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Business Roundtable on Corporate Governance in 1997 and 2019 Term Paper

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BRT Statements from the Normative Perspective

The Business Roundtable (BRT) 1997 Statement on Corporate Governance may serve as a case-study in stockholder theory. It stresses that a corporation’s primary objective is increasing its market value, which is why its primary social obligation is responding promptly “to situations that may directly affect stockholder value” (Business Roundtable [BRT], 1997, 1). This perspective is fully in line with the basic tenets of normative stockholder theory as defined by Hasnas – that managers are “agents for the stockholders,” and their social responsibility is to stockholders alone (1998, 21).

The 1997 Statement does not elaborate on possible collision between ethical obligations to stakeholders and ethical principles of larger society. The document only offers truisms such as “it is in the long-term interests of stockholders for a corporation to treat its employees well” (BRT, 1997, 3). Thus, while stressing ethical obligation to achieve economic goals for stockholders, the Statement underscores its potential ethical complications.

The 2019 Statement on the Purpose of a Corporation champions the values of the stakeholder theory. The document states that the corporations “share a fundamental commitment to all of [their] stakeholders,” and even underlines the word “all” for additional emphasis (BRT, 2019, 1). It also notes that each stakeholder is “essential,” and the stockholders only occupy the fifth and last position in the list offered – after customers, employees, suppliers, and communities (BRT, 2019, 1).

This approach demonstrates a sharp contrast to that of 1997 and is a clear example of the normative stakeholder theory. It maintains that all groups involved in a firm’s activities have notable interests, and there is “no prima facie priority of one set of interests and benefits over another” (Donaldson and Preston, 1995, 68). Thus, the social responsibility of a corporation is not only to its shareholders but to all groups participating in the business processes.

If one judges both documents based on the central premise of the normative perspective – that the corporations should assume social responsibility because it is ethically necessary – one will find out that the 1997 statement lacking. It is normative in a technical sense, as it rationalizes the corporations’ obligations to their shareholders in ethical rather than purely practical terms. However, the document still arrives to profit as the ultimate rationale and declares higher stock value its ultimate purpose.

Essentially, is implies that “value maximization leads to [an]… efficient solution” regarding CSR which is why pursuing higher stock value should theoretically result in social benefits for everyone involved (Jensen, 2002, 240). Thus, the 1997 Statement first declares a purely financial goal and then assigns a supposed social benefit to it. As a result, its normative character is not inherent, but secondary to the economic goals– “profitable first and right second.”

The 2019 Statement, on the other hand, seems rooted in the normative perspective on CSR in a more fundamental way. It immediately begins with an ethical premise that “Americans deserve an economy” promoting opportunities and dignity, and then derives principles form this ethical obligation (BRT, 2019, 1). Even though the word “ethics” or its derivatives only appears once in “dealing fairly and ethically with [the] suppliers,” the overall character of the document reveals a clear emphasis on “right” rather than merely “profitable.”

Unlike the Statement of 1997, the recent document does not portray the fair dealing with the employees, suppliers, customers, or communities as a side effect of profitable business practices. Rather, it perceives them as the major driving force behind doing business as an American corporation. Thus, the new Statement is closer to the spirit of the normative approach with its emphasis on doing what is right.

One may object that the 1997 Statement does not demonstrate an exclusive commitment to shareholders and recognizes the interests of other stakeholders as well. Indeed, the document mentions the stakeholder theory and suggests that the managers should not discount the interests of stakeholders other than the stockholders (BRT, 1997, 3). However, the Statement immediately clarifies that “the interests of other stakeholders are relevant as a derivative of the duty to stockholders” (BRT, 1997, 3).

This position stands in direct contradiction with one of the basic premises of stakeholder theory: that “the interests of all stakeholders are of intrinsic value” (Donaldson and Preston, 1995, 67). As a result, the recognition of stakeholder theory in the document remains a pure technicality. All the basic premises of the 1997 Statement remain firmly rooted in the stockholder theory, which is why it may serve as a textbook example of this theory in action.

Reactions to the 2019 Statement

Pistor’s article titled “Why America’s CEOs Have Turned Against Shareholders” is an interesting example of the criticism received by the 2019 Statement. The author’s basic premise is that discussing whether the turn from the stockholder theory to stakeholder theory obscures the larger problem: “America’s corporate leaders believe they can decide freely whom they serve” (Pistor, 2019). From Pistor’s perspective, this situation is fundamentally wrong, as the firm managers should act as agents of the corporations’ shareholders instead of choosing their own agenda at will.

When she criticizes American CEOs for remaining on the board “for years on end” together with the executives they appoint, she appeals to the corporate governance principles (Pistor, 2019). Considering this, one may interpret Pistor’s criticism as an example of the normative shareholder theory, as the author stresses the managers’ ethical obligations embodied in the corporate governance principles.

