In 2019, the Business Roundtable (BRT), a nonprofit lobbying group of more than 200 corporate CEOs, issued a “Statement on the Purpose of a Corporation.”
The 181 signatories to the statement committed to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities, and shareholders. “This was a big deal,” says Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. “It’s the first time they’ve done this in modern history.”
Intrigued by the announcement, Rajgopal asked: What does it mean to be stakeholder-friendly? “It’s really difficult to be good to everybody,” Rajgopal says. He cites Costco as an example: “Customers love Costco because of the great prices, and the quality is fabulous. Employees love Costco because they pay well. But the reason customers and shareholders are happy is that they're squeezing their suppliers.”
Recognizing this unique challenge, he wanted to examine how many of the BRT statement’s signatories were successful in prioritizing all of their stakeholders.
Key Takeaways:
- Signatories of the BRT’s “Statement on the Purpose of a Corporation” showed no evidence that they engaged in stakeholder-centric practices before or after signing the statement.
- In fact, the signatories performed worse than their non-signatory counterparts.
- There are no mechanisms to enforce these pledges, so it falls to consumers to choose to engage with companies that are meeting their commitments.
How the research was done: “The methodological challenge was, how do you test the statement that we are going to be good to everybody?” Rajgopal says. To analyze the signatories’ actions, the researchers identified the publicly listed firms that signed the BRT statement and cross-verified their track record with stakeholders other than shareholders. “Testing this is very hard,” says Rajgopal, “so we looked at each company’s violation records across regulatory agencies that are supposed to safeguard stakeholder interests. For instance, if it's the environment, we looked at the EPA; if it's labor, we looked at OSHA; if it's anything to do with shareholders and fiscal bad behavior, you look at the SEC, DOJ, FTC, and so on.”
The researchers focused their analysis on ESG measures based on compliance with environmental and labor laws, CEO compensation, board composition, and the balance of power between management and shareholders.
In their analysis, they asked two main questions: First, whether signatory firms were already leaders in stakeholder-centric treatment prior to signing the statement and, if not, whether signing the statement reflected a genuine commitment to change as evidenced by performance improvements in ESG measures.
What the researchers found: “Our findings are sobering,” the researchers wrote in their paper. Their analysis found no evidence that statement signatories engaged in such stakeholder-centric practices before or after signing. In fact, compared to similar corporations that didn’t make the commitment to the BRT, signatories violated environmental and labor laws more frequently, had higher carbon emissions, relied more on government subsidies, and were more likely to disagree with proxy recommendations on shareholder proposals. Moreover, the researchers didn’t see any improvements in the companies’ practices post-signing.
Why it matters: ESG ratings and other “socially conscious” commitments notoriously lack consistency. “With this research, it’s no longer a free for all,” says Rajgopal.
This paper contributes to Rajgopal’s greater body of work revealing the shortcomings of these types of commitments. “There’s an accumulating body of evidence that suggests that these pledges about being a responsible member of society are not actually being followed through,” Rajgopal says. “And that's quite serious. If you're discussing the role of business in society, and if you have no way to make people accountable for the commitments they make, then why bother with it?”
Until there’s an enforceable mechanism, he says, the best remaining option is for customers to leverage their expectations against companies that aren’t meeting their commitments as a socially conscious business. It’s limited by the information customers can access, but he points to the boycotts against Nike, when it was revealed that it used child labor, and the organic movement as successful examples. “The customer is very powerful,” he says.
Adapted from “Do Socially Responsible Firms Walk the Talk?” by Aneesh Raghunandan of the London School of Economics and Shivaram Rajgopal of Columbia Business School.
