Amid 'Purpose' Debate, Reassess Engagement: Directors need to bolster transparency, scrutinize company political spending.

Author:Brown, Stephen L.

In light of the renewed debate around corporate purpose, companies and boards may want to reassess their engagement and outreach plans for 2020.

The debate around purpose was reignited by the August publication of the Business Roundtable's (BRT) "Statement on the Purpose of a Corporation." According to the BRT, the statement redefined the purpose of a corporation to promote "an economy that serves all Americans." The 181 CEOs who signed it (including KPMG's CEO) committed "to lead their companies for the benefit of all stakeholders--customers, employees, suppliers, communities, and shareholders." Boards should find time on their agendas to discuss the BRT statement and its implications for their companies, including board oversight and governance.

While the concept of benefiting employees and other stakeholders is not new, the BRT statement comes amid an environment marked by a growing sense of urgency around societal and environmental issues including climate change, income inequality, and human capital management. Institutional investors have set expectations for corporations to address these issues in the context of long-term value creation.

Reactions from the business and investor communities have been mixed. Some view the BRT statement as an important commitment to stakeholders by corporate America, while others are skeptical. And some investors oppose it based on concerns that the statement diminishes managerial accountability to shareholders. In its response to the statement, the Council of Institutional Investors stated, "Accountability to everyone means accountability to no one."

What's changed in the law?

Legally, nothing has changed. As attorneys of Wachtell, Lipton, Rosen & Katz wrote,

"The fiduciary duty of the board is to promote the value of the corporation. In fulfilling that duty, directors must exercise their business judgment in considering and reconciling the interests of various stakeholders--including shareholders, employees, customers, suppliers, the environment, and communities --and the attendant risks and opportunities for the corporation."

What's different from a market/stakeholder perspective?

Investors have always reacted to corporate decisions --positively when they like what a company has done and negatively if they believe a corporate decision is not in their best interests, long or short term. The BRT statement simply highlights important stakeholder issues for a higher level of engagement.

That said, we can...

To continue reading