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Has the Business Roundtable Changed the Standard for Directors’ Duties to Corporations?

September 10, 2019

On August 19, 2019, the Business Roundtable (TBR), an association of top CEOs, surprised corporate America by adopting a new “Statement on the Purpose of a Corporation,” which declared that a corporation’s purpose is a “fundamental commitment to all … stakeholders,”[1] including not only shareholders but also customers, employees, suppliers, communities and the environment. Some legal and business analysts claim that the 181 CEO signatories from the largest US companies[2] intended to replace the long-held principle that the sole purpose of a corporation is to maximize shareholder profits[3] with a more CSR-friendly definition that allows Boards to weigh certain social and third-party interests equally with those of shareholders.[4]  

But has the TBR Statement really changed anything for corporate Directors? From a legal perspective, the answer is “probably not.” Corporate law in Delaware and most (if not all) other states already allows Directors to consider non-shareholder interests (such as the environment, employees’ well-being, suppliers’ workers’ rights, and the community) insofar as they impact on the ultimate goal of shareholder profit. Under the “business judgment rule,” a Board is permitted to account for third-party interests when making a specific decision if it reasonably believes that such considerations will increase shareholder profits in the long run.[5]  Directors will be protected from liability for breach of their fiduciary duties if they clearly state (preferably in writing or recorded proceedings) that they have studied and accounted for third-party, non-shareholder interests because the Board believes them to be relevant to maximizing long-term shareholder value.[6] For example, Directors may conclude that spending money on expensive environmentally friendly re-fits, while decreasing profits immediately, will ultimately be in the shareholders’ long-term best interests due to efficiency savings, increased market goodwill, enhanced reputation of the company, and lower payouts in environmental lawsuits.

In order to assure Boards that they may consider non-shareholders in their decisions, forty-one states (but not Delaware) have adopted so-called “constituency statutes” [7] that explicitly allow corporate Directors to balance shareholder interests with those of other stakeholders to ascertain what is most profitable for the company in the long run. Most of these statutes do not specify the relative weight to be given to shareholder and non-shareholder interests, and this question has not yet been resolved in court.[8]  For now, it appears that most constituency statutes simply codify the business judgment rule. 

In an effort to spur the creation of “socially responsible” for-profit companies, Maryland and thirty subsequent states have created a new type of entity called a “beneficial corporation” (“B-corp”),[9] which allow Directors to weigh third-party or societal interests against shareholder interests in their decision-making processes. Shareholders in B-corps know and accept that profit maximization is not the sole goal of the company. Delaware, in which 60% of the Fortune 500 are incorporated,[10] has created a B-corp entity (the “public benefit corporation”) that goes even farther, by requiring such a company’s Board to be managed “in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct and the … public benefits identified in its certificate of incorporation.“[11]

TBR’s Statement on considering social and other non-shareholder interests along with those of shareholders appears to be simply a restatement of the current law in Delaware and many other states. The TBR Statement does not say that non-shareholder interests are equal to or can overrule shareholder interests; rather, the Statement seems to be a reminder to corporate Boards that they may take third- party interests into account when determining the long-term pecuniary interests of the shareholders. Ultimately, the law remains that shareholder profits are of overriding importance.[12] Shareholders who want the companies in which they invest to consider corporate social responsibility as seriously as shareholder profits may choose to invest in B-corps or corporations whose mission includes, and whose actions demonstrate, a commitment to corporate social responsibility.

[1] Business Roundtable, “Statement on the Purpose of a Corporation,” Aug. 19, 2019, https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans (emphasis in original).

[2] The Statement was signed by the CEOs of, inter alia, Amazon, Apple, Bank of America, Boeing, BP, Caterpillar, Coca-Cola, Deloitte, Exxon Mobil, General Motors, Goldman Sachs, IBM, Johnson & Johnson, JP Morgan Chase, Marriott, Morgan Stanley, PwC, Procter & Gamble, and Wal-Mart.

