Why America’s CEOs are talking about stakeholder capitalism

By Mark Roe

CAMBRIDGE — Back in August, the Business Roundtable, which comprises the chief executive officers of America’s largest companies, with combined annual revenues of more than $7 trillion, updated its long-standing statement regarding corporate purpose. It is not just about shareholders, the CEOs say; their firms must be committed to all stakeholders, including customers, employees, suppliers, communities and the environment. In fact, shareholders came in last on the CEOs’ new list. And the statement’s principal author, in his apparent exhilaration, is reported to have said that he felt like Thomas Jefferson drafting the Declaration of Independence.

The August announcement generated three main strands of reaction. First, some liberal commentators applauded US business leaders for finally getting the message. They criticised not the goals, but the lack of a proposal for how stakeholders can hold CEOs directly accountable. More skeptical observers said that the statement differed little from previous Business Roundtable pronouncements on corporate purpose: boards and executives need, or at least want, discretion to balance the interests of various stakeholders other than the company’s owners. For these critics, this latest declaration offered nothing new, but was a restated manifesto of CEO and board discretion and power to run their companies as they see fit.

The third strand of reaction came from business realists, who pointed out that successful firms cannot run roughshod over their customers, employees, suppliers and communities. Even a company that is laser-focused on shareholder value must gain the loyalty of other stakeholders and avoid making enemies of them. Suppliers will not rush a delivery if they fear they will not be paid, sullen employees will not produce a quality product, and irate customers will buy elsewhere.

There is much to be said for these views. But two deeper forces help to explain why the Business Roundtable felt that it needed to say something now.

First, activist shareholders are making life uncomfortable for the boards and senior executives of America’s largest corporations. The Business Roundtable’s statement is thus in part a plea from CEOs for more autonomy vis-à-vis shareholders. In effect, the Roundtable’s statement does constitute a “declaration of independence”, one seeking to liberate CEOs and boards from the influence of activist investors. Thus interpreted, US corporate leaders are building a coalition against activist shareholders, and want employees, customers and those demanding more ethical sourcing to support them. Freeing boards and executives from shareholder influence, the statement implies, will enable corporate America to treat employees, the environment and communities better.

Second, as politics and public opinion shift beneath corporate America, CEOs are trying to maintain their balance. US Senators Bernie Sanders and Elizabeth Warren, two of the leading contenders for the 2020 Democratic presidential nomination, have called for major changes in the way large corporations are run. Warren, for example, wants employees to be represented on boards, as is common in Germany and some other countries, and favours breaking up America’s largest firms. And while US President Donald Trump has yet to turn his anti-elite populism against the corporate sector, he is unpredictable, and some of the most powerful examples of elite privilege occupy US C-suites.

It is plausible to wonder, therefore, whether the Business Roundtable is recalibrating their statement of corporate purpose to help put big business lower on populist target lists. True, Warren and Sanders will not change their own views simply because powerful CEOs have stated a recalibrated view of the aims of US corporations. And Trump will remain unpredictable. Yet it is the underlying shift in public opinion that should, and seems to, concern the Roundtable. Anti-corporate ideas are in the air, and they do not originate from the political leaders who are expressing them. They will persist regardless of how any leader fared. But any politician pursuing that agenda would need allies to implement policies targeting large corporations. If their potential allies are more or less satisfied with corporate America’s new statement of purpose, especially if CEOs act on it in a media-visible way, then populist anti-business measures will lose traction.

The relevance of such political considerations is even more pronounced in the United Kingdom, which began reexamining the purpose of large companies several years before America did. In particular, the British Academy is funding a deep and serious rethink of corporate purpose, led by mainstream academics and business leaders. It is perhaps no surprise that talk of making UK firms less shareholder-centric and profit-oriented increased with the emergence of Jeremy Corbyn, the left-wing leader of the opposition Labour Party, as a potential prime minister. Political currents can induce business leaders to coopt and adapt.

Yet, perhaps we should not be overly cynical. Surely not all the US CEOs who backed the Business Roundtable’s statement regarded it purely as a matter of political calculation, or as an opportunity to angle for advantage. Some, perhaps even many, have absorbed some of the values reflected in the new criticism. Business executives constantly have to adapt to changing environments, whether that change is of consumer preferences, technological demands, or political currents.

Mark Roe is a professor at Harvard Law School. He is the author of studies of the impact of politics on corporate organisation and corporate governance in the United States and around the world. ©Project Syndicate, 2016. www.-syndicate.org