Issue #9                                                                                               September 2019
Business Roundtable moves corporate purpose forward
by Professor Jordi Canals
The Business Roundtable, one of the most influential U.S. business associations, has reignited the debate on the importance of corporate purpose. In its Statement on the Purpose of the Corporation, issued on August 19, 2019, it highlights: “Each of our (company) stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country” (see Statement). The statement is supported by close to 200 CEOs of some of the largest U.S. companies.

In this statement, industry leaders do not forget about shareholders and the need to generate long-term value for them. What is relevant in this document is the importance given to the other stakeholders: customers, employers, suppliers, and communities.
In some ways, this is an approach that has been more dominant within the business community in Continental Europe. The concerns of companies for employees, customers or the protection of the environment have been more prominent than in other parts of the world. The notion of the multi-stakeholder company has been applied more actively in Europe, including large well-known companies such as Unilever, Nestlé, or Schneider, among others. On the contrary, over the past 30 years, the U.S. regulation and business practice have adopted the notion of shareholder primacy, even if there is no legal support to avoid concern for other stakeholders.
Moreover, the board of directors and the top management team have some fiduciary duties not only to shareholders, but to all stakeholders. The long-term development of the company -and long-term value creation- needs to take all of them into account.     
While we should welcome this initiative, there are some caveats to keep in mind. The first is that making a multi-stakeholder company work well requires not only a well-defined statement of purpose, but a very competent and committed top management team, which translates that purpose into strategy and execution. It is not easy to define and execute a business model that takes into account the perspectives and interests of such a variety of people. As we have discussed in the Unilever case (see Unilever (2017): The Board of Directors and the CEO in Governance and Strategy, IESE Case, 2019), the level of sophistication of strategy making and implementation are extremely high. 
The second is that a statement of purpose is not an excuse for lower profits. Companies need to keep delivering economic value while taking into account other dimensions -including investment and expenses- that are key, such as employee education and health care benefits, total customer service, or environmental impact along the whole value chain. Unless companies that signed that statement work very effectively in this direction, it would be a useless statement.
The third is that the statement may be seen as one more step in the PR process organized by some large companies to offset some negative activities that they carry out by pointing out some concerns on the social impact of companies. While any generalization in this respect is unfair to companies that do a lot of good work, there has been a lot of talk and initiatives related to corporate social responsibility over the past 20 years. Some progress has been achieved, but there are still some areas under the direct responsibility of companies and their boards where companies’ efforts have not been enough. These areas include, among others, poor employee education and training, low wages, complex tax structures to pay lower taxes, anti-trust behavior, and negative environmental impact.
In the case of the U.S., there is an additional caveat. The looming possibility that a 2020 Democratic administration could put additional pressure on companies regarding social issues is real. Senators Elizabeth Warren and Bernie Sanders have recently declared that U.S. companies are making record profits and spending record amounts on share buybacks, while wages have stagnated. Senator Warren has announced some specific measures to reform the business world. The Business Roundtable statement may be seen as a defensive line that CEOs want to draw to protect their companies from more intense scrutiny and tougher regulation in the near future.
Empirical research points out that companies with higher purpose -measured in different ways- eventually generate higher financial returns over long periods of time. Moreover, a good purpose that has an impact on strategy and execution can better engage employees and help articulate a more human view of companies. This is a good step. Nevertheless, this requires the board of directors and senior managers’ commitment to better governance and more competent and human management. Otherwise, the statement could become a useless piece of paper. 

Jordi Canals 
IESE Center for Corporate Governance

Corporate Governance News

American CEOs commit to abandon the era of investors first 
Business Roundtable announces that CEOs -representing almost 193 companies with over US$7 trillion in revenue and almost 15 million employees- have signed a statement that shifts from shareholder primacy to commitment with all stakeholders… read more
Some reasons to remain skeptical about the Business Roundtable
Prof. Erik Gordon (University of Michigan) argues in The Conversation why under the existing corporate legal framework, CEOs cannot change the fiduciary duties that board directors as agents tribute to shareholders as principals… read more
Sweden’s largest pension fund advocates for specific regulatory measures to improve corporate culture
With the occasion of the ongoing amendments to the Swedish Code of Corporate Governance, Pension fund Alecta (EUR 87 billion) encourages to Swedish regulatory authorities to introduce specific measures that promote positive corporate culture and values… read more
WeWork undertakes IPO amid criticism for questionable governance practices
CNN Business informs on some controversial aspects in WeWork’s governance that have been voiced by the media, now more so with the company’s initial public offering… read more
Activist investor Elliot puts pressure on Germany’s Scout 24 
In a letter addressed to Scout24 CEO Tobias Hartmann, the asset manager asked for a series of measures -selling part of the business, among them- to drive up share price… read more
Mediaset waits for the “ok” from shareholders to merge despite disapproval from its largest investor
Reuters sheds light on the Italian broadcaster’s plans to reorganize its business to stretch further throughout Europe, despite the opposition from Vivendi, which holds a 29% stake in Mediaset… read more
Integrating ESG into company’s core business is key for survival 
In today’s business world, contributing to pressing environmental and social challenges is essential to ensure an organization’s future. Failing to appease these quickly changing demands from society is making companies more susceptible to productivity losses, falling profit margins, and lower morale… read more

In Case You're Interested...

Vanguard Releases Third-Annual Investment Stewardship Report

This is the third report of its kind to be published by Vanguard. The report provides information on company engagement (discussions) with boards and management teams from almost 900 companies and voting records on nearly 170,000 matters in 13,225 companies… read more

Stakeholder Governance and the Fiduciary Duties of Directors

In the midst of recent debate surrounding American CEOs challenging of the shareholder primacy model, Harvard Law School publishes an article by Martin Lipton (founding partner of Wachtell, Lipton, Rosen & Katz) claiming a bedrock principle of corporate law—namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can (or should, or must) consider the interests of other stakeholders besides shareholders… read more

IESE's Recent Research on Corporate Governance 

“The Role of the CEO in Business Model Renewal”

Chapter (August 2019)

Book: General Management in Latin and Iberoamerican Organizations: A Humanistic Perspective, Caldart, A.; Ricart, JE and Carrera, A. (editors). Oxford: Routledge, July 2019.
AuthorRicart, Joan Enric
Read summary

“Why Purpose Needs Strategy (and Vice Versa)”

Chapter (August 2019)

Book: Carlos Rey, Miquel Bastons, Phil Sotok. Purpose-driven Organizations: Management Ideas for a Better World. Cham: Palgrave Macmillan, 2019. 
Author: Rey, Carlos; Ricart, Joan Enric
Read summary

“Unilever (2017): The Board of Directors and the CEO in Governance and Strategy”

Case (July 2019)

“The Barceló Group: Entrepreneurial Spirit and Corporate Governance”

Case (July 2019)

Upcoming Events & Programs

ECGI Annual Members’ Meeting 2019 
(hosted by IESE CCG)

Date: October 24, 2019
Location: IESE, Barcelona Campus
Visit the event website 

IESE CCG and ECGI co-organize the conference “Corporate Governance and Ownership with Diverse Shareholders”

Date: October 25-26, 2019
Location: IESE, Barcelona Campus
Visit the event website

Executive Program: “Consejos de administración responsables”

Date: January 28-29, 2020
Location: IESE, Madrid Campus
Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 18-21, 2020
Location: IESE, Barcelona Campus
Visit the program website

A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo