30 Aug The Role of the Corporation in America*
The Role of the Corporation in America
America’s corporations and their CEOs – in fact, the concept of corporatism and American Capitalism themselves – have been under attack from a broad swathe of the public. What was conventional wisdom in the 20th Century – with Americans identifying with the slogan “What’s good for General Motors is good for America” – now is viewed as C-suite spin. Whereas 60% of Americans in the 1950s had a favorable opinion of big business, a 2017 Gallop poll found that only 21% now do. America’s woes – income inequality, stagnant wages, lagging productivity, the Great Recession and monopoly – are all blamed on America’s big companies and their CEOs (whose pay over the past 40 years has grown 940% while average worker pay has increased only 12%).
This reality has led America’s most prominent CEOs to begin a PR campaign to reshape their image and that of corporate America. That campaign has not received a favorable reception.
The August 23rd TLR (“What is the Meaning of American Capitalism?”) focused on the PR message conveyed by the “Statement of Purpose of a Corporation” recently issued by the Business Roundtable, America’s most influential group of corporate plutocats plutocrats leaders. The Statement committed the Roundtable’s members to be better human beings lead their companies for the benefit of all mankind “customers, employees, suppliers, communities and shareholders” – that is, the constituencies those companies affect – and not solely for the American Capitalist goal of maximizing profits for shareholders. Two days after the Roundtable released its Statement, outdoor-apparel retailer Patagonia and 31 other firms challenged the Roundtable’s plutocats CEOs to “walk-the-walk” by changing their legal incorporation status, become “benefit corporations” and get serious about dealing beneficently appropriately with all stakeholders. But that isn’t what 181 of the Roundtable’s 188 plutocats CEOs are about to do … and they deferred to one of their champions to respond to Patagonia’s criticisms.
On August 20th, Marty Lipton, America’s leading legal defender of corporate management, issued a statement clarifying what he viewed as the Business Roundtable’s actual intention – that is, to ensure the primacy of corporate management over “[s]hort-termism, lack of investment, junk bond-financed hostile takeovers, and activist instigated financial engineering…” – by advocating a “director-primacy” model. As the creator of the poison pill – a neat legal strategy designed to perpetuate management control by preventing hostile takeovers … even by shareholder majorities (Mr. Lipton is the foremost legal opponent of corporate activism) –, Lipton is a natural spokesperson for plutocats CEOs and Boards of Directors. “[S]takeholder corporate governance recognizes that the management and board of directors’ primary fiduciary duty is to promote the long-term value of the corporation and is not primarily to maximize shareholder wealth. To fulfill that duty, the board of directors uses its business judgment in reconciling competing interests among the stakeholders – employees, customers, suppliers, the environment, communities and shareholders. If the directors are not conflicted and use due care in reconciling the competing interests of the stakeholders, and in doing so seek to promote long-term value, they will have the protection of the business judgment rule and the courts will defer to their decisions without second-guessing them.”
That’s an interesting spin on the Roundtable’s pronouncement, but is it necessarily correct?
The business judgment rule relied on by Lipton is a legal doctrine that validates good-faith decisions made by Boards of Directors. To-date, courts have validated Board decisions intended to maximize current shareholder value in both friendly and hostile takeovers – without any consideration of stakeholders’ longer-term financial, environmental or community-oriented interests. That value is what a willing buyer would pay a willing seller with neither being under an obligation to buy or to sell. Or, put another way, it’s the value shareholders would place on their investment without attributing any value to the interests of others. A compelling argument can be made that the Roundtable’s change-of-Statement will impact calculation metrics by redefining value precisely because it requires Boards to put a value on the interests held by all stakeholders, thereby requiring a different calculus of Director “good faith.” If so, it would alter existing valuation methodologies and invite litigation to second-guess Board determinations. There can be little doubt that the legal industry will jump on that opportunity. Valuation experts in both friendly and hostile takeover situations therefore are being invited to input a new set of metrics in making their determinations. The Roundtable’s PR strategy invites new valuation theories that will lead to increasing litigation.
