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.