CEOs backing new governance statement cause a stir

CEOs backing new governance statement cause a stir

When over 180 of America’s top CEOs signed a new corporate governance agreement that effectively eliminates shareholder primacy and commits to representing the interests of ‘all Americans’, the move was going to attract attention.

The Business Roundtable, an association of chief executives of America’s leading companies, updated its ‘Statement on the Purpose of a Corporation’ outlining what it believes to be a more modern standard for corporate responsibility.

Under the new agreement, CEOs are encouraged to run their business for the benefit of all stakeholders, including customers, employees, suppliers, communities and shareholders.

Since 1997, the statement has always endorsed principles of shareholder primacy – which states corporations exist principally to serve shareholders.

However, the Business Roundtable wants business leaders to move away from this way of thinking and ensure their corporations represent the needs and values of all stakeholders.

As a result, the new agreement states that while each individual company serves its own corporate purpose, corporations should commit to a number of new principles. These include supporting the communities in which they work, respecting the people in communities, and protecting the environment by embracing sustainable practices across businesses.

Businesses should also compensate staff fairly and provide benefits, training and education, and also deal with suppliers fairly and ethically.

To generate long-term value for shareholders, CEOs should also provide the capital that allows companies to invest, grow and innovate, and commit to transparency and effective engagement with shareholders, the agreement states.

But the new principles have been heavily criticised, with one prominent industry figure calling them “misleading marketing at best, a dangerous power grab at worst”.

Luigi Zingales, a finance professor at the University of Chicago Booth School of Business and a fellow of the European Governance Institute, has made his opinion clear – don’t trust CEOs who say they don’t care about shareholder value anymore.

In a comment for the Washington Post, Mr Zingales said that it is misleading because “all of the goals the Business Roundtable lists are just good business policy to maximize the long-term value of a corporation.

“Even Milton Friedman, the champion of the ‘shareholder theory’ that puts maximizing profits as the primary responsibility of a corporation, would approve of them,” he said.

Mr Zingales questioned why executives needed to emphasise separate goals. The professor’s words are scathing, stating that the same business leaders who signed the new statement have “knowingly sold fraudulent mortgages to investors and defective products to customers, aggressively marketed addictive drugs, dumped toxic products in their communities and used every possible trick to elude (if not evade) taxes”.

Mr Zingales believes the new statement is an attempt to present a kinder image to cover the reputational blow daily scandals are imposing on corporate America, describing it as “a marketing ploy with no real bite”.

“At worst, [the new agreement] is a dangerous power grab,” Mr Zingales claims.

“The problem in today’s corporate America is not that executives are excessively bound to pleasing shareholders, but that they do not give them enough voice.”

The academic, whose book Saving Capitalism from Capitalists has been acclaimed as ‘one of the most powerful defences of the free market ever written’, said shareholders have little say on many important issues, such as how much carbon dioxide companies choose to emit, how much money is spent in lobbying governments, and “how many guns are sold to the Saudis, contributing to the genocide in Yemen”.

He explained these are not merely business decisions, but involve social preferences. “In privately held corporations, corporate policy reflects the social preferences of the shareholders. In publicly traded companies, it does not. It reflects the whims of the incumbent executives and of their handpicked board members,” Mr Zingales wrote.

The problem with the Roundtable’s new purpose statement, according to the professor, is that it does not ameliorate this problem, but makes it worse.

However, a number of industry leaders have lent their support for the updated statement, citing the positive impact the commitment will have on long-term value creation.

“It is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society,” Darren Walker, president of the Ford Foundation said.

And Bill McNabb, former CEO of Vanguard, described the new agreement as a “thoughtful statement”.

“By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers,” Mr McNabb said.

Mr Zingales, however, is standing firm and believes corporations should take a more democratic stance to corporate governance and responsibility.

Last Updated: 1 September 2019
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