What’s in a mission statement?

In a wide-ranging FT Lunch article, I saw some interesting remarks from the new McDonald’s boss, Mr. Kempczinski. On the issue of McDonalds becoming the target of US labour organisers campaigning for a $15 minimum hourly wage, Mr Kempczinski is quoted to have said: “it’s not McDonald’s job to set societal policies around things like what’s the right wage rate and stuff like that”. In response, the author, Mr. Edgecliffe-Johnson, is right to wonder how that comment squared with McDonald’s mission articulated a year ago: “to make this company an example for the world”.

This is another example of companies’ mission statements not amounting to much.

Danone and Friedman’s statue

Danone had made news in June for getting onto the “business with purpose” bandwagon. Danone became an enterprise à mission, or purpose driven company which requires it to generate profit for its shareholders, and do so in a way that it says will benefit its customers’ health and the planet. Danone’s CEO Emmanuel Faber even spoke of toppling Friedman’s statue. The Financial Times has reported yesterday that Danone has taken a bigger hit from the pandemic than its competitors and is looking to prune its business. The news article went on to say that investors have been skeptical of the focus on ESG, and “frustrated by Danone’s inability to deliver on its financial targets”. It is the latter part of this statement that I want to highlight. Investors will likely not object to ESG so long as financial targets are being met. In other words, profits matter (especially in times of crisis) and Friedman’s statue is not so easily toppled.

THE CORPORATE PURPOSE DEBATE BEYOND THE US

While the corporate purpose debate is certainly not new, the most recent point of ignition has been the 2019 statement from the Business Roundtable about the purpose of the corporation. Parallelly, the UK corporate governance code has been amended to reflect new expectations from companies; and in Australia, the ASX Corporate Governance Principles were amended with similar themes. In a forthcoming article, I have compared the recent edition of the corporate purpose debate in the US, UK and Australia and argue that rather than creating a big shift to stakeholder-centric governance, these developments, at least in the UK and Australia, signify a focus on corporate culture and the relationship of company management with employees.

In the US, as Bebchuk and Tallirata and some others rightly argue, the statement from the Business Roundtable does not reflect a genuine change of approach. Bebchuk and Tallarita found that the companies whose CEOs were signatories to the Business Roundtable’s 2019 statement on corporate purpose had not amended their corporate governance guidelines to include stakeholder welfare. On the contrary, they find that many of those companies’ corporate governance guidelines contain strong endorsements of the shareholder primacy principle. However, in a recent post, Medland and Taylor argued that the statement should not be dismissed but should rather be seen as a recognition from businesses that their behavior is under public scrutiny and evaluation. Even if this is the case, the Business roundtable statement seems to be a recognition in words alone. Since the authors of the statement are the CEOs of companies, such recognition would only be useful if those companies backed up the statement with corresponding actions.

UK and Australia have more interesting developments on corporate purpose. For one thing, these developments have been initiated by regulatory bodies rather than CEOs making a statement. For another, they seem to emphasize internal corporate culture which is then expected to also flow into how companies interact with external stakeholders.

The UK’s Corporate Governance Code, 2018 (“Code”) embraced the idea of corporate purpose. It says that the board is responsible for setting the company’s purpose. Although purpose is not defined in the Code, the role of the board has been defined broadly to include “promot[ing] the long-term sustainable success of the company, generating value for shareholders and contributing to wider society”. While no hierarchy is specified, shareholder value is mentioned before the much vaguer concept of contributing to society. So, corporate law has not been shaken out of its mould. However, the Code then stipulates that “the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned” and that “all directors must act with integrity, lead by example and promote the desired culture.” “Culture” is not defined, but the Code goes on to say that “the board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success” and that “the workforce should be able to raise any matters of concern”. Thus, corporate purpose should not only be a goal with regard to the company’s external stakeholders but also be relevant to how the company’s workforce operates at various levels and how employees are taken care of.

Australia has had similar developments. The 4th edition of the ASX Corporate Governance Principles and Recommendations does not mention the phrase corporate purpose. However, Principle 3.1 says that a listed company should articulate and disclose its values. Further, the commentary to Principle 3.1 echoes some of the ides regarding corporate purpose in the UK Code. It says:

A listed entity’s values are the guiding principles and norms that define what type of organisation it aspires to be and what it requires from its directors, senior executives and employees to achieve that aspiration. Values create a link between the entity’s purpose (why it exists) and its strategic goals (what it hopes to do) by expressing the standards and behaviours it expects from its directors, senior executives and employees to fulfil its purpose and meet its goals (how it will do it).

