Jamie Dimon

CEO stakeholder commitments illusory claim Harvard duo

Research conducted by two renowned Harvard academics has cast doubt on the commitments made a year ago by 181 CEOs affiliated to the Business Roundtable trade group.

Twelve months ago, business leaders at some of the world’s biggest companies pledged that they would consider the interests of all stakeholders in their business dealings, and not just shareholders.

The commitment was signed in an updated “Statement on the Purpose of a Corporationby members of the Business Roundtable (BRT), a trade association for CEOs and business leaders who want to promote a thriving US economy and opportunities for Americans.

A statement at the time indicated that this radical change in corporate operations was backed by CEOs including JP Morgan’s Jamie Dimon and Vanguard’s Bill McNabb.

However, since then, Harvard Law professor Lucian Bebchuk and colleague Roberto Tallarita have investigated the companies who signed the statement to ascertain whether these commitments were endorsed, or ratified, by their leadership teams. Their conclusions were disappointing.

Having contacted every business who had signed up to the new purpose statement, Bebchuk found that little has changed in the corporate governance policies of these companies over the past 12 months.

Worse still, the two academics found that the many of the CEOs who endorsed the BRT statement, did so without the approval of their board.

Having contacted every company who signed up to the revised Business Roundtable commitment, they only received responses from 48 organisations. Of these, 47 stated that the CEO’s decision to sign was not approved by the board of directors.

The researchers argue that if these pledges were to genuinely change how companies treat their stakeholders, they would have expected the company’s boards to have approved, or at least ratified, the commitment.

“We found that decisions to endorse the statement were generally made by CEOs without the approval of their board of directors,” Bebchuk said.  

He added that because corporate decisions of significant importance “generally receive such board approval” it can only be concluded that these CEOs perceived that their pledges would not lead to “meaningful changes in stakeholder treatment.”

The Harvard duo suggest that the decision not to pass the commitment before the board may have been innocent, however.

Bebchuk said it is possible that the CEOs believed that their companies were already meeting the required standards for considering stakeholders in their decision making. That said, if this were the case, Bebchuk argues that these businesses were not, in fact, making a major change at all.

The research looked at whether the signatory companies had changed their corporate governance guidelines in the past year. While the academics acknowledged that many of the companies had updated their guidelines, most companies still had a shareholder primacy approach.

Johnson & Johnson’s CEO Alex Gorsky had originally said that the revised Business Roundtable commitment “better reflects the way corporations can and should operate.” But when the researchers looked at the company’s corporate governance guidelines, they found an explicit commitment to shareholders.

“The business judgment of the Board must be exercised . . . in the long-term interests of our shareholders,” it states.

JP Morgan Chase had a similar misalignment in its corporate governance guidelines. While CEO Jamie Dimon had said that the “modernized principles reflect the business community’s unwavering commitment” to stakeholders when he signed the new statement, JP Morgan’s policy still states that the board “is responsible for the oversight of management on behalf of the firm’s shareholders.”

Earlier in August, the two Harvard academics published their study entitled The Illusory Promise of Stakeholder Governance, in which they found that corporate leaders have strong incentives to benefit stakeholders, but only if it does not hurt the share price.

“That conclusion will be greatly disappointing to some and welcome to others,” Bebchuk said. “But all should be clear-eyed about what corporate leaders are focused on and what they intend to deliver.”

The academics wrap up their research by noting that so-called stakeholderism is unlikely to actually benefit stakeholders as its supporters claim, unless companies embrace the changes at board level and implement the changes throughout the corporate culture.

Last Updated: 14 August 2020
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