THE FUTURE OF CORPORATE GOVERNANCE IN THE AGE OF STAKEHOLDER CAPITALISM BY - GAUTHAM A B, TIMNA BRIJIT TENNISON, RESHMA R & PRIYAMOL C P
THE
FUTURE OF CORPORATE GOVERNANCE IN THE AGE OF STAKEHOLDER CAPITALISM
AUTHORED
BY - GAUTHAM A B,
Practicing Advocate at Nedumangad
Court, Kerala, India
CO-AUTHOR - TIMNA BRIJIT TENNISON,
CO-AUTHOR 2 - RESHMA R
CO-AUTHOR 3 - PRIYAMOL C P
2nd Semester LL.M (Commercial Law)
Student at C.S.I College for Legal Studies, Kottayam, Kerala, India
ABSTRACT
The idea behind stakeholder
capitalism is that an organisation should prioritise serving the interests of
all parties involved, including partners, consumers, staff, the community, and
society at large. The BR Statement of the Purpose of a Corporation, which
promotes stakeholder capitalism above and beyond traditional shareholder
capitalism, was signed by 183 of the 206 Business Roundtable (BR) corporations
in August 2019. Boards of BR companies must to push for a more proactive
obligation to stakeholders and think about changing corporate arrangements to
foster stakeholder capitalism. Future studies ought to keep looking into this
corporate governance possibility.
INTRODUCTION
But
the COVID-19 epidemic tested the 2019 promise. The downturn in the economy and
the loss of jobs have brought to light shortcomings in the creation and
application of stakeholder governance. Examining if the BR firms "walk
their talks" is crucial. Second, now is the moment to create and promote
the "new normal" of corporate governance as we look for and construct
the "new normal" of life beyond COVID-19. As businesses and their
boards move towards true stakeholder governance, it is imperative that we
support them in recognising and incorporating the opportunities and challenges
that lie ahead. Third, a firm must undergo a fundamental shift in order to
implement stakeholder capitalism. B companies and public benefit corporations
(PBCs) offer a fresh and creative approach to business that can be transparent
and accountable to stakeholders. Businesses should think about implementing
these new corporate structures and redefining their objectives to put
stakeholders first.
NATIONAL INVESTEE EXAMINATION
Over
the last few years, such corporate purpose has been analysed closely[1].
The coronavirus pandemic in 2020 increased the level of inspection, and it
continues today. It is coming from institutional investors who are integrating
the consideration of environmental, social, and governance factors into their
investment and voting decisions[2].
Other stakeholders, including customers, workers, and regulators, are also
scrutinising. PBC statutes offer a different, for-profit corporation structure
that specifically considers corporate social responsibility. The two biggest
asset managers in the world, Laurence Fink, CEO of BlackRock, which has $7.4
trillion in assets under management and 70 offices across 30 countries, and
Mortimer Buckley, CEO of Vanguard, which has $6.2 trillion in assets under
management, signed this BR Statement. But State Street Global Advisors, the
third-biggest asset manager in the world with $3.1 trillion in assets under
management, isn't a part of the Business Roundtable (BR). Laurence Fink wrote a
letter to all CEOs of publicly traded firms worldwide in January 2018, asking
them to prioritise inclusive and sustainable economic growth for the vast
majority of people and to begin considering their companies' social effect.
