The (Re)Purposing of the Corporation: What Compensation Professionals Need to Know about the Business Roundtable Statement
The Business Roundtable, a US-based association of high-profile CEOs with the mission of “promoting a thriving U.S. economy and expanded opportunity for all Americans through sound public policy,” made a bold statement on August 19. What was their assertion? That shareholder primacy—the idea that a corporation exists primarily to serve its shareholders—isn’t suitable for our modern era. Instead, corporations must take into account all of their stakeholders, including shareholders, employees, customers, suppliers, and their communities at large.
Interesting, right? It’s not actually a new concept, and it reminds me of sitting for my first course years ago as an American business student in England. Those early days abroad are mostly a blur to me now, but I vividly recall my own surprise when the professor contrasted the shareholder primacy model dominant in the US and UK with the stakeholder orientation that’s more prominent elsewhere in Europe.
Momentum behind the Stakeholder Framework
Anytime CEOs of companies like JP Morgan and Johnson & Johnson band together to challenge a deep-seated paradigm like shareholder primacy, you can plan for some headlines about it. That doesn’t necessarily make it real. But in this case, there does seem to be some genuine momentum.
Larry Fink of BlackRock has made his position known. In the last two annual letters to the companies BlackRock invests in, he challenged them to think about purpose more broadly than profit and to even use this macro passion to fuel their pursuit of long-run, sustainable growth.
Intel is also moving in this direction. During a recent webcast by the Integrated Reporting Council, I listened as Erika Kelley, the chipmaker’s external reporting manager, described expanding their 10-K to include all their forms of “capital”:
- Social and relationship
This more holistic discussion, Erika explained, allows management to tell a cleaner story about how they actually think about the business.
The Future of Shareholder Primacy
As we unpack this momentum and the statements business leaders make, we need to be specific about what it means. I see two possibilities:
The shareholder primacy framework crumbles. We transition to a stakeholder framework that mandates incorporation of stakeholder interests in decision-making in a more formal way.
The shareholder primacy framework stays—but in a more nuanced form. It reflects a view that the only sustainable way to drive shareholder value creation is by pursuing long-run, balanced relationships with customers, employees, communities, and suppliers.
I’m not ready to wager a prediction, but it’s worth noting that our entire legal and economic system is not set up to abandon the shareholder primacy framework. Whether we should initiate that abandonment is quite simply above my pay grade. Structural challenges aside, however, it does seem to hold that the way to maximize shareholder value in our current age is to embrace a more holistic view of an organization’s stakeholders.
This has massive implications for all of us who spend our time in compensation and related areas of human capital management.
What it Means for Compensation
If you’re reading this article, you probably spend a lot of time speaking to senior executives and boards about compensation. You’re charged with developing innovative incentive programs to help drive your organization’s strategy, keep the organization compliant, and stay abreast of changes. As the shareholder primacy paradigm continues to evolve, here are some things to consider:
1. How should compensation support an evolution toward a more formal balancing of customer, employee, community, and supplier needs? If these constituents are really so important, should metrics be added to the short-term or long-term plan?
Our view: The problem is that measurability is tough and goal-setting even tougher. What’s more, many of these areas will show meaningful progress only over a period of time that exceeds the current best practice of three-year performance periods. Nonetheless, traditional three-year metrics tied to earnings per share (EPS), cash flow, and total shareholder return (TSR) may fail to send a meaningful signal. To mitigate this difficulty, we often suggest considering whether including a qualitative metric in the short-term plan would add value.
With the recent changes to Section 162(m), it’s easier than ever to add a more qualitative or holistic metric into the short-term plan. The bigger question, then, is whether the metric is objective and measurable enough to be meaningful.
2. How should the board oversee stakeholder needs? To that end, how can compensation leaders proactively keep the board apprised and well-informed?
Our view: The devil is in the details as there really are multiple questions on the table. For instance, what’s an issue for the full board versus the compensation committee? Should compensation committees broaden their charters to cover all of human capital management? If so, what information will the board or compensation committee of the board need in order to adequately oversee deeply complex matters like corporate culture and diversity and inclusion (D&I)?
