The notion that businesses are accountable to all stakeholders is a wide-open door for activists seeking to pressure companies.
Five years later, it’s clear that downplaying shareholders and emphasizing stakeholders is not the way to go.
F ive years ago, Business Roundtable released the “Statement on the Purpose of a Corporation.” The statement upended years of corporate philosophy, where businesses had a responsibility to act solely in the best interests of their shareholders. In this new world of corporate responsibility, companies now had responsibility to a new group of actors: stakeholders, people operating within the same community as the business, even extending to those outside that direct community who could be affected by that business’ practices and decisions.
Aside from maximizing shareholder return and acting within the parameters of the law, the Roundtable statement encouraged corporations to embrace “sustainable practices” in the name of “protecting the environment” and protecting the company’s “fundamental commitment to all . . . stakeholders” (emphasis added). A shorthand term for this is “stakeholder capitalism,” a notion inextricably connected with ESG. ESG is a scoring system designed to help investors do well by doing good, as the marketing slogan has it. By giving managements permission to widen their obligations beyond the duty they owed to shareholders, stakeholder capitalism allows them to attach more weight to ESG than would otherwise have been the case.
The notion of a corporation serving both environmental causes and shareholders’ interests had tremendous initial appeal, at least to those who didn’t stop to think about it. Yet, it has been five years since that statement was released. What has really happened in the corporate space since?
The both-and of the Roundtable statement has become an either-or. Corporate America has become enmeshed in controversies, with brands from Target to Tractor Supply drawing headlines no company should want to see.
ExxonMobil’s desire to serve its shareholders by aiming to expand its share of the oil-and-gas market has been criticized and outright opposed (albeit unsuccessfully) by powerful pro-ESG interests in lobbying groups and blue-state pension funds. And Target’s desire to flaunt progressive values has proved expensive, with the company seeing a significant sales decrease over political boycotts last year.
Are their woes solely the fault of the architects behind the Business Roundtable’s redefinition of corporate responsibility? Of course not — but the Roundtable’s philosophical approach makes such patterns difficult to ignore.
The notion that businesses are somehow accountable to all members of the communities in which they and their suppliers operate is a wide-open door for activists seeking to pressure companies. Under this activist framework, it’s in the best interests of an oil-and-gas business to aim for “net zero,” in keeping with contemporary progressive orthodoxy. Never mind that such aims would shrink shareholder return and, indeed, the company (in the case of ExxonMobil, activist groups say that it would be good for the company to shrink).
There is no particular evidence that a fossil-fuel company is well equipped to switch to renewables. Rather than switch to lower-returning businesses, it might do better to return capital to its owners. They can, after all, invest that money in companies with a proven record in renewables or — who knows — invest it in a oil-and-gas company less interested in the Roundtable’s sermons.
The Roundtable statement’s architects aren’t walking anything back. On the five-year anniversary of the original statement, the group posted an essay praising its effects. It read, in part, “Roundtable member companies have in important ways supported their employees and customers, served as good partners to their suppliers, enhanced their communities, and thereby increased value for their long-term shareholders.”
For shareholders who own these member companies, it’s worth asking whether they are pleased with the results of the politicization of many of the companies in which they invest. If Target’s decision to lean into Pride Month hurts its investors’ return, it’s hard see how that satisfies any traditional understanding of corporate purpose.
When we measure the strength and utility of a corporate philosophy by what it accomplishes, hurting shareholder return is a clear indicator that the Business Roundtable’s redefinition of corporate purpose was profoundly flawed. The notion of stakeholder capitalism has negatively affected the shareholders who up until five years ago were considered the sole owners of the companies in which they invest. Stakeholder capitalism dilutes ownership and, as shown above, can come at a cost. Political/social controversy affects brand performance, and brand performance affects shareholder value, which affects the financial future of those who invest in companies for return, not activism.
Combating the mechanisms of corporate politicization means being honest about opposing the notion of stakeholder capitalism that allowed such politicization to occur. Returning to a traditional idea of fiduciary responsibility and moving back toward a shareholder-first future demands nothing less.