Profits shouldn't be the only goal. Bill McNabb, the former CEO of Vanguard,
said, "I appreciate the BR CEOs' intelligent statement regarding the
purpose of a corporation. Boards can concentrate on generating long-term value
and better serving all stakeholders, including suppliers, customers,
communities, workers, and investors, by adopting a more comprehensive and wide
perspective of the company purpose. Fink
elucidated the connections between purpose and profit in a letter he sent to
these CEOs in January 2019 by promoting actions that will result in long-term,
sustainable growth and profitability. A company's purpose is what drives it to
pursue profits rather than just being the means to an end in and of itself. A
business that is genuinely purpose-driven operates with the strategic
discipline and focus that propels long-term profitability and brings
management, staff, and communities together. Fink
stated in his letter from January 2020 that BlackRock will start to remove
investments that carry a high risk associated with sustainability, like those
in coal companies, and that the company would prioritise environmental
sustainability when making investment decisions. His goal is to get businesses,
not just energy companies, to reconsider their carbon footprints. "Awareness
is changing rapidly, and I think we are on the verge of a fundamental reshaping
of finance," the author said. Investors need to reevaluate their
fundamental beliefs about contemporary finance in light of the climate risk
research. A corporation cannot generate long-term profits without embracing
purpose and taking into account the requirements of a wide range of
stakeholders, as I have stated in previous letters. The
engine of long-term profitability is the ultimate goal. We think that directors
should be held responsible when a corporation fails to address a significant
issue. Asserting that the U.S. must limit global warming below 1.5 degrees
Celsius, or slightly less than 3 degrees Fahrenheit, in order to prevent
catastrophic climate breakdown, world-renowned climate scientist Michael Mann
concurred with Fink's emphasis on climate risk. He stated that this must be
done within the next four years. BlackRock dissented or did not cast votes for
4,800 directors at 2,700 distinct firms in 2019. According
to Fink, "When companies are not making sufficient progress on
sustainability related disclosure and the business practices and plans
underlying them, we will be increasingly inclined to vote against management
and boards of directors." Businesses need to be purposeful and dedicated
to servicing all of its stakeholders, including shareholders, clients, staff,
and the communities in which they do business. By doing this, investors,
employees, and the general public will all benefit from increased long-term
profitability for your business.
As
of 2018, 37% of the funds invested in American mutual funds and exchange-traded
funds (ETFs) were passively held, according to Moody's Investor Service. According to Moody's forecast, the market share of
passive investors will cross a threshold and reach over 50% in 2021. It was
written that the spread of technology is similar to the trend in active versus
passive investing. For investors, passive investing is thought to be a more
cost-effective and efficient kind of technology. Passive investment will gain
popularity over time as more people become aware of it. For instance, Berkshire
Hathaway CEO Warren Buffett has advised investors to only invest in index
funds, such as the Vanguard S&P 500 index fund.
THE CARD OF THE STAKEHOLDER CAPITALIST
The
Test of Corporate Purpose (TCP), a group of researchers whose advisory board
includes a professor of management from the University of Oxford and senior
executives from Morgan Stanley and Liberty Mutual, and KKS Advisors, an
environmental consulting firm, conducted a study funded by the Ford Foundation
to evaluate how corporations have responded to the pandemic and the movement
against racial injustice. After examining the operations of 800 businesses
whose stock is listed in the S&P 500 and the FTSEurofirst 300, the
researchers reduced the sample size to 619 businesses for which they could
obtain at least three years' worth of information from trade journals, news
articles, and other industry sources. They assessed how much businesses were
following the guidelines set forth by the nonprofit Sustainability Accounting
Standards Board, which advocates for standards related to social and
environmental issues. They looked at how the companies fared in June and July
2020 on a number of pandemic-related indicators, including the following:
capital allocation (stock buybacks and dividends), governance (board tenure,
board recruitment requirements, and independent board chair), lobbying and
political spending, taxes and havens, and environmental issues (land-use change
like deforestation, carbon footprint, water usage, etc.). All of these
indicators are relevant to the pandemic. The
study concluded that while the signatories to the BR's Statement of the Purpose
of a Corporation failed to set themselves apart in the quest of racial and
gender equality, they had performed no better than other businesses in
safeguarding jobs, labour rights, and workplace safety during the pandemic. The
analysis came to the conclusion that, since the start of the epidemic, the
signatories of BR companies have not succeeded in bringing about significant
changes in their corporate purpose at a time when enlightened purpose ought to
be of the utmost importance. The report’s conclusion enhances doubts that
corporations can be depended upon to moderate their quest for shareholder
profits to pursue stakeholder solutions to challenges like climate change,
racial injustice, and economic inequality[3]. A law review article cited this fact as evidence that
the pledge was merely a public relations stunt rather than a significant
corporate governance issue. The report also pointed out that very few companies
that signed the BR Statement on the Purpose of a Corporation submitted it to
their governing boards for approval. For instance, Wells Fargo (which was
placed in the lowest quadrant of the report) was singled out by the report for
turning down a shareholder proposal to put the BR pledge into action by looking
into the possibility of changing the bank's legal structure to become a public benefit
corporation, which would have given it the authority to put shareholder
interests ahead of other considerations. While
some of these companies did lay off people, the study did not evaluate the
extent to which signatories to the BR Statement had continued to pay dividends
to shareholders while doing so. The CEO of Marriott International, the largest
hotel operator in the world (ranked third), Arne Sorenson, is co-chairman of a
BR working team that is examining Covid-19. He declared in March 2020 that
2,700 of Marriott's 4,000 corporate employees would be placed on furlough.
