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Last month, the Business Roundtable declared the end of shareholder primacy. Customers, suppliers, employees, and communities now join shareholders on the list of stakeholders that member companies consider when making strategic decisions.
The business media roared. According to many headlines, the Business Roundtable’s revised “Purpose of a Corporation” is a threat to shareholders and to the efficient distribution of capital in the economy. These concerns are not unfounded. The statement makes clear that in a conflict between the interests of the stockholder and the interests of other stakeholders, all bets are off. Shareholders seeking to maximize returns therefore will be hard-pressed to decipher which firms are looking out for their interests and which are not.
Financial markets, however, shrugged. The 15-day return from August 19 — the date of the announcement — to September 3 on a portfolio of stocks consisting of the publicly-traded members of the Business Roundtable was 0.8 percent. This is the exact same as what would be expected based on the same portfolio’s historical relationship with the S&P 500.
Were markets right to dismiss the statement as cheap talk? Prior research indicates that perhaps not. External stakeholders look for opportunities to influence corporate behavior. Soft targets are most desirable. According to recent research by business school professors Mary-Hunter McDonnell, Braden King, and Sarah Soule, firms that signal an openness to external stakeholders by setting up board committees focused on corporate social responsibility are more likely to be receptive to social-issue proxy proposals by activist shareholders. The Business Roundtable’s members placed a seat at the table for environmental groups, labor unions, and consumer advocates. Investors should not be surprised then when new voices get heard in the boardroom.
On net, it is hard to determine if the fact that companies are considering more diverse interests will help or harm stockholders. The growing popularity of employee-owned companies and benefit corporations indicates that corporate managers are looking for ways to leverage broader stakeholder engagement. Firms frequently partner with environmental non-governmental organizations in order to learn how to better manage environmental risks and avoid activist challenges. BlackRock CEO’s Larry Fink argues that companies with a purpose that integrates all stakeholders are more profitable in the long term than those that seek profits for their own sake.
However, the Business Roundtable’s statement muddies the water for investors. When a corporation is registered as a B Corp, shareholders know that the firm’s goals are a hybrid of profit motive and social purpose. Employee stock ownership plans explicitly tie the well-being of shareholders to those of employees by making them one-and-the-same. When Coca-Cola partners with the World Wildlife Fund, shareholders receive a valuable seal of approval from a globally respected NGO in exchange for a corporate commitment to environmental responsibility. In contrast, investors in companies that measure success based on consumer, employee, supplier, and community impact would be hard-pressed to divine how companies balance these goals against shareholder value. Nor would they know whether or how the formula is changing over time.
So, where should investors expect the biggest impact of the revised corporate raison d’être? On one side are firms where stakeholder engagement is already part of their corporate strategy. These corporations are already sensitive to non-shareholder claims, like those that rely heavily on brand reputation, producers of consumer goods with many substitutes, and in industries fearful of future government regulation. On the other are firms where it’s profit maximization or nothing. These companies are in highly competitive industries, where even a slight shift in focus away from minimizing costs and maximizing prices will open the door for a more ruthless competitor to enter.
The most interesting cases are the firms in the middle, who do not deal directly with consumers, but for whom brand is important. Those who have a large consumer base, but who do not face close market substitutes. And, those who have been identified as bad corporate actors in the past and are looking for a way to rehabilitate their image. For them, expect some changes to strategic decision making in order to respond to more diverse interests.
Will this shift be good for shareholder returns? Financial markets are not yet sure.
Even JP Morgan has started talking about the importance of various stakeholders. Will this shift be good for shareholder returns? Financial markets are not yet sure.
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