Academics have called on member of the Business Roundtable—whose luminaries include Jeff Bezos of Amazon and Larry Fink of BlackRock—adopt the legal status of benefit corporations to ensure their statements on being “purposeful” business are binding.
The Roundtable—a club for executives in some of the biggest companies in the US—issued a statement in August last year saying its members would now use a “stakeholder” model of governance rather than a “shareholder” model.
However, experts writing for the Harvard Law School Forum on Corporate Governance insist their promises will fall short of being binding unless they change the legal status of their companies. They say Roundtable members should consider becoming benefit corporations, a legal entity that imposes an obligation on corporates to “creating public benefit and sustainable value in addition to generating profit”.
The report—written by an Oxford University professor, a former Chief Justice of the Delaware Supreme Court, and a governance expert from EOS Federated Hermes, , Robert Eccles, Leo Strine and Timothy Youmans—said: “Just one thing has to happen to make the benefit corporation model the dominant form of corporate governance in US capital markets: the Business Roundtable and mainstream institutional investors must rally behind it.
“If the Business Roundtable supports conversion of their public companies to this model, their mere ‘trust us, we care’ words will become those of accountable leaders who embrace an enforceable obligation to others.”
Examples of benefit corporations include sports clothing company Patagonia and Aveda, a manufacturer of hair and skincare products.
When the Business Roundtable published its note last year it caused headlines around the world. The statement said: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
Alex Gorsky, chair and CEO of Johnson & Johnson and chair of the Roundtable’s governance committee, said: “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”
The academics reported that if companies want to be serious about being sustainable and responsible in a way fair to all stakeholders they must take three steps: make a “statement of purpose” in relation to stakeholders; and apply the right metrics for success using third-party reporting frameworks such the Global Reporting Initiative or recommendations from the Task Force on Climate-related Financial Disclosures.
The last step is to make a company’s commitment to its purpose “enforceable”. Adopting the benefit corporation standard is the way forward on this issue, the writers said.
Currently, they wrote, directors “may” give consideration to stakeholders interests, but there is no compulsion. “As a practical matter, therefore, virtually all American public corporations are governed by rules that provide power only to stockholders, and none to other stakeholders.”
As the effects of the Covid-19 pandemic have unravelled around the world many commentators have speculated that those companies that prioritise sustainability and a corporate purpose will emerge from the crisis in better shape.
Colin Mayer, professor of management at the Saïd Business School, University of Oxford, and author of the British Academy report Principles for Purposeful Business and the book Firm Commitment, said in an interview with Board Agenda that the pandemic means companies that face up to defining their “purpose” will be the ones that emerge from the crisis in better shape.
He said: “Business is going to fundamentally change as a result of this. The response to the financial crisis was to bring about a very substantial change in terms of the nature of our financial system.
“What’s happening now is that the rest of the corporate sector is going through a similar existential crisis, which will need it to reconsider its fundamental reason for being: namely its purpose.”