Marty Lipton’s uncompensated-for(?) interpretation of the Business Roundtable’s Statement is intended to further thwart corporate activism by advocating the vesting of absolute benevolent control and discretion in managements and Boards of Directors. They should be the sole determiners of what’s best for everyone – including activist and passive shareholders alike – and, from Lipton’s legal standpoint, almost anything they do (as long as they’re “not conflicted”) should be unchallengeable under the business judgment rule. Therefore, despite its lofty language, it is Pollyannaish far-fetched to believe that the Roundtable’s Statement is intended to motivate managements and Boards to actually allocate more than words value to stakeholders’ interests.
In his interpretation, Lipton asserts that “our corporate system … relies on the integrity of managements and boards of directors.” Really? In the currently-charged, anti-CEO, anti-corporate environment is it reasonable to believe that the public will buy into the “integrity” of those very same plutocats CEOs? Or that every one of Lipton’s clients America’s managements and Boards possess that lofty “integrity”? To the contrary, a cogent argument can be made that it’s the activist shareholders who keep self-interested incompetent ineffectual managements and Boards honest. That’s one of the great strengths of American Capitalism and America’s Rule of Law (see “The Rule of Law” in the April 5th TLR) and is reinforced by the fact that activism has only recently gained a modicum of traction in Europe and Japan where markets have been static, consensual and closely regulated … and where local corporations have significantly underperformed America’s world-leading corporations. Is Lipton correct when he says that making corporations accountable to shareholders is “ill-conceived … and has utterly failed”? Or that making corporations accountable to other stakeholders would be “state corporatism in the form of legislation like Senator [Elizabeth] Warren’s Accountable Capitalism Act”? Is making corporations accountable to the benign dictatorship of CEOs and their tame Boards of Directors therefore the only rational path forward? Hardly.
Another group that has spoken out, this in support of the Roundtable’s Statement, is the Council of Institutional Investors (CII). Despite supporting its PR effort, CII was horrified by the Roundtable’s rejection of Milton Friedman’s long-standing “shareholder primacy” model that “[the] corporate executive … is the agent of the individuals who own the corporation … and his primary responsibility is to them.” CII nevertheless agreed with Lipton that decision-making should be vested solely in managers and Boards who “have clear accountability to company owners.” That is, although managements and Boards should “respect stakeholders,” they should freely ignore their interests in maximizing value for shareholders. CEOs and Boards – members of CII – accordingly should determine what is best for corporate America. Put another way, as CII sees it, accountability to a broad range of stakeholders means accountability to no one. CII, like the Business Roundtable, is opposed to anyone who might want to remove its members from their positions of power – people like corporate activists (who Lipton opposes) and those who want the government to have the controlling voice in balancing the interests of stakeholders (like Elizabeth Warren).
The only certainties arising from the Roundtable’s Statement are that it will focus greater scrutiny on the authority that should be vested in CEOs and Boards, will motivate legislators to over-regulate that authority … and will lead to an increase in litigation. As Justin Danhof, general counsel for the National Center for Public Policy Research, editorialized in The Hill, “Rather than create a circle of equals, the Roundtable has elevated a group of far left ‘stakeholders’ over everyone else. All actual shareholders should engage these corporate leaders and fight for their rightful seat at the table.” The National Review concluded, “If today’s corporate-responsibility police truly want a free and virtuous society, they are better off focusing their efforts on eliminating the crony-capitalist abuses that seek to squash competition. For it is competition that creates accountability, and accountability that drives results – yes, results for all stakeholders.” USA Today added, “The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.” TLR agrees with USA Today’s conclusion that “Any business that isn’t focused on its customers, employees, suppliers and communities does not have its eye on the ball. And that ‘eyeball’ is profits for shareholders.”
Finally (from The Economist)
*┬® Copyright 2019 by William Natbony. All rights reserved.