CEOs face pushback over stakeholder refocus

The August pledge by 181 CEO members of the Business Roundtable that their companies now will serve all stakeholders, not just shareholders, promises to make things a lot more interesting in corporate boardrooms — and potentially in courtrooms — in the coming months.

Reversing a policy in place since 1997 that a company's primary purpose is to maximize shareholder value — period — the CEOs said they now are committing to delivering value to customers, investing in employees, dealing fairly with suppliers and supporting local communities, as well as generating shareholder value.

Signers include the chief executives of Apple, Amazon, BP, Bank of America, Coca-Cola, Ford, Johnson & Johnson, Walmart and Visa. To Business Roundtable Chairman Jamie Dimon, chairman and CEO of J.P. Morgan Chase & Co., expanding the commitment to all stakeholders "is the only way to be successful over the long term."

But institutional investors and other shareholders see it as putting shareholders last, casting them not as owners but simply as suppliers of capital.

In its own statement, the Council of Institutional Investors — whose pension fund, endowment and foundation members hold a collective $4 trillion in assets — warned the policy shift would diminish shareholder rights and, in the absence of new mechanisms to assure accountability of boards and management, would lead to "accountability to no one."

Long-term views and strategies are import- ant, CII officials said in the statement, but "if 'stakeholder governance' and 'sustainability' become hiding places for poor management," the economy or pubic equity markets will suffer.

Charles M. Elson, the Edgar S. Woolard Jr. Chair of Corporate Governance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, Newark, views the new Business Roundtable policy as "a mistake."

Before Business Roundtable members adopted the shareholder-first policy in 1997, companies trying to appeal to all stakeholders "led to very bad management and very bad results — for their investors and their employees. The folks who are ultimately hurt are working men and women" whose pension funds invest in the companies, Mr. Elson said.

Returning to that policy "will come back to haunt" company executives, especially if shareholder value drops, Mr. Elson warned. He said he hopes the CEOs will soften their approach as they move to implement the change, and take care to keep shareholders at the front of the line.

"The point is, these people invested in you. What happens the next time you ask for their money?" he said.

Corporate directors should brace for tough questioning from shareholders much more organized now than three decades ago, especially if the economy sags, he said.

"An angry shareholder base would vote them out, if the results were not there," said Mr. Elson, who expects board directors to first have some tough questions of their own for any CEO trying to implement the all-stakeholder policy.

The legal consequences could be serious as well, although a client memorandum from law firm Davis Polk & Wardwell LLP, Washington, downplays the potential impact by describing the Business Roundtable statement as "mainly symbolic, since legislatures and courts, not trade associations, define the scope of a director's fiduciary duties."

One potential legal change resulting from the new position is whether board directors' duty of care to the corporation and shareholders becomes broadened to include a duty to other stakeholders. Since most U.S. corporations are incorporated in Delaware, that state's law makes clear the directors' fiduciary duty is to the company and its shareholders.

The judicial system's current business judgment rule gives corporate directors discretion to act without having their fiduciary duty challenged, as long as they are informed and acting in good faith. A board decision not in the best interests of the company or its shareholders would remove the protection of that rule. Experts caution that the new Business Roundtable policy could create a legal avenue for challenging how well boards fulfilled their duties, and that the current rule could get amended or somehow expanded to include a duty to other shareholders.

There is room for misinterpretation of fiduciary duty, warned a separate memo from Sullivan & Cromwell LLP, New York. Corporations will need to strike a careful balance when considering other constituencies and have a clear framework for making decisions, "and may wish to consult with institutional investors," the lawyers advised.

Companies wanting to conduct business for an express public benefit have the option of being designated a public benefit corporation, or B Corp, in states that allow them, legal experts said. Prominent B Corp examples include Patagonia Works in Ventura, Calif., an outdoor apparel company, which says it is managing for supply chain integrity, working conditions and environmental protections; and New Belgium Brewing Co. in Fort Collins, Colo., which says it diverts most of its waste from landfills.

Then there is the political aspect of this new Business Roundtable stance. While some observers see it as window dressing by corporations to show they are attuned to changing social interests and demands, skeptics see it as a political move to head off attempts to legislate or regulate perceived corporate imbalances such as rising executive pay and wage inequality.

The idea already was raised last year by Massachusetts Sen. Elizabeth Warren, a Democratic presidential candidate whose proposed Accountable Capitalism Act would "reverse the harmful trends over the last 30 years that have led to record corporate profits and rising worker productivity but stagnant wages," Ms. Warren said when introducing the bill last August. She attributed that trend to the shift by corporations to the shareholders-first policy from considering all stakeholders. To swing the pendulum back, her proposal would have workers elect 40% of board members, make it harder for executives to sell stock and companies to buy it back, and have direct shareholder say in corporate political activity.

The U.S. might not be quite ready for that, but to Tim Mohin, CEO of Global Reporting Initiative, an independent international organization promoting sustainability reporting, the new Business Roundtable position "appears to be a tipping point" that U.S. companies and stakeholders have been building to for a long time.

The policy might be light on specific goals, but most of the 181 signatories publish annual sustainability reports based on the GRI Sustainability Reporting Standards. Many of those standards are required in capital market disclosures in 45 countries, and with this latest move publicly declaring the companies' commitment to sustainability measures, that example could be catching, Mr. Mohin said.