Update 377: Shareholders vs. Stakeholders?
Cos. Pay Lip Service, but Not a Cent in Taxes
Last week, the CEOs of the nation’s largest corporations signed a statement redefining “the purpose of a corporation.” Now, corporate management should serve not only the company’s owners, but other stakeholders (employees, customers, the public) as well.
Any owner ever sued by a stakeholder knows they are not to be ignored. Owners don’t do well in tort claim cases. This has long been true. But when a basic duty of citizenship is owed, to pay taxes for example, the record of service of 15 signatory CEOs’ firms is no example. This may be a moment for lofty and lefty avowals but corporate fiscal citizenship is what needs to change before the public will listen to lip service.
Happy Labor Day weekends, all…
Last week, the Business Roundtable (BRT), representing CEOs of the largest American companies, issued a statement redefining the purpose of a corporation from one that primarily serves the interests of shareholders to one that benefits all stakeholders. The Business Roundtable has periodically issued statements on corporate governance since 1978, and shareholder primacy has been central to their doctrine since 1997.
This statement challenges a long-established organizing principle of corporate management. But what does it mean practically? And why now? Is the statement a charm offensive by Corporate America, seeking to ward off momentum on Capitol Hill to address corporate social responsibility, or is this a serious reconsideration of corporate priorities and practices?
Shareholders: Who Are They, and What Are They Owed?
Shareholder primacy is a corporate governance theory holding that a firm’s primary obligation of purpose is maximization of shareholder value, disregarding other stakeholders like local communities, consumers, and employees if need be. The view, championed by Milton Freidman in the 1970s and adopted by the U.S. business community, hasn’t been seriously challenged or discussed since.
Shareholder primacy continues to justify a host of business practices from environmental degradation, to lax health and safety practices, to predatory leveraged buyouts. The Business Roundtable’s new statement of purpose explicitly rejects the notion of absolute shareholder primacy. JP Morgan CEO Jamie Dimon took a lead role in crafting the new statement, which reads in part, “each of our stakeholders is essential… we commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
Who exactly are these stakeholders? Per the Roundtable statement, they include “customers, employees, suppliers, communities, and shareholders.” So shareholders are one of five stakeholders that corporations should consider in their decision-making process. Companies managing by these new rules would invest profits into their employees and local communities, and would address negative externalities like pollution or increased systemic risk in financial markets in lieu of actions like CEO pay raises or stock buybacks, which do not confer societal benefits.
The Business Roundtable seems to be advocating support for Environmental, Social and Governance (ESG) models and criteria used to evaluate investment decisions based on values, rather than pure profit. Factors like transparency and access to company information, as well as public concern for issues like climate change and sustainability, has led to a rise in ESG investing. Empowered, socially conscious and long-term investors are thinking twice about investing in firms that treat their workers poorly or employ all-male boards of directors.
The Roundtable’s statement of purpose may signal a change in thinking among the titans of American industry, but it lacks teeth to implement changes. BRT cannot force member companies to take certain actions. Moreover, no specifics on how to carry out new ideals were offered.
Corporate citizenship is also legally constrained. While courts have historically given CEOs and business leaders enormous latitude to make decisions as they see fit, many states have some form of shareholder primacy engrained in statute. And for good reason — companies must act as fiduciaries and CEOs should not be able to dodge shareholder accountability.
Legislation and Candidate Proposals
BRT has historically fought the rise of unions and economic reform legislation, antitrust bills, CEO accountability measures, minimum wage increases, corporate tax increases, and pro-consumer Supreme Court decisions.
In this wake, Members of Congress and Democratic Presidential candidates have offered a slew of proposals to address social ills exacerbated by shareholder primacy:
- A Corporate Minimum Income Tax would subject more of a corporation’s business income to income tax. As the tax code stands, even the nation’s most profitable corporations can report little to no taxable income to the IRS. Sen. Warren has released a plan to levy a seven percent tax on corporations for every dollar of profit they earn over $100 million. This would raise Amazon’s income tax burden from $0 in 2018 to upwards of $700 million, and the entire proposal would raise over $1 trillion in revenue over ten years.
- Sen. Warren’s Accountable Capitalism Act (S. 3348, 115th) would require all U.S. companies with $1 billion or more in annual revenues to obtain a federal charter as a “United States corporation,” obligating the firm to consider the interests of all stakeholders (including employees, customers, shareholders, and communities) in their corporate governance activities. Employees would vote to elect at least 40 percent of the board of directors; new restrictions would be placed on political contributions.
- Sens. Baldwin, Gillibrand, Sanders, and Warren’s Reward Work Act, S. 915, which would repeal the 1982 Securities and Exchange Commission (SEC) 10b-18 rule that makes it easier for corporations to buy back their stocks. The legislation also includes a measure on worker representation on corporate boards.
- Employee Stock Ownership Plans (ESOPs) are another way for workers to share in the success of a company. ESOPs provide employees with a contribution-free retirement plan, and they have been shown to foster higher levels of productivity, profitability, job stability, and employment growth compared to non-ESOP counterparts. The federal government can increase participation in ESOPs through tax incentives and by equipping agencies like the Small Business Administration to assist in supporting them.
Paradigm Shift or Press Release?
Sen. Warren called the Roundtable’s announcement last week “a welcome change,” but added that “without real action, it’s meaningless.” An assortment of politicians and experts from across the political spectrum expressed cynicism about the Roundtable’s statement. Republican National Committee official Harmeet Dhillon said “the Business Roundtable is just virtue signaling,” offering faux solutions to real problems.
Fifteen Fortune 500 companies listed as signatories to the BRT pledge paid no federal income taxes in 2018. Yes, shareholder primacy has contributed to societal ills like economic inequality, worker alienation, and environmental degradation, but its overthrow by corporate leaders in a statement strikes some as irrelevant at best. At worst, the statement is a smokescreen obscuring a corporate citizenship marked by resistance to first-world ESG standards and paying federal taxes, rather than commitment to a broad vision of corporate purpose and obligation.