of Friedmanism by legislation also seems unlikely. The prime example may be Senator Warren’s proposed bill, the Accountable Capitalism Act. In the press releases introducing the Act, Senator Warren emphasized that “booming corporate profits and rising worker productivity have not led to rising wages.” The reach of the Act, however, goes far beyond attempting to increase workers’ compensation. In summary, it provides:

— American corporations with more than $1 billion in annual revenue must obtain a federal charter from a newly formed Office of United States Corporations at the Department of Commerce. The new federal charter obligates company directors to consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates.

–The boards of United States corporations must ensure that no fewer than 40% of its directors are selected by the corporation’s employees.

–Directors and officers of United States corporations are prohibited from selling company shares within five years of receiving them or within three years of a company stock buyback.

— United States corporations must obtain approval of at least 75% of their shareholders and 75% of their directors before engaging in political expenditures.

— A United States corporation that engages in repeated and egregious illegal conduct may have its charter revoked.

Even if Elizabeth Warren should be elected president, and carry with her control of the House and Senate, it is doubtful that the Act, or any approximation, would be enacted. For example, federalizing supervision of corporations, and requiring 40% worker representation on corporate boards, will be bridges too far for many Democrats as well as Republicans. (The proposed Act would apply to “very large” corporations, i.e., those having revenues of at least $1 billion, but that would take in a lot of territory: Forbes lists as the 1,000th largest corporation by revenue, Carvana, an on-line used car dealer with revenues of nearly $2 billion.)

Whatever the prospects for Warren’s bill, there is no doubt a good deal of dissatisfaction with corporations in the air, and no one can know just where it may lead. Hence, the Roundtable’s attempt to mount a pre-emptive response is understandable. But how effective was the Roundtable’s attempt at a new look? Two of the prime sources of complaint against corporations went conspicuously–but not surprisingly–unmentioned. They are matters of concern not likely to be eliminated by corporate “good works” undertaken in the name of social responsibility

The pressing issue of wage stagnation was arguably addressed by a reference to compensating workers fairly, but no mention was made of the extraordinary chasm that has developed between the compensation of CEOs and that of the average worker. As Vox reported on June 26, 2019:

The average chief executive of an S&P 500 company earned 287 times more than their median employee last year, according to an analysis of the new federal data released Tuesday by the AFL-CIO labor federation. America’s CEOs earned a staggering $14.5 million in 2018, on average, compared to the average $39,888 that rank-and-file workers made. And CEOs got a $500,000 bump compared to the previous year, while the average US worker barely got more than $1,000.

That ratio may be compared with 1978, when CEO earnings were roughly 30 times the typical worker’s salary.

The term “wage stagnation” may have a somewhat academic and abstract sound, but the ratio of CEO compensation to that of the average or median worker is vivid and easily understood, particularly when compared to prior years. If the Roundtable CEOs cannot be persuaded to counsel restraint for themselves and their peers, federal action may be unavoidable. (One possibility might be to tax executive compensation on an upward sliding scale with tax rates increasing as the pay ratio of the taxpayer’s compensation increased. For example if the ratio reached, say, 287:1, the tax rate might climb to 90%)

Another sore point lies in corporate political contributions, and particularly contributions that are undisclosed. While corporations are barred from making contributions directly to federal candidates, the Supreme Court decision in Citizens United, upheld on First Amendment grounds independent corporate expenditures for “electioneering communications.” At the same time, Citizens United also upheld disclosure requirements, but current law provides major loopholes from disclosure. Corporations may make undisclosed contributions, “dark money,” to trade associations and to “social welfare” organizations. Unlike most political committees regulated by federal election law, these tax-exempt groups do not have to disclose their donors. And while they are not allowed to have a “primary purpose” of influencing elections, they may spend tens of millions of dollars doing that or influencing legislation.

A requirement of 75% shareholder approval of all political expenditures, as provided in the Warren bill, is probably unworkable and unlikely to be legislated. Nevertheless, there is much to be said for greater disclosure of corporate political contributions. The Roundtable’s 2016 “Principles of Corporate Governance,” made the timid observation that “To the extent that the company engages in political activities, the board should have oversight responsibility and consider whether to adopt a policy on disclosure of these activities.” The 2019 Statement made no reference at all to political activity but expressed a general commitment to “transparency and effective engagement with shareholders. Political activity is surely an area in which shareholders deserve at least transparency if not effective engagement.

Disclosure of corporate contributions may result in some push-back from shareholders, but that might a be a good thing in assuring that boards are careful to make sure that political contributions are in fact aligned with the corporation’s interests and public positions. Numerous examples of corporations funding politicians or causes inconsistent with their interests or proclaimed values may be found in a draft report of the Center for Political Accountability, “COLLISION COURSE The Risks Companies Face When Their Political Spending and Core Values Conflict and How To Address Them.” 

If anything is clear, it is that the work of the Business Roundtable, in attempting to establish and defend modern principles of of corporate responsibility and behavior, probably has a long way to go.