Back in January, I visited the Museum of Neoliberalism in Lewisham, South London. And, as the anniversary of the US Business Roundtable’s (BRT) statement on corporate purpose loomed in the calendar, that trip kept coming to mind.
Co-curated by Darren Cullen and Gavin Grindon, more than a museum, it is a satirical piece of art exposing what can go wrong with capitalism in its current form.
It is arguably the same form of capitalism the BRT helped to engineer. The same one that, exactly a year ago, the BRT supposedly repudiated in favour of the corporation’s stakeholders.
Of course, the museum features the father figure of neoliberalism, Milton Friedman, who, in a Freudian slip, was last year stabbed in the back – or at least, everybody interpreted the BRT’s statement as the notion of shareholder value primacy being buried alive.
“It’s the ultimate hypocrisy for them to say ‘we are all about the stakeholders’. They couldn't figure out a way to continue to justify the levels of pay anymore based on stock price. They have to figure out something else to pay themselves” – Nell Minow
But one of the most striking artifacts of the museum is part of an installation devoted to Amazon, which recreates a fulfilment center in the UK. The title says it all: “Bottle of Amazon employee urine, anonymous, 2019”.
The curators say it is authentic and the content belongs to a UK warehouse worker who avoided going to the toilet not to fall behind on their productivity targets.
Amazon’s CEO Jeff Bezos signed the BRT’s pledge and in his case this bottle can be an allegory of how difficult it can be to balance the interest of all stakeholders (Amazon’s original name was Relentless.com and customers their declared first stakeholder who should be served likewise – relentlessly).
The BRT’s statement has made seismic waves since its publication, to the extent that people have received it as a return of the Great Debate over corporate purpose from the Golden Age of Capitalism (when it was conventional wisdom that corporations fulfill a social service as well as a profit-making function).
‘Stakeholder capitalism’ has now become one of the most popular words in corporate lingo. It has also stirred a global debate on whether Corporate America wants to shift towards a more European form of Rhine capitalism or social market economy.
Purpose of the purpose
But what was the ultimate motivation of the BRT to come out with a statement that could be interpreted in such a way?
Corporate governance pioneer and Vice-Chair of ValueEdge Advisors, Nell Minow, has her own “cynical assumption”, for which she admits lacking any evidence.
“After they did everything they could with stock buybacks – we had record stock buybacks, last year and the year before to prop up the stock price – they couldn't figure out a way to continue to justify the levels of pay anymore based on stock price. They have to figure out something else to pay themselves.”
Minow compares it to the Roadrunner Show cartoons, when the predatory Wile E. Coyote “runs off the cliff and is suspended in the air for a minute before it drops”.
“That’s kind of where they were with regards to stock price performance, and they had to think of something else.”
She says: “It’s the ultimate hypocrisy for them to say ‘we are all about the stakeholders’. I didn’t take it seriously a year ago and I don’t take it seriously now.”
Academics consulted by RI didn’t seem impressed either. Lucien Bebchuk and Roberto Tallarita from Harvard published a paper, The Illusory Promise of Stakeholder Governance, in which they conclude that the BRT statement should be viewed as “a PR move rather than as the harbinger of a major change”.
Among many reasons, they asked the majority of companies involved whether the board had approved or intended to approve the pledge signed by their CEOs. Only one did.
“BRT members told CII that the intent of the statement was not to change anything, but it was more of a public relations effort” – Amy Borrus
Asked about what the ultimate goal of the BRT could be, Bebchuk tells RI: “Raising expectations that corporate leaders would on their own make stakeholder-protecting choices would serve the interests of such leaders in two ways: first, by expanding the scope of discretion of corporate executives that shareholders and society would accept; and, second, by deflecting pressures for outside laws and regulations that would provide meaningful protection to stakeholders.”
The paper also points out that there are no big conceptual differences between what is normally identified as stakeholder capitalism and shareholder value maximisation. Both would require corporate leaders to pay attention to stakeholder interests as a means to achieve long-term shareholder value maximisation.
Across the pond, Alex Edmans, Professor of Finance at the London Business School, avoids speculating about what was in the minds of the BRT CEOs at the time: “Perhaps they were genuine, but perhaps they were doing it as a PR stunt,” he says, preferring to focus on the significance of the statement, which despite its huge fanfare, he thinks it was “quite meaningless”.
He echoes Bebchuk and Tallarita, saying shareholder value is already interlinked with stakeholders. “Thus, the more important question is not so much what the CEOs’ objectives when signing the statement were, but whether they will put it in practice, and I see little evidence of this so far.”