Apart from that, one may also interpret Pistor’s article as a very specific and peculiar kind of the right-wing criticism of CSR. As mentioned above, the author’s central point is that the CEOs conviction that “they can choose their own masters” is fundamentally wrong and unacceptable (Pistor, 2019). As far as she is concerned, the decision to shift from the stockholder theory to the stakeholder theory as a guiding principle is merely a manifestation of this negative development. Yet even though this is not the author’s man idea, her position still amounts to the opinion that the corporation ought not assume CSR without consulting their shareholders. In this sense, Pistor’s article gravitates toward the right wing of the critical spectrum, although this is not the text’s defining feature.

In the article “If Business Roundtable CEOs Are Serious about Reform, Here’s What They Should Do,” Summers demonstrates another approach to the issue. His primary focus is on how the corporations should implement the proclaimed changes. One of his concerns is “what role does the United States have as a stakeholder” in the corporate future envisaged in the 2019 statement (Summers, 2019). Considering this attention to the state as an actor, it should not be surprising that Summers focuses closely on legal aspects.

According to him, the CEOs should not merely declare stakeholder theory as their guiding principle, but also “push for laws and regulations that support firms’ ability to stand up for their stakeholders” (Summers, 2019). Hence, Summer’s reaction to the 2019 Statement is a clear example of legal stakeholder theory: corporations should assume social responsibility insofar as it is legal, and expanding this responsibility requires corresponding legislation.

One more source that examines and criticizes the 2019 Statement is Olson’s “Corporate Happy Talk and the Duty of Shareholder Loyalty.” In this article, the author points out that the proclaimed adherence to the interests of all stakeholders is a mere declaration. He stresses that corporate governance principles, however well-intentioned and polished, are not obligations that someone may legally enforce.

It is the corporate law that constitutes “a system of rights and corresponding duties that [one] can take to court,” and the proclaimed duties outside of this framework are not truly obligatory (Olson, 2019). Thus, Olson’s principal concern is that the new document proclaims responsibilities aside from legal, and pursuing these responsibilities may harm the legally protected interests of shareholders. Therefore, the article represents the legal stockholder theory by stressing that the companies are obliged by law to serve the interests of their shareholders.

There is, however, yet another dimension to Olson’s interpretation of the 2019 Statement. It reveals itself when the author discusses potential practical effects of the new self-imposed and non-legal obligations assumed by the corporations. From his perspective, the main practical implication of the new Statement is “eroding the legal duty of loyalty currently owed to the investors who put up the capital” (Olson, 2019).

He points out that the corporations may use the interests of the stakeholders who do not own their stocks to perform actions that harm the overall interests of the shareholders Olson, 2019). Thus, as far as the author is concerned, assuming wider CSR is not a doubtful initiative mot merely because it put informal obligations before the legal ones. Olson’s article may also serve as an example of the right-wing criticism of CSR – that corporations ought not to assume social responsibility harming shareholder interests.

Finally, yet another reaction to the 2019 Statement is Pitt’s “A Bunch of CEOs Want to Fix Capitalism. You Can’t Fix Anything Built on Slavery.” The author declares it highly unlikely that the businesses will make any decisions that do not serve their economic or political interests. According to him, it is inconceivable even to think that wealthy and influential CEOs would “throw sand in the gears of a system that has served them so well” (Pitt, 2019).

Pitt prefers to view the recent shift in corporate governance and CSR not to any ethical considerations, but to the purely practical reasons grounded in politics. He points out that the new Statement comes precisely when both Democratic forerunners for the presidency “have made breaking the grip of corporate and shareholder greed the hood ornaments of their campaigns” (Pitt, 2019). Under these political circumstances, it is beneficial for the CEOs of large companies to step forth with the initiative of their own to appear responsible citizens and receive positive PR. Thus, Pitt’s article embodies the leftist criticisms of CSR: companies will nor assume social responsibility unless it is profitable o good PR.

Works Cited

The Business Roundtable. , 1997.” European Corporate Governance Institute. Web.

—. “Statement on the Purpose of a Corporation.” Business Roundtable. 2019. Web.

Donaldson, Thomas, and Preston, Lee. E. “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.” The Academy of Management Review, vol. 20, no. 1, 1995, pp. 65-91.

Hasnas, John. “The Normative Theories of Business Ethics: A Guide for the Perplexed.” Business Ethics Quarterly, vol. 8, no. 1, 1998, pp. 19-42.

Jensen, Michael C. “Value Maximization, Stakeholder Theory, and the Corporate Objective Function.” Business Ethics Quarterly, vol. 12, no. 2, 2002, pp. 235-256.

Olson, Walter. “Cato Institute. 2019. Web.

Pistor, Katharina. “Project Syndicate. 2019. Web.

Pitt, William Rivers. “Truthout. 2019. Web.

Stout, Lynn A. “The Problem of Corporate Purpose.” Issues in Governance Studies, vol. 48, 2012, pp. 1-14.

Summers, Lawrence H. “Larry Summers. 2019. Web.

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