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  • Doug Chia

Business Roundtable's new Statement on the Purpose of a Corporation

Updated: Oct 8, 2019

By now, you've seen the Statement, background, history, signatories, initial media reports, tweets, blog posts, etc. so I'll skip right to my own thoughts. (You can read some thoughtful blog posts of contrasting opinions from people smarter than me here, here, here, and here.)

What I think about the action:

Like the Commonsense Governance Principles (1.0 and 2.0), it's not about what is being said, which we all know is nothing new (e.g., the J&J Credo was written in the 1943; my most recent boss at The Conference Board, Steve Odland, often says "'CEO' stands for 'Customers, Employees, Owners'... in that order"), but rather who is saying it. A lot of us have been talking about stakeholder governance like broken records for a while now, but we have limited powers to convince the main actors to move.

It is partly a PR move by the CEO club known as the BRT, but there must have been a lot of debate among them over moving back to the stakeholder school of governance after however many years it was, and that's a big deal. If you've ever tried to get on a CEO's calendar for even 15 minutes, let alone a solid hour, you know these people are extremely booked up with matters probably more mission-critical than yours, so the fact a bunch of the most prominent ones sat down to think about and hash out a revised Statement when they really didn't need to puts some significance behind its release. It's good these CEOs are seeing corporate governance as something worthy of their time.

And, I'm impressed by the continued leadership of JPMorgan's Chairman/CEO Jamie Dimon, the current Chairman of the BRT. He's made several moves to draw attention to corporate governance, like being the driving force behind creating the original Commonsense Principles and reconvening that group to review and refresh them two years later. I believe he actually cares about this stuff, so thank you Jamie!

As for the current group of 180+ signatories, you've gotten credit for it, so now it's time to show you actually mean it. But, how can you show you mean it when critics see a stakeholder-oriented statement as overly subjective, squishy, and devoid of accountability? One word: "Metrics."

If you've worked at a company, you've seen managers going up to the CEO demand metrics for everything, whether internal and external. How many times have you heard your own managers tout the old Peter Drucker maxim, "What gets measured get managed"? They want to see evidence in the form of data. It makes sense, especially in this day and age where people demand pay for "performance," and they want to be able to track that performance, which requires some way to measure it. For the Drucker true-believers, you must come up with metrics, now matter how creative you have to be. No excuses. (As an in-house lawyer, I hated this. How can you come up with a quantifiable way to measure the quality of corporate governance and securities law work? My conclusion was you can't, which may explain why I'm no longer employed by a corporation, or a law firm where the favorite metric is the billable hour, but it did challenge me to think about what success looks like.)

This should be no different. Measure it. Show us how you are doing what you say you believe. If you have a goal, tell me how you are going to get there, and periodically report to me on your progress. If you can't do it right now, try. Show, don't tell. Put your money where your mouth is. Put up or shut up. Yada, yada yada. Seriously though, get creative. No excuses. That's what you make the rest of us do, so let's see you do the same thing. If that doesn't happen, this glorious Statement is yet another well-written set of platitudes that critics will throw up all over and see as something for CEOs to hide behind when they deliver lousy financial performance and tell noisy shareholder advocates to pound sand.

What I think about the substance:

OK, so what do I think about the stakeholder school of thought versus Milton Friedman and his shareholder primacy philosophy? Those who know me know I'm a stakeholder kind of guy. Part of it is from drinking a lot of free Kool-Aid during my time at J&J. The Credo was literally on the wall of every single room and factory floor in every single J&J facility around the world, with the possible exception of bathrooms. If you don't know what the Credo says, the BRT's Statement is basically a rephrasing of it, which is probably no accident since J&J Chairman/CEO Alex Gorsky was heavily involved with the Statement. And I really do believe a company's first responsibility is to its customers, then its employees, then the communities in which it operates, and if the company does all those things the right way, its shareholders will be plenty happy about the value of the shares they own. This is true for both public and private companies.