We do believe the board should be interested in human capital management beyond the C-suite. But we’re equally sensitive to the reality that board members aren’t spending hours every week walking the halls and acquiring the context needed to exercise oversight over the entire human capital value chain. These are very firm-specific questions, so the right answer will likely differ by organization. At a minimum, we’re seeing CHROs prep their compensation committees with more holistic insight on topics like pay equity and D&I. Other environmental, social, and governance issues are already hot topics of discussion—and often at the full board level.
We favor proactive efforts to bring information to the board instead of waiting to be asked for it.
3. Are there metrics that are more or less suited to evolutions in the shareholder primacy framework? What does this suggest about popular metrics like TSR, EPS, and return on invested capital (ROIC)?
Our view: Again, we don’t expect to see a surge in targets relating to customers, employees, suppliers, and communities. So we might ask which of the more traditional metrics and equity vehicles can support a broader conception of who a firm’s key stakeholders are.
TSR is one. Remember, TSR encompasses everything, because it’s the market’s expectation of an organization’s future. If profits are high in the current period—but the firm is embroiled in an awful scandal, recently had a major product safety issue, or is overly concentrated in an industry that is degrading the environment—all of this will show up in TSR. In contrast, it won’t show up in more traditional metrics like ROIC and EPS because these metrics reflect what’s happened in the past.
4. What non-financial metrics are companies considering? If they’re tough to measure, is there still a reason to try them?
Our view: Yes, there’s a reason, but with an important caveat. Compensation committees often start a dialogue by saying they want to be bold and different. However, once they see peer data suggesting nobody else is doing the same bold or different thing, enthusiasm often fizzles. In other words, it’s tough and risky to be different.
We’ve spent a lot of time talking to clients about strategic and transformative metrics. Microsoft is widely regarded as the poster child of transformative metrics as they’ve linked incentives to strategic priorities like cloud adoption rates, LinkedIn sessions, and Windows 10 devices. However, you need to decide whether to make the transformative metric short-run or long-run, and how you’ll set rigorous goals that you expect will be tied to shareholder value creation.
Shorter-term metrics are by their very nature less transformative, but easier to set goals for. We’ve seen many companies set transformative metrics (e.g., one prominent company linked its short-term incentive plan to revenue from “next-generation” services). Some achieve high payouts only for shareholders to lose a lot of money over the same time period. This is why we think TSR works very elegantly with other metrics, especially non-financial metrics.
5. Is this evolution in the shareholder primacy paradigm too big and too complex to really apply to a compensation function? In other words, maybe it’s prudent to stay on the sidelines as these structural shifts unfold.
Our view: Yes, this is heavy stuff. I’m the first to acknowledge that a wholesale undoing of the shareholder primacy framework is very hard to fathom in light of ingrained legal and economic structures in the US.
But as corporate leaders emphasize how employees, customers, suppliers, and communities support value generation, we argue that the employee equation is a gateway to everything else. Motivated, retained, and fulfilled employees are the instruments through which responsible supplier relationships are formed, customers are delighted, and communities are enriched. The human element really matters, and we think that boards are particularly interested in understanding how to manage the firm’s human capital more effectively.
Compensation leaders can have an enormous impact here. For instance, we work with more and more clients on pay equity studies and D&I monitoring. Boards are also asking more and more questions on these topics. Neither pay equity nor D&I should be once-and-done matters; annual analyses that include understanding root causes and testing whether prior initiatives moved the needle are critical.
Business is certainly much more than maximizing profits to shareholders. To me, sitting in that lecture hall in England all those years ago, the stakeholder framework was simply a definition in a textbook—a theoretical abstraction. Today, as someone who has built a career in compensation and leads an organization committed to creating fulfilling employee experiences, partnering with diverse suppliers, delighting customers, and participating in community life, this question is deeply personal.
And I think it’s deeply personal for all of us. Let’s keep the dialogue going.