Thus, corporate purpose is not only the reason for the existence of the company but also its goals; and then achieving those goals in accordance with ethical standards the company sets for its senior executives and employees.

Commentators in the US are right to conclude that, since the law and incentives that company boards and executives are subject to have not changed, the Business Roundtable statement by itself cannot transform company law. However, in the UK and Australia, there is a more esoteric idea that is part of the corporate purpose developments. This idea is focused on a company’s purpose, not only in terms of why it exists but also of how it conducts itself both externally and internally. Rather than simply saying that stakeholder interests should be prioritised, there are specific exhortations about culture and values. The UK Code and Australia’s ASX principles are both soft law instruments that require companies to undertake some soul-searching to comply with the Code and the principles, and then make relevant disclosures. This process will be useful if companies understand that complying with these soft law mechanisms and making disclosures are not an end in itself but rather a means to an end. That end would be the prevention of egregious scandals which is ultimately in the interests of both shareholders and other stakeholders.

Two sides to the “social licence to operate” idea

The 4th edition of the Australian Securities Exchange Corporate Governance Principles and Recommendations (‘ASX Corporate Governance Draft Revisions’) has an interesting piece of history. The draft version made reference to a company’s culture and ‘social licence to operate’. The relevant principle stipulated that listed companies “should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. The commentary to the principle said that a listed company’s “social licence to operate” was “one of its most valuable assets” and that such “licence can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner”. However, per comments received during the consultation period, the words “social license” was omitted from the final version of the 4th edition of the ASX Corporate Governance Principles.

Despite this, companies understand that the community in which they operate is an important stakeholder at a time when social media amplifies community voices directly or indirectly. Rio Tinto, after blowing up a 46,000-year-old sacred Aboriginal shelter in Western Australia knew enough to apologise to the indigenous peoples affected “for the distress the event caused”. Further, when its CEO was faced with calls to resign because he had not read the archaeological report (commissioned by the company in 2018) which pointed out that the site was of the “highest archaeological significance in Australia”, the company’s board decided to address the matter differently. The company board, after a review, announced that the CEO and some other executives who were involved would lose a chunk of their bonus payments. While clawbacks from executive compensation for misconduct and other decisions that harmed various stakeholders (and hence the company and its shareholders) are a good idea, Rio Tinto clearly used it as a way to signal that they care about the community and in fact were attempting to renew their “social licence”.

When we accept this bonus clawback as a positive outcome, it is important to recognise that the converse situation where a company attempts to generate community support to oppose a law is the other side of the same coin. I blogged recently about Google writing an open letter to the Australian public in response to Australia’s proposed News Media Bargaining Code under which tech giants like Google and Facebook would be required to pay for news content failing which they could be faced with penalties worth millions of dollars. The open letter warned that warned that Google would be forced to provide Australians with a “dramatically worse Google Search and YouTube” because of the proposed law. A little later the MD for Facebook Australia and New Zealand followed suit by writing that they “will reluctantly stop allowing publishers and people in Australia from sharing local and international news on Facebook and Instagram”. Facebook’s update further adds:

The ACCC presumes that Facebook benefits most in its relationship with publishers, when in fact the reverse is true. News represents a fraction of what people see in their News Feed and is not a significant source of revenue for us. Still, we recognize that news provides a vitally important role in society and democracy, which is why we offer free tools and training to help media companies reach an audience many times larger than they have previously. 

Facebook products and services in Australia that allow family and friends to connect will not be impacted by this decision. Our global commitment to quality news around the world will not change either. And we will continue to work with governments and regulators who rightly hold our feet to the fire. But successful regulation, like the best journalism, will be grounded in and built on facts. In this instance, it is not.

This, just like Google’s letter, is a direct appeal to the public or the relevant community (in this case, the entire Australian public). The tech giants in this case are also using the “social licence” but in this case it is to their advantage.

