Corporate Governance

Shearman & Sterling LLP 4 | Governance Amid Crisis – How 2020 Changed the Boardroom Before the COVID-19 pandemic captured national attention and leading into the 2020 proxy season, there were a number of key developments in the debate over the role of the corporation that bear mentioning. Business Roundtable Statement In August 2019, the Business Roundtable issued its Statement on the Purpose of a Corporation, which it characterized as the outline of a modern standard of corporate responsibility. Signed by 181 CEOs of the largest public companies, the statement was perceived to be extraordinary in its rejection of the shareholder primacy model, which has been the guiding principal of corporate governance for decades. The statement starts with a defense of free-market capitalism, asserting that it is "the best means of generating good jobs, a strong and sustainable economy, a healthy environment and economic opportunity for all." Instead of asserting that shareholder primacy and free market capitalism alone will deliver on these promises, it goes on to state that all corporations, regardless of industry, share a fundamental commitment to all "stakeholders," naming customers, employees, suppliers and communities, in addition to a company's own shareholders. With respect to employees, the statement stresses a corporation's commitment to fair compensation, important benefits, training and education for a changing world and the fostering of diversity and inclusion. With respect to communities, it notes that the signatories protect the environment by embracing sustainable practices. With respect to shareholders, the statement promises a commitment to long- term value generation, coupled with transparency and engagement. The statement is only a page long, but it is notable for its widespread adoption and commentary. In part, the statement is a predictable public reaction to the criticisms that have been leveled against corporations for not doing more to address notable global challenges, including climate change, diversity at the highest levels of corporations and income inequality. Certainly, the ESG movement and the increasing engagement with shareholders on ESG topics, as well as vocal calls from investors to embrace a greater corporate "purpose" and sustainable business models, must have been driving factors. But the real challenge for the signatories and other corporations that embrace the statement is how they will demonstrate the commitment to the themes and specific actions laid out in the statement in the way they run their companies every day. There would certainly seem to be substantial room for critics to point to the statement and take companies to task for not meeting its lofty aspirations. Also significant is the emphasis on engagement with shareholders. Criticism of stakeholder governance has often been based on the notion that corporate boards and managers, given too much leeway to consider other factors would engage in activities that enrich themselves or cultivate special interests at the expense of shareholders. In a sense, the fact that a meaningful ownership percentage of the largest public companies has become concentrated in the hands of institutional owners that are increasingly vocal, influential and critical makes this moment possible. Armed with this influence, and the commitment of companies to engage, shareholders can perhaps safely focus on the long term and allow companies to take into account these "ESG considerations" as they develop a strategy for sustainable long- term growth.

• Cover