Why CEOs’ statement vs. shareholder primacy isn’t the last word

Responsible investing advocates have claimed it as a win, but it leaves numerous questions unanswered

Why CEOs’ statement vs. shareholder primacy isn’t the last word

Those engaged in debates over corporate responsibility and responsible investing may agree that last week’s release of the US-based Business Roundtable’s (BRT) statement of corporate purpose was a bombshell event. But that doesn’t make them any less divided.

The statement represented an about-face from the BRT’s long-held commitment to the Friedman Doctrine, which saw maximizing shareholder returns as the sole objective of a corporation. Its 181 signatories, representing CEOs from a diversity of industries, underscored the importance of considering five stakeholder groups.

Advocates of ESG investing have seized on it as a sign of victory. Among them is the Responsible Investing Association of Canada (RIA), which celebrated the statement’s acknowledgement of companies’ duty to “protect the environment” and “foster diversity and inclusion, dignity and respect” for employees while delivering long-term profits for shareholders.

“Responsible Investors … recognize that well-governed companies with strong performance and social and environmental metrics are likely to be better long-term investments,” RIA CEO Dustyn Lanz wrote in a statement. “The Business Roundtable has redefined the purpose of a corporation in line with this thinking. This announcement provides leverage for responsible investors who engage with companies on ESG issues.”

Lanz also expressed the RIA’s desire for a similar statement from the Business Council of Canada (BCC), adding that the association will be reaching out to start a dialogue.

Not everyone’s enamoured with the BRT declaration. Many say that a five-stakeholder model of corporate purpose raises difficult questions, such as whether government-mandated minimum wage levels constitute fair compensation and how the role of stock prices as a CEO’s official scorecard would be affected.

There are also those who wonder whether the statement has any meaningful weight. In a piece published in the Harvard Business Review, Lynn Paine, the John G. McLean Professor of Business Administration at Harvard Business School, argued that the statement was less a “call to action” than an updated description of how CEOs see their job. She also cited the statement’s silence on changes in corporate governance or management practice to implement the new stance, as well as the unanswered issue of how to weigh and reconcile the interests of various stakeholders.

“The small number of signatories from the investor community is yet another reason to take a ‘wait-and-see’ attitude,” Paine continued.

Noting that the signatories included only five firms that are primarily asset managers and five diversified banks with large asset management groups, she said that to see more names of influential investors, particularly from the hedge fund and private equity space, “would have been comforting.”


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