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In America’s boardrooms, the shareholder morphs from protector to threat

18/12/19 - Paul Rissman, Open Society Fellow and co-founder of Rights Co-Lab

Open Society Fellow Paul Rissman explains why moves away from shareholder primacy aren't necessarily what they seem

This article is part of our Rethinking Corporate Governance blog series, and is co-published with Rights CoLab. 

In August 2019, the Business Roundtable - one of the most important business lobbies in the United States - issued an open letter titled ‘Statement on the Purpose of a Corporation’. Signatories included 181 CEOs of America’s most prominent public companies.

Among a series of otherwise innocuous aspirational statements, one line caused a business media and corporate law frenzy: “We share a fundamental commitment to all of our stakeholders.” After listing “customers, employees, suppliers, communities and shareholders” as the stakeholders in question, the letter concluded by reiterating that “each of our stakeholders is essential.”

Corporate law pundits took this to be the beginning of the end of “shareholder primacy”, or the idea that shareholders are the most important constituency that a corporation must serve. This theory has often been used as an excuse by corporations when they are called on to be better corporate citizens or come under fire for excessive pressure on suppliers and employees, leading to unsafe workspaces staffed by underpaid and underage workers.

Although a legal doctrine called the “business judgment rule” technically gives managers and directors the freedom to run their companies as they see fit, corporate management teams have traditionally blamed investors for forcing them into mean-spirited or even unethical short-term behavior in the name of wringing the last penny from the business. Sometimes, such as when activist hedge funds come calling, this accusation is justified. For this reason, shareholder primacy is often seen as an evil philosophy.

While many were overjoyed at the potential demise of shareholder primacy, I for one was not. The priorities of shareholders have changed significantly over the years. In fact, shareholder Larry Fink of BlackRock is one of the key proponents of the very concept of “corporate purpose”.

One quarter of US assets are now managed by shareholders who claim to be interested in returns driven by social and environmental considerations, rather than merely financial ones – and this figure continues to grow as public concern for non-financial issues increases.

Pressure on corporate management in the form of shareholder resolutions has increased apace. Responsible shareholders have achieved impressive gains forcing corporate disclosure of lobbying, an issue ever more salient since the Supreme Court’s Citizens United ruling in 2010. That decision unshackled corporate political contributions. But it also specified that shareholders have a role in monitoring whether a corporation’s ‘political speech’ advanced their business interests.

In the Spring 2019 annual meeting season, 33 political disclosure and accountability shareholder resolutions received an average of 36% support - up from 2018 and 2017. While these resolutions are non-binding, it is a rule of thumb that resolutions receiving at least 30% shareholder support must at least be afforded attention.

The pressure is working in certain respects. Nearly 60% of the companies in the S&P 500 Index now disclose some or all of their political spending. Resolutions supporting diversity and inclusion in the workforce, such as those asking for disclosure of Equal Employment Opportunity breakdowns of women and minorities in managerial and non-managerial ranks, now also routinely garner support of 30% or higher.

Grassroots activists have also begun to utilize the power of the share. It isn’t uncommon for groups to purchase stock in a target company in order to ask questions and make statements at annual shareholder meetings. Larry Fink of BlackRock, a signatory to the Roundtable letter, has had his own shareholder meeting affected in this way.

As a result of these and other changes, corporate managers and directors are viewing shareholders as less of a shield and more of a sword pointed at them. Jamie Dimon of JP Morgan Chase, one of the organizers of the Business Roundtable letter, has notably raged that shareholder meetings have become “a farce”, hijacked by social advocacy groups. 

The corporate world is fighting back. The National Association of Manufacturers sponsors the Main Street Investors Coalition, a group that is dedicated to opposing social and environmental activism by shareholders. Last summer, the Business Roundtable itself advocated for tightening the rules under which shareholders may submit and resubmit proposals.

The US Securities and Exchange Commission has dutifully incorporated these ideas into a proposed rulemaking, for which the comment period is currently open. In this context, the “purpose” statement may be viewed as just another phase in the programme to diminish the impact of socially responsible shareholders.

With this letter, the Roundtable can claim that there is no need for further legislative or regulatory action, because the corporate world is already on board. At the same time, it can begin to plead the case that shareholder social and environmental activism is unnecessary and, indeed, that shareholders deserve lower priority for their socially responsible interests.

On balance, the business and human rights community has reacted to the Roundtable’s letter with cautious optimism. It seems likely, however, that this is simply an attempt to dupe them. We may be better served by adhering to the advice, “Beware of Titans bearing gifts”.