Corporate purpose and long term thinking

Crises force change and we know the current one has forced a move into more digitization in almost all sectors. Talking about the transformation of law firms, a recent FT article made an incidental point about the business form:

“The partnership model at the heart of many global law firms, which pays out the bulk of profits to partners with a stake in the business, may also prove a strain in the crisis.”

It goes on to quote the managing director of a leading firm saying that this practice of yearly payouts to partners was “short-term thinking”, and that a long-term view was needed. This, in the context of law firms, would translate to retraining lawyers in different practice areas that are more relevant in a crisis (restructuring for instance).

It is interesting to see the importance of long-term thinking being underscored irrespective of the business form.  

The corporate purpose debate has taken on the two-dimensional form of shareholder primacy versus stakeholderism. It will be useful to add more nuance to this debate and find ways to prevent short-term thinking irrespective of the context. While we are accustomed to thinking about short-termism as the root cause of companies focusing on immediate gains for shareholders while neglecting the company’s other stakeholders, it is also true that companies could be short-sighted while pushing a more social cause. (I have a short and ongoing series on short-termism in the latter context.)

From benign stewardship to a power grab?

By now, most of us are well acquainted with Larry Fink’s 2019  annual letter, in his capacity as the head of Blackrock Inc., one of the largest fund management firms, addressed to the CEOs of companies in which Blackrock invests, emphasising on the social responsibilities of business.

In bold letters, Fink’s letter said, “I believe we are on the edge of a fundamental reshaping of finance”. Indeed, Blackrock is taking stewardship over the edge and transforming it into something more sinister.

One of the core ideas underpinning stewardship codes is that institutional investors put the interests of their beneficiaries and clients first. Blackrock on the other hand seems to be driven by other motives. As Bernard Sharfman argues in his recent article, “while BlackRock’s shareholder activism may be a good marketing strategy, helping it to differentiate itself from its competitors, as well as a means to stave off the disruptive effects of shareholder activism at its own annual meetings, it seriously puts into doubt BlackRock’s sincerity and ability to look out only for its beneficial investors and therefore may violate the duty of loyalty that it owes to its current, and still very much alive, baby-boomer and Gen-X investors”.

Blackrock’s ESG activism may also be politically intertwined. BlackRock is an adviser to the U.S. Federal Reserve’s financial intervention to rescue corporations from the lockdown crisis and an advisor to the Bank of Canada. This again brings its duties to beneficiaries and clients into question. Terence Corcoran, discussing these developments warns of corporatism. As he says: “The state has no business in the boardrooms of the nation. And corporations have no business in the staterooms of the nation”.

From a corporate law perspective, we should also worry that the stewardship focus seems to have brough us to a point where corporate decision-making is becoming hijacked by institutional investors like Blackrock.

An acknowledgment that the ‘New Normal’ needs something new

By Sreekar Aechuri*

Shareholder primacy as an approach has been one of the long standing principles of Corporate Governance. Dr. Kamalnath argued here and here that shareholder primacy as a guiding principle to put forth ‘company interests’ should be preferred over stakeholderism especially when the world is in the midst of a pandemic. She also talks about companies such as Uber, Google and Zoom stepping up to the needs of customers, employees and other stakeholders in this uncertain time as instances of the ‘Enlightened Shareholder Value’ (ESV). It is important to appreciate the distinction that Dr. Kamalnath draws in the above posts – instead of shareholder primacy as the approach, she vouches for shareholder primacy to be a guiding principle for attaining the ‘best interests of the company’ à eventually leading to an ‘enlightened shareholder value’.

This post intends to critically examine some of these arguments and highlight the concerns with this approach especially in the present times: “new normal”. There are four important concerns with this approach –

Firstly, ESV suffers from the same functional concern that stakeholderism suffers from i.e. the dilemma of uncertainty and vagueness of ‘best interests of the company’ guided by shareholder primacy. This leaves discretion with directors due to its vagueness and uncertainty as to their decisions which can be rationalized as guided by shareholder primacy (especially in the midst of a pandemic). This concern is similar to the assertion of the realist school of thought that judicial pronouncements are often influenced by prejudices, notions and beliefs of judges which are later rationalized in the garb of laws (instead of the other way around).