Sixty-five of them will be permanently laid go in October 2020. In April 2020,
the company would pay $160 million in dividends to its stockholders.
Positively,
the report highlighted BlackRock (2nd quadrant) and its CEO, Laurence Fink, for
directing investments towards businesses that mitigate climate change.
BlackRock also donated $50 million for pandemic emergency services, which
included supplying hospitals with essential medical equipment. Presently, the
BR comprises 206 enterprises. 130 of them, or 63%, were evaluated for this
report. Others, like the private partnerships of public accounting firms,
lacked the necessary three years of data. The FAANGM stocks in the U.S. market
are the four BR businesses in the fourth quadrant, Microsoft in the third
quadrant, and the non-BR company, Facebook, which is also a fourth-quadrant
company. Approximately 25% of the market capitalisation of the S&P 500
public stocks is now held by these six corporations. They are therefore in the
top 1% (6/500) for stockholder success, despite being primarily in the lowest
4th quadrant for stakeholder performance. This presents an intriguing trade-off
between values or viewpoints. For instance, the majority of the profits of
S&P 500 businesses have gone towards stock buybacks and options, rather
than salaries and bonuses, as executive compensation in the United States has
changed. The richest 10% of Americans own 84% of all stock shares under this
redesigned system, despite the fact that the pandemic-ravaged economy hasn't
stopped the U.S. stock market from approaching an all-time high.
ESSENTIAL QUESTION FOR CAPITALISM STAKEHOLDER
The
fundamental query for stakeholder capitalism was posed by Andrew Ross Sorkin,
the business editor of The New York Times: "What precisely does it mean to
be in favour of all stakeholders?" For those who wish to see a more
expansive form of shareholder capitalism, there is still an uncomfortable truth
to face: it is extremely difficult for a business to care for its other
stakeholders if it is not turning a profit for its shareholders. The CEO of
Salesforce, a firm in the first quadrant, Marc Benioff, has long advocated for
a more inclusive stakeholder approach to governance, but he also recognises
that growth and earnings must come first. Following a major restructuring in
August 2020, Salesforce, which had announced record revenues, let go of over
1,000 employees. Benioff said, "It's not a stakeholder nonprofit," in
response to the question of whether that was disingenuous given that he had
frequently discussed employees as stakeholders. Stakeholder capitalism is what
it is. The company's long-term interests, which will best serve the interests
of all stakeholders, must come first in my opinion. In his 2020 annual letter
to shareholders, Berkshire Hathaway CEO Warren Buffett stated, "In
representing your interests, business-savvy directors will seek managers whose
goals include delighting their customers, cherishing their associates, and
acting as good citizens of both their communities and our country."
Buffett acknowledges that shareholders must be served first with a profitable
company. A more affirmative obligation to
stakeholders and society was promoted in an article published in September
2020. Co-authors of the book were Leo Strine, arguably the most significant
judge in corporate America for the previous ten years, and Joey Zwillinger,
co-founder and co-CEO of the New Zealand-American footwear firm Allbirds.
Strine served as chief justice of the Delaware Supreme Court, which has
jurisdiction over more US firms than any other state due to Delaware's high
corporate incorporation rate, until retiring in 2019.