[3] See M. Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” NY Times Mag., Sept. 13, 1970, https://timesmachine.nytimes.com/timesmachine/1970/09/13/223535702.html?pageNumber=379, 32, 33 (“In a free-enterprise, private-property system, a corporate executive is an employe [sic] of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society….”). The seminal case in this regard is Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919) (“A business corporation is organized and carried on primarily for the profit of the stockholders”).

[4] See, e.g., Council of Institutional Investors, “Council of Institutional Investors Responds to Business Roundtable Statement on Corporate Purpose,” Aug. 19, 2019, https://www.cii.org/aug19_brt_response. Others have opined that the Statement is aimed at placating consumers who are angry about CEO earnings increasing by about 1000% from 1978-2018 while the average worker’s pay increased less than 12%. See, e.g., D. Lazurus, “CEOs say they care about customers and workers. Propaganda experts are unimpressed,” L.A. Times, Aug. 21, 2019, https://www.latimes.com/business/story/2019-08-20/business-roundtable-propaganda-david-lazarus; C. Garten-berg and G. Serafeim, “181 Top CEOs Have Realized Companies Need a Purpose Beyond Profit,” Harvard Bus. Review, Aug. 20, 2019, https://hbr.org/2019/08/181-top-ceos-have-realized-companies-need-a-purpose-beyond-profit; C. Posner, “Business Roundtable Says So Long to Shareholder Primacy – Commits to Deliver Value to All Stakeholders,” Mondaq.com, www.mondaq.com/article.asp?articleid=838700&email_access=on.

[5] See, e.g., Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. 1968); A.P. Smith Mnfg. Co. v. Barlow, 98 F.2d 581 (N.. 1953); eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); Atkins, Gerber and Micheletti, “Social Responsibility and Enlightened Shareholder Primacy: Views from the Courtroom and Boardroom,” Harvard Law School Forum on Corp. Gov. & Fin. Reg., Feb. 21, 2019, 2-4.  A possible exception to the business judgment rule may exist when the company is for sale, in which case the Directors are expected to look only to maximizing shareholder profit on the sale. See, e.g., Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986); Mills Acquisition Co. v. Macmillian Inc., 559 A.2d 1261, 1285 (Del. 1988).

[6] See, e.g., eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); Shlensky, supra note 5; A.P. Smith Mnfg, supra note 5; Atkins, Gerber and Micheletti, supra note 5.

[7] See J.R. Shealy, “The Corporate Identity Theory Dilemma: North Carolina and the Need for Constructionist Corporate Law Reform,” 94 N.C. L. Rev. 686, 691 (2016), http://scholarsip.law.unc.edu/nclr/vol94/iss2/6.

[8] However, the US District Court for the Eastern District of Pennsylvania held in a preliminary injunction hearing that a board could reject a rival bid in favor of a less lucrative offer because the latter offered better employee protections. Norfolk Southern Corp. v. Conrail Inc., C.A. No. 96-CV-7161 (E.D. Pa. Nov. 19, 1996). See generally, R.C. Turner, “’Revlon Duties’ and state constituency statutes,” ABA Business Law Today, Jan./Feb. 1999, https://apps.americanbar.org/buslaw/blt/8-3shareholders.html.

[9] “State by State Status of Legislation,” BenefitCorp.net, http://perma.cc/L2VK-KDAY

[10] Atkins, et al., supra note 5, at 1.

[11] Del. Corp. Code, Title 8 Chap. 1, §362(a).

[12] One of TBR’s outside legal counsel from Sidley & Austin commented that the Statement “shouldn’t be read as suggesting or necessitating a change in the board’s or management’s fiduciary duty, nor changing the legal landscape.” G. Colvin, “CEOs Say They want to Look Beyond Shareholders – But the Law May Get in the Way,” Fortune, Aug. 26, 2019; https://fortune.com/2019/08/26/business-roundtable-shareholders-rights-law/.

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