Business Law Blog

The Business Roundtable, a voice for a significant number of major corporations in the United States, has issued a statement that reverses the “primacy” it formerly afforded to shareholders and endorses a commitment to corporate purpose. Shortly after the release of the statement, the Council of Institutional Investors, another major voice for market participants, issued its response, expressing concern with the Business Roundtable’s new commitment on the basis that it “undercuts notions of managerial accountability to shareholders.” The financial press, as well, reacted swiftly, with major publications and prominent analysts offering their commentary. The Economist asked, on its next cover, “What are Companies For?”.^[1]

As capitalism proceeds through the crossroads at which it has found itself in the decade following the financial crisis, the paradigm of corporate governance that has prevailed for the last 50 years is shifting.^[2] The strain of this shift is most visible in the United States, with the competing statements noted above a clear example, but its relevance is global, including in Canada. Notably, the strain is evident in the way the commentary and even the statements themselves struggle to express concepts that are just emerging, a struggle familiar in Canada, where the Supreme Court’s leading decision on the directors’ fiduciary duty, in BCE Inc. v. 1976 Debentureholders, introduced concepts that, without a clear expression of a larger theory of “corporate purpose”, have not always been easy to reconcile.^[3]

Despite this strain, as social, economic and political volatility continue to affect our institutions, the Business Roundtable’s statement shows the progress the doctrine of “corporate purpose” has made in a short number of years, and the beginnings of an acceptance across the business community of a better way of understanding what a corporation is, what it is for, and what it can achieve.

Purpose

Central to the Business Roundtable’s statement is the concept of “purpose”. Its title is “Statement on the Purpose of a Corporation”, and it includes the affirmation from the CEOs that represent its membership that “each of our individual companies serves its own corporate purpose.” The statement, however, does not distinguish between the purpose of “a corporation”, speaking generally, and the respective purposes of each of the member corporations. Nor does it draw the key connection between corporate purpose and the commitment to a broader universe of stakeholders that offended the Council of Institutional Investors.

“Corporate purpose” is a doctrine of corporate governance under which the board and management of each corporation aim not to benefit any one stakeholder group directly, but to achieve, over the long term, what the corporation was formed to achieve. The basic premise is that corporations are formed to solve real problems and fulfill real people’s desires in a profitable way. If they succeed in doing so, the shareholders, customers, employees, suppliers and communities in which they operate all benefit. Unlike under the doctrine of “shareholder primacy”, where the benefit of the corporate endeavour is aimed exclusively at its shareholders, profit alone is not the goal; it is a by-product of the corporation’s pursuit of its purpose.

The purpose of each individual corporation should not be confused with the purpose of “the corporation”, as an institution, or the purpose of “business”, as an engine of prosperity. The doctrine of corporate purpose looks to the governance of individual corporations, not to business as a whole, but it nevertheless recognizes that if every individual corporation pursues its own unique purpose - whether that be extracting resources, building self-driving vehicles, developing pharmaceuticals or selling advertising - “business” writ large will thrive, which will benefit society more broadly.

In its response to the Business Roundtable’s statement, the Council of Institutional Investors claims that “it is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.” This claim is true, but misplaced. Under the doctrine of corporate purpose, each individual corporation has only one responsibility: to pursue its purpose over the long-term. It does not need to focus on broader social needs, or take on external “social responsibilities”. The concept of “corporate social responsibility” had little legal justification and could not offer a coherent alternative to shareholder primacy. Corporate purpose, in contrast, recognizes that the interests of the corporation in pursuing its purpose are aligned with the long-term interests of shareholders in creating value.

Primacy

All the same, pursuing the corporate purpose does require the consideration of stakeholder interests. In forming its strategy to achieve its purpose, a board and management must assess who the corporation’s actions will affect; a failure to do so would be a failure to fully develop the strategy or manage the risks it engenders. But considering how these stakeholder groups will be affected and mitigating the risk of those effects does not give non-shareholders “primacy” or “centrality” in the corporate governance regime.

Even in Canada, where the consideration of stakeholder interests is a key element of the directors’ fiduciary duty, shareholders enjoy a much more privileged position in the corporation than other stakeholders. First and foremost, shareholders elect the directors, and only the shareholders can remove them from office. Further, the traditional corporate remedies of the derivative action and the oppression remedy are explicitly available to registered and beneficial shareholders; any other stakeholder requires leave of the court for standing. In that context, and in a jurisdiction where the business judgment rule already provides boards with tremendous latitude in their decision-making, a commitment to corporate purpose hardly restricts accountability to shareholders.

And in jurisdictions where the fiduciary duty does not explicitly require the consideration of stakeholder interests, the practical difference is insignificant: a board that seeks to fulfill its obligation to supervise the management of the business, including its risk management function, can hardly ignore the effects of its decisions on stakeholders, but those stakeholders do not get to elect or remove the directors, or enjoy the same remedies as shareholders, particularly where the corporate statute does not include an oppression remedy.

In this sense at least, a form of shareholder primacy still prevails. And there are valid arguments for allowing that to be so, even where boards and executives are legally bound to pursue the corporation’s purpose as a primary matter. The Council of Institutional Investors would surely agree that shareholders collectively, operating through markets, are able to assess most effectively a business’s long-term potential.

Ultimately, the issue is not whether primacy belongs to shareholders, to boards or to other stakeholders. The issue is that primacy itself is not relevant to corporate governance. Purpose is what should guide corporations, not the primacy of any constituency.

From Primacy to Purpose

It is not clear yet what the Business Roundtable’s “commitment to all of our stakeholders” means in practice, beyond the basic requirement that their interests be considered in corporate decision-making. Nor is it clear how that commitment will be restricted, if at all, by the demands of groups like the Council of Institutional Investors that corporations be primarily accountable to shareholders, or by the confines of U.S. corporate law. In Canada too, where a more stakeholder-oriented corporate law has been in place for over a decade and where the doctrine of corporate purpose provides the clearest lens through which to understand our Supreme Court’s pronouncement on the fiduciary duty, the language of “primacy” is still prevalent, and boards, still elected by shareholders and still subject to proxy fights, still struggle to understand who ought to be the ultimate beneficiary of their decision-making.

But the development in the highest reaches of the business community of a language to express this emerging paradigm is a hopeful signal that market participants are converging on its key principles, and are doing so in a way that can be accommodated without changes in the law.

_{[1] The Economist, August 24, 2019 edition.}

_{[2] For a brief discussion of the rise of “shareholder primacy” and the emergence of the doctrine of corporate purpose, see my February 2019 blog post, The New Corporate Governance: Corporate Purpose and Corporate Leadership.}

_{[3] For a discussion of the BCE decision and the fiduciary duty of directors in Canada as it applies to stakeholder interests, viewed through the lens of corporate purpose, see my April 2019 blog post, Corporate Duties, Indeterminacy and the 2019 Federal Budget.}