An assessment of the business roundtable's corporation purpose redefinition

• Published date: 01 June 2023
• Author: Timothy Marlo,Timothy T. Perry
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/jacf.12573

DOI: 10.1111/jacf.12573

ORIGINAL ARTICLE

An assessment of the business roundtable’s corporation purpose

redefinition

Timothy MarloTimothy T. Perry

School of Analytics, Finance, and Economics, Southern Illinois UniversityCarbondale, Carbondale, Illinois, USA

Correspondence

Timothy T.Perry, School of Analytics, Finance, andEconomics, Southern Illinois University Carbondale, Carbondale, IL 62901, USA.

Email: timothy.perry@business.siu.edu

INTRODUCTION

This paper investigates the Business Roundtable’s (BRT) con-

troversial 2019 restatement of the purpose of the corporation.1

Well-known executives representing BRT firms pledged to move

away from strictly focusing on maximizing stockholder wealth

and move toward a multiple-stakeholder-driven focus. This paper

examines the types of firms that comprise the BRT, shows how the

restatement announcement was interpreted by financial markets,

and assesses the impact of the restatement on the stockholders and

stakeholders of BRT firms.

Among our primary findings are the following: The ini-

tial announcement by the BRT in 2019 elicited a positive

response from financial markets, as evidenced by statistically sig-

nificant cumulative abnormal returns beginning the week prior

to the announcement. In the years following the announce-

ment, BRT firm stocks outperformed stocks of firms that

were not BRT members, despite selling at significant valu-

ation discounts. Evidence of welfare improvements for other

stakeholders of BRT firms was very limited, yet executive com-

pensation increased significantly, in the years following the 2019

announcement.

The Business Roundtable (BRT), a United States lobbying

organization made up of corporate officials, was founded in 1972

to advocate on behalf of corporations in the formation of public

policy. In1997, the BRT was clear to emphasize in its policy state-

ments that the “principal objective of a business enterprise is to

generate economic returns to its owners.” But in 2019, the BRT

changed this position and restated the purpose of a corporation

in terms of its commitment to “all our stakeholders,” which they

identified in the following order: customers, employees, suppliers,

communities, and stockholders.2

The BRT’s 2019 restatement connected with broader public

support and encouragement for corporations to pursue socially

conscious objectives. In his 2020 book, The New Corporation:

1www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-

to-promote-an-economy-that-serves-all-americans.

2Creditors were not identified as a distinct stakeholder group.

How “Good” Corporations are Bad for Democracy, Joel Bakan

suggested that multi-decade trends of stagnant wages, increased

inequality, awareness of climate change, and political dysfunc-

tion have presented an opportunity for corporations to embrace

such sentiments.3Laura Starks said the “idea that corporations

have some social responsibility is now embedded in our culture.”4

With an increased faith in the ability of corporations to solve

social problems, substantial amounts of capital have been strategi-

cally reallocated to some type of Corporate Social Responsibility

(CSR), Socially Responsible Investing (SRI), or Environmen-

tal, Social, and Governance (ESG) investment. Figure 1conveys

this increased interest as observed from Google searches ref-

erencing the term “ESG.” Blackrock’s Larry Fink stated that:

“society is demanding that companies, both public and pri-

vate, serve a social purpose … companies must benefit all of

their stakeholders, including shareholders, employees, customers,

and the communities in which they operate.”5In 2020, about

a third of professionally managed assets were categorized as

ESG.6

Private for-profit entities that are legally separate from their

owners, such as societas publicanorum in the Roman Repub-

lic, guilds in the Middle Ages, and joint-stock companies in the

mercantilist era, have been chartered by governments throughout

history to execute a wide variety of risky, large-scale tasks. Such

ventures were intended to generate both private profits and public

benefits. Highly influential in the foundation of the United States

legal and political traditions, William Blackstone reasoned that,

since corporations are chartered by sovereigns, corporations ought

to provide public benefits as well as private profits, even as Adam

3Bakan, Joel. 2020. The New Corporation: How “Good”Corporations Are Bad for Democracy.

New York,NY: Vintage Books.

4Starks, Laura T. 2021. “Environmental, Social, and Governance Issues and the Financial

Analysts Journal.” Financial AnalystsJournal 77(4): 5-21.

5Fink, Larry. 2018. “A Sense of Purpose.” Blackrock, Inc. January 17, 2018. https://www.

blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter.

6US Sustainable Investment Forum Foundation.2020. “Report on US Sustainable and Impact

Investing Trends2020.” November 12, 2020. https://www.ussif.org/files/Trends%20Report%

202020%20Executive%20Summary.pdf.

J. Appl. Corp. Finance. 2023;35:63–72. © 2023 Cantillon & Mann.63wileyonlinelibrary.com/journal/jacf