When I think about the stakeholder versus shareholder debate, I keep going back to the motto, "The customer is always right." Contrary to what many say, companies don't exist for the shareholders. Quite the opposite, companies exist to provide some kind of good or service for people who need it and are willing to pay for it.

Who starts a company thinking, "Hey, let's be shareholders and come up with some way to maximize the value of the money each of us is going to pony up"? Maybe there are some, but I think it's a small minority. More likely, someone starts a company because they notice the absence of something people really want/need and they have a clever idea for a solution. To use another cliche, think of the lemonade stand. "We see weekend bikers riding on paths getting thirsty, so let's set up a lemonade stand along one, and some of the bikers will probably stop and pay a buck for a cold cup. Let's make a nice sign, put up an umbrella for riders to catch some shade, and maybe even have a memorable name for our little operation. Heck, let's have a website! We'll all pitch in to buy the supplies, work different shifts, and split up whatever money is in the jar at the end." There you go. A company was created and exists to deliver something to the customer. The company needs someone to provide money to operate, but that comes after the customers emerge.

You can apply that pattern to the people who started making sterile gauze for soldiers wounded on the battlefield, created secure places to store money, invented small portable electronic devices to listen to music, or coded apps for people to use their cellphones to find rides home because they were sick of standing on the curb for half and hour hailing a cab. That's how a company starts and why it continues to exist. Investors give you money to make the business better and scale it up, and in return they have a claim to the profits, which of course they want to see a lot of. Once the need for your good or service fades to the point where you can't break even and your investors get antsy, you either adapt your goods or services to your customers' changing needs or create something entirely new, or you fold up your lemonade stand, give the investors whatever money is left, and go pursue other interests. It starts with having customers and ends with shareholders getting a piece of the money you make. In between those two stakeholders, you need good employees to do the work and in return you pay and treat them well, and you need to keep that spot on the bike path neat and clean out of respect for the people who live around there, lest they tell bikers to ride past you and give you dirty looks or tell City Hall to make you go somewhere else.

The stakeholder theory has its holes. Among them is trying to determine how to devote resources to each of the stakeholders. Inevitably, there will be disagreements between and among stakeholders, and someone will feel like they are getting the shaft. For example, if a company needs to close a plant because it no longer makes economic sense to keep it open, but the plant employs the majority of people in that particular town, management may decide to find a way to keep the facility operational out of concern for the wellbeing of the employees and others who live there. Are the shareholders supposed to empathize with the workers and lower their profit expectations? And is it realistic or even wise to look to CEOs and boards of directors to make big societal decisions rather than focus on the bottom line? Why should shareholders accept a company donating money or goods to charitable causes when there is no quantifiable benefit? Some say, if you want to do the stakeholder thing, go form a B-corp.

As for my urging to come up with metrics, some of the greedier CEOs will try to game them to ensure they keep getting paid crazy money. And, they'll make everyone look bad while being impervious to shaming. (Like I tell some of my shareholder proponent friends, "You can't shame the shameless.")

There are a lot of smart people who say stakeholder governance and shareholder primacy are basically the same thing, or at least present different paths that lead to the same place. Taking into account the interests of all of your stakeholders to the best of your ability based on available quantitative and qualitative data makes for good business decisions, which will maximize long-term shareholder value. This is true, but I don't think maximizing shareholder value is the goal; it's an outcome. Therein lies the difference.

1 comment

1 Comment

Sep 04, 2019

Doug, Great piece and really lays out the views of someone with experience on the ground. As you know the board and C-Suite management is often pulled in opposite directions while trying to keep a feel on the pulse and attitude of the stakeholders and at the same time manage the demands of the short term expectations of the institutional shareholder. Clearly the metrics that are tracked by the latter is the quarterly earning release. The metrics that measure the stakeholders health is collected through talent retention, bench strength, employee and customer surveys and feedback loops, and community feedback and activism. As the BRT is trying to extract themselves from the overbearing influence of the shareholder activists, hedge fund…


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