Secondly, the structural concern that there is no assurance/convention that the directors of a company continue to guide their decisions by ESV after a period of time (assuming that they even adopt this approach at a particular point of time). If mandated/regulated, then it effectively pans out as stakeholderism because these two approaches only differ in their form (not practice).

Thirdly, blurring of the distinction between different stakeholders whose interests may be considered as ‘company interests’. The advent of digital technology has greatly shifted market interests and operations. Eight of the ten most valuable brands in the world operate largely on digital platforms. These shifts also changed the traditional conceptions of corporate operations mainly with the ‘free labour phenomenon’ i.e. contributions of customers/users of digital companies (without any monetary considerations) mainly by providing personal data and monitoring online activity. The fact that the labour of these customers in one country contribute to profits of the companies in another country can also expand the scope of ‘company interests’ without any guiding framework to proceed, for making decisions by directors.

Finally, the humungous control, influence and resources of big corporations and their ability to influence public considerations especially from the last three decades (due to advent of capitalist economic policies across the world) must derive correlative public responsibility on these corporations. In 2019, 26 people (incidentally but not surprisingly, all shareholders in big corporations) owned as much as the poorest 50% of the world’s population. (This article examined 25 companies which had more revenues than many countries of the world.) This context is to understand the potential that big companies have influence over public policies, debates, opinions and considerations among other important spheres of human life.

In this new socio-political context (a collation of the above four concerns), we cannot simply suggest anymore that legal sanctions should be enough to contain the concerns because in addition to their structural constraints, there are implementation issues as well. We cannot anymore accept Prof. Gordon’s argument that problems of stakeholders is government’s responsibility and Dr. Kamalnath’s argument that requiring public duties would mean passing the buck to corporations. When big corporations operate (and profit) on performing important functions (many a times ‘public’), they should not be allowed to escape from correlative responsibilities that tag along with these functions. With this much public power, there cannot not be correlative public responsibility.

What must be understood is that in this new normal, principles of ‘shareholder primacy’ and ‘enhanced shareholder value’ in their current form cannot be continued to operate any longer. These conclusions cannot be mistaken with author suggesting that directors guide their decisions through stakeholderism. What approach/changes ought to be adopted in the new normal is another debate altogether but what cannot be escaped any longer is an acknowledgement that big corporations owe some duty/responsibility/obligation to persons beyond their shareholders.

 

* The author is currently pursuing a bachelor’s degree in law at National Academy of Legal Studies and Research, India. He would like to thank and express his sincere gratitude to Dr. Akshaya Kamalnath for her continuing insights, guidance and support which made this post possible.

Corporate purpose – club rules

The first rule of corporate purpose is: You do not talk about corporate purpose. The second rule of corporate purpose is: You do not talk about corporate purpose. The third rule of corporate purpose: Someone yells “what you are saying is not what you are doing”, then things get complicated. We are still thinking about the fourth rule of corporate purpose.

Talking about corporate purpose is in right now. The Business Roundtable did it and now we all are. However, even with public statements about a corporations’ purpose being much wider (i.e. encompassing ESG and other feel good issues), there is not too much practical change in corporate activity. Professor Lucian Bebchuk and Roberto Tallarita, in their study, found that the companies whose CEOs were signatories to the Business Roundtable’s 2019 statement on corporate purpose had not amended their corporate governance guidelines to include stakeholder welfare.

Professors Jill Fisch and Steven Solomon argue in a recent post (briefing their new article on corporate purpose) that:

…at least as a default matter, the purpose of a corporation should be understood as maximizing the economic value of the firm.  We argue that this default is the only position that adequately protects existing expectancy interests.  We stress that a focus on economic value does not imply indifference to the interests of non-shareholder stakeholders; indeed, we maintain that, in pursuing long-term economic value, corporate managers are not merely permitted but compelled to consider the effect of the corporation’s operations on stakeholders and society at large.

Indeed. The pursuit of long-term shareholder value includes various aspects which directors should balance. Professors Fisch and Solomon however do not reject the value of corporate purpose. Instead, they say that it allows companies to signal priorities to their constituents.

This is where I would be concerned. While we are talking about corporate purpose, we have to worry about the third rule of corporate purpose i.e. complications with greenwashing or socialwashing; and begin to come up with a fourth rule to combat this.