by Carla Ilten
The recent Business Roundtable “declaration” of corporate responsibility to stakeholders is a curious document. In good American-exceptionalist fashion, it is perfectly ahistorical, ignores international practice, and purports to be innovative while including mostly commonplace small business values.
A wider horizon.
The declaration reads as if “shareholder primacy” were the natural baseline for businesses, and attention to stakeholders beyond shareholders were a whole new idea, surprisingly brought forth by CEOs. The “shareholder value myth” has been debunked by Lynn Stout in 2012, so maybe this is just a particularly slow corporate response to the insight that shareholder value “primacy” – an obsession of corporate strategy with stock price as the single measure of success – has always been undermining both the public and the shareholders’ interests.
At the same time, the shareholder value fixation hasn’t even been around for more than a few decades, when large corporations became central to the U.S. economy and the consolidation games began. Traditional proprietor owned, small businesses have never lost sight of their communities or long-term viability. So we’re talking about solving a home-made, big corporate problem, stoked by CEO careers built on share price incentives.
The declaration reads as if these CEOs had never even heard of corporate governance in international comparison. While the statement mentions only the “purpose” of a corporation, many other societies have successfully implemented structural safeguards that enforce stakeholder representation in corporations.
“Purpose,” or structure?
The Business Roundtable’s statement vaguely discusses goals or ends, when what we need to know is how these ends will be achieved. That’s what governance is good for: defining goals and making sure they’re being pursued. But why should we assume that CEOs get to redefine the purpose of the corporation? Aren’t CEOs hired by Boards, who represent shareholders? Are CEOs essentially saying that they’re redefining who they’re accountable to? It seems so – but such a fiat is only a speech act, unless structures and rights are reconfigured.
So it’s useful to be a little more systematic and distinguish between various pathways to stakeholder accountability: There are different ownership models, there is codetermination in governance, there are multi-stakeholder models, and the good old labor representation via unions. Though I suspect our modernized CEOs at the BRT weren’t thinking of unions when they wrote their declaration. Let’s walk through these structurally different ways to approach stakeholder representation.
You can redefine the “shareholder” term all day long, but the voting rights in public corporations are still with the shareholders, the people or institutions who own equity. So who owns a company is crucial to who it will be accountable to. This is also the assumption that Employee Ownership advocates have been working from for decades. Joseph Blasi, the J. Robert Beyster Distinguished Professor at the School of Management and Labor Relations at Rutgers University, has dedicated his career to fostering the structural alignment of interests of the firm with employees through actual Employee Ownership, where employees own the shares. The latest success in the story of Employee Ownership in the U.S. is the founding of the Institute for the Study of Employee Ownership and Profit Sharing. Employee owned businesses are, unsurprisingly, more stable than outsider-owned companies, pursue long-term goals, and can boast higher employee satisfaction and wealth.
Companies outside the U.S. have achieved similar outcomes with a different structural approach that does not rely on ownership – which is also a financial risk to employees – but on shared decision making in companies. Having employees directly represented in decision making bodies is called codetermination. Codetermination results in long-term strategy and stability, as well as a fairer distribution of profits. Codetermination is legally required for companies of a certain size in Germany, a hallmark of its “Social Market Economy.” Here, stakeholder representation is ensured by regulation, rather than left to CEO visions or fashions. Of course, a crucial actor in a Social Market Economy are unions, who organize the representation of employees systematically and are political actors in their own right. In societies dominated by large organizations, it is clear that individuals cannot represent their own interests. Stakeholders must be defined as classes and represented by bodies as powerful as the corporations themselves.
There are organizations that are structurally built to facilitate both ownership by the stakeholders who economically rely on the organization, and democratic decision making. In his response to the Business Roundtable’s statement, Doug O’Brien of the National Cooperative Business Association points out these built-in accountability mechanisms in cooperatives. Cooperatives are owned by the people who use the company, either as producers, consumers, or workers. There can even be more than one class of stakeholders defined as owners of a cooperative, which is then run as a multi-stakeholder cooperative. The start-up Resonate, for example, has devised three classes for its music streaming platform cooperative: musicians, listeners, and workers. All of these groups have an interest in the utility of the organization, or what it produces and how, rather than in sheer monetary gains unrelated to operations. In the cooperative “one member, one vote” governance structure, all of these shareholders – natural persons, not institutions – have equal voting rights for the Board of Directors, regardless of their investment.
Show me the money.
So, in light of these already existing organizational mechanisms to ensure stakeholder representation, what does the Business Roundtable offer? A reliance on “purpose” – one of the most variable and easily shifted dimensions of organizational activity, if it comes from the managerial top. And a list of fair business practices that indeed many of the undersigned are actively violating. Unless stakeholder representation is structurally inscribed into organizations, we don’t need to consider statements about purpose anything more than PR stunts and social-washing. But a real debate or a political window of opportunity might arise, where the already existing models for stakeholder accountability become more visible, and shareholder corporations’ externalities more unacceptable. Maybe the declaration can also be read as a more desparate attempt to restore the reputation of CEOs as “charismatic saviors” and of corporations as citizens in an era of large corporation decline and challenge and disruption from tech entrepreneurs who claim to have neither employees nor stakeholders. It’s about nothing less than what the Business Roundtable refers to as “America’s economic model:” reliance on businesses as “engines” of a society’s success – where somehow the horse and the cart got disconnected, and maybe even confused to begin with.