BUSINESS STRUCTURES TO SUPPORT PARTY CAPITALISM
A
company's board should think about becoming a PBC or applying to become a
certified B corporation if it is truly committed to stakeholder capitalism and
the BR's commitments. According to the law, a PBC is a for-profit company with
the goals of generating a public benefit or benefits and conducting business in
a way that promotes stakeholder capitalism and sustainability. The
corporation's certificate of incorporation must state the public benefit that
it intends to further. A positive effect (or the mitigation of a negative
effect) on one or more groups of people, things, communities, or interests
(aside from stockholders) is referred to as a public benefit. This includes,
but is not limited to, effects that are literary, medical, religious,
scientific, technological, artistic, charitable, cultural, economic,
educational, environmental, or educational. A PBC's board must oversee or
manage the company's operations in a way that strikes a balance between the
public benefit stated in the incorporation certificate and the financial
interests of the corporation's stakeholders and stockholders who may be
significantly impacted by its actions. If a board director makes a choice that
a person of ordinary, sound judgement would approve of and it is made with
knowledge and objectivity, then the director will be regarded to have fulfilled
his or her fiduciary duty to the corporation and its stockholders. A publicly
traded company (PBC) must give a statement to its investors outlining how it
intends to advance both its own public benefit and the interests of people who
will be significantly impacted by its actions. The following details from a
stakeholder capitalism perspective must be included in the statement, which
must be submitted at least every other year:
·
The goals set forth by the board to further the interests and benefits of
the general public.
·
The benchmarks that the board has established to gauge how well the company
is advancing the interests and benefit of the public.
·
Factual data that is objective and based on the standards the board has
selected regarding the corporation's performance in achieving those goals.
·
An evaluation of how well the company met its goals and advanced the
interests and benefit of the general public.
CONCLUSION
The
signature of the revised BR Statement on the Purpose of a Corporation in 2019
is a marker of the increased popularity of stakeholder capitalism among the
most influential corporations in the world. Whether these businesses are
adhering to stakeholder capitalism and offering suggestions to their boards is
the primary research topic of this article. According to a comprehensive
analysis by KKS Advisors and TCP, BR firms did not perform better than their
S&P 500 counterparts in over a dozen areas, such as COVID-19 policies,
labour practices, job security, and employee safety. In order to fulfil the
promises made to stakeholders in the new BR Statement, critics of stakeholder
capitalism have stated that they will be keeping an eye out for businesses that
provide the same level of stringent data reporting and transparency on
non-financial performance metrics, such as workplace safety, employee
diversity, gender pay data, greenhouse gas reduction, and governing boards, as
they do with financial performance metrics. Similar to how public corporations
are required to have regular external audits of their financial accounts, these
critics advocate for regular external audits of non-financial measures. As a
result, several businesses have already made the decision to have a third party
monitor non-financial data. PBCs and B businesses, such as Patagonia and
Allbirds, and Danone NA and Ben & Jerry's, have arisen to put these
concepts into practice and provide shareholder opportunities for corporate
governance. BR firms ought to think about adopting these new organisational
structures, and their boards ought to actively strive towards embracing
stakeholder capitalism.
[1]Klemash,
S., Smith, J. C., & Doyle, R. (2019, June 13). Stakeholder capitalism
for long-term value creation (Harvard Law School Forum on Corporate
Governance). Retrieved from
https://corpgov.law.harvard.edu/2019/06/13/stakeholder-capitalism-for-long-term-value-creation/
[2]Alexander,
F., Ensign-Barstow, H., & Palladino, L. (2020, October 26). From
shareholder primacy to stakeholder capitalism (Harvard Law School Forum on
Corporate Governance). Retrieved from
https://corpgov.law.harvard.edu/2020/10/26/from-shareholder-primacy-to-stakeholder-capitalism/
[3] KKS Advisors, & TCP. (2020,
October 24). COVID-19 and inequality: A test of corporate purpose. KKS
Advisors. Retrieved from
https://www.kksadvisors.com/tcp-test-of-corporate-purpose-september2020