ImpactAlpha, Aug. 19 – The next dominoes to fall in the new logic of stakeholder capitalism: outmoded conceptions of ‘fiduciary duty’ and ‘materiality.’
The latest episode of ImpactAlpha’s Returns on Investment podcast took up the strategic impact of the revised statement of corporate purpose signed by 181 CEO members of the Business Roundtable.
“It’s a tactical victory. Let’s go from win to win,” I argued in the podcast’s, uh, roundtable discussion.
The logic: By embracing the interests of customers, employees, suppliers and communities, along with shareholders, as ‘stakeholders’ that corporate managers must respect and serve, the Business Roundtable statement makes such interests material to the long-term performance of those corporations.
That’s the argument that has long been made by advocates for consideration of so-called ESG factors (for environmental, social and governance) that are steadily working their way into corporate reporting and investor due diligence. Networks such as the Sustainable Accounting Standards Board have documented the “materiality” of such factors on an industry-by-industry basis (here’s a handy “materiality map” for 11 industrial sectors). Generally speaking, factors deemed material must be disclosed to investors on a timely basis.
If corporations deem such factors material and report them, investors may well be duty-bound to consider them as well. Logically speaking, it could be a dereliction of fiduciary duty not to account for factors that previously were seen as externalities. That is, if corporations think their long-term success depends on the success of a broader set of stakeholders, fiduciaries would likewise seem duty-bound to consider such impacts.
The materiality question has implications for policy and regulatory guidance, specifically for pension plans governed under the Employee Retirement Income Security Act, or ERISA. The Trump administration has been seeking to walk back guidance issued in the Obama administration (which itself reversed Bush-era guidelines that had reversed Clinton-era reforms).
The “materiality” question also bears on Labor Dept. guidance that has warned pension plan managers not to spend too much time or money on “shareholder engagement” activities unless they directly affect economic performance.
Podcast roundtable regulars Imogen Rose-Smith and Brian Walsh cautioned that the 300-word statement might hardly mean all that. In fact, the double-reverse reading of the CEOs’ move is that the intent may well have been to weaken the voice of shareholders, who have been seeking to hold corporate managers accountable for everything from climate risk to executive compensation.
“You’re too willing to declare victory,” Rose-Smith told me. The new statement of corporate purpose is more likely a strategic move in the long-running battle between shareholders and corporate management, she said. “I don’t think a bunch of corporations saying, “Yes, we care,” is the victory you say it is. At best it’s accepting that there has been a shift in the discourse.”
That shift in the discourse, I argued, is precisely the point. “At a historical-restructuring-of-power level, the other side blinked,” I argued. “They’re feeling some heat. That heat is what we have to turn up.”