The BRT statement has even prompted the creation of an initiative called the Test of Corporate Purpose (TCP), co-chaired by Hiro Mizuno, Sacha Sadan and Bob Eccles Founder and CEO of the TCP, Mark Tulay, tells RI that it is “a systematic, rigorous study and stress test of corporate purpose in light of the Covid pandemic, social unrest and inequality crises”.
The results will be launched on 22 September, coinciding with the 50th anniversary of Friedman's popular essay about businesses’ (lack of) social responsibility beyond enriching shareholders. “It is time for a new form of stakeholder capitalism to replace Friedman’s view of shareholder primacy,” says Tulay.
The BRT signatories are among 800 companies covered by the TCP, with data provided by TrueValue Labs and the methodology by KKS Advisors.
Former ESG analysts at MSCI, Matt Moscardi and Damion Rallis, have been religiously documenting whether BRT’s CEOs have walked the talk on their statement. They have analysed media reports touching on stakeholderism during the last year for their radio show, Business Pants.
Moscardi tells RI: “It is all about protection of the status quo. It is a masterclass in gaslighting. It smacks so much of single-stakeholder favouritism, the irony being that investors aren’t the stakeholders who win. It is always management who wins over everybody else.”
Accountability and ESG data
Moscardi says that almost all the signatories have, one by one, failed to live up to their stakeholder-centric statement during the pandemic. What he calls the new class of “moral hazard employees” (outsourced contract workers) have been exploited even more at a time when they needed healthcare and protections, he says.
“What percentage of the BRT actually gives you disclosure around their stakeholders? 90% of them don’t even give you how much they pay employees on aggregate. Only the ones that are in pharma or finance give you any sort of numbers around it, because that is the biggest expense they have.”
On the back of the Black Lives Matter movement, Moscardi and Rallis also dug up data on the diversity demographics of some of the companies behind the BRT’s Special Committee for Racial Equity and Justice.
They claim that Johnson & Johnson had more pictures of people of colour in their sustainability reports than they do in their workforce – 70% versus 30%. A practice Moscardi labeled as “brownwashing”.
Minow disagrees with how the debate on corporate purpose has been framed as shareholders vs stakeholders, because any company that doesn’t treat stakeholders well, is not going to treat shareholders well.
“In my view, what we are talking about here is really financial reporting,” she says, highlighting the obsolescence of accounting standards. “Everything we talk about under the category of ESG are elements of investment risk not accurately presented on the current financial reports. So, it is just a question of getting more accurate data on which to evaluate an investment.”
According to Moscardi, there is an opportunity to redefine ESG and sustainability in a more meaningful way and one that connects finance with the real world. There is an opportunity to start measuring companies based on returns to stakeholders.
“Why don’t we do that? Because data, indices and rating providers are not going to ask companies for it, neither backtesting their own approaches”, he says. “There is so much money tied up in ESG, but ESG means anything and means nothing, in the same way as when the BRT’s CEOs say they serve stakeholders but they serve no one.”
“We fully expect that shareholders will continue to hold companies accountable if they fail to generate long-term returns” – BRT
Arguably the BRT statement has been a stroke of genius. Effectively, it is taking advantage of the ESG echo chamber’s noise to render investors useless – particularly responsible investors.
Has the BRT’s statement been a Declaration of Independence from shareholders? Has it shown that CEOs are more ESG-friendly and better stakeholder guardians than responsible investors? Minow and Moscardi agree that it’s part of a drive to avoid shareholder accountability.
But there’s one more thing: regulators are also stepping up to the plate, suggesting there could be a connection between the BRT’s self-appointed status as ESG champion and major regulatory changes on the cards.
First, the reform of proxy voting rules being undertaken by the SEC.
Second, the proposed ESG rules and pension funds fiduciary duties by the Department of Labor.
The narrative behind those changes would be that stakeholders and ESG are already in the good hands of Corporate America’s main CEOs, therefore any shareholder oversight is superfluous.
There is a chance, of course, that all this debate about stakeholder capitalism and corporate purpose is the consequence of a big misunderstanding.
According to Amy Borrus, Executive Director at the Council of Institutional Investors (CII), not many people remember that the BRT issued a lengthy clarification in medium.com six days after the initial statement.
In it, the BRT explicitly denied any intent to abandon shareholder value, saying: “We fully expect that shareholders will continue to hold companies accountable if they fail to generate long-term returns. However, our companies are also challenging themselves to do more.”
Borrus tells RI that people might have higher expectations than the BRT really intended. “In fact, BRT members told CII that the intent of the statement was not to change anything, but it was more of a public relations effort to state more clearly that CEOs in doing their jobs these days do think of [their stakeholders].”
Borrus says people read into the statement what they want to, and that all the attention might have caught the BRT by surprise.
Maybe the Purpose of a Corporation Statement wasn’t made on purpose after all.
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