One of the first acts of new Wells Fargo CEO Charlie Scharf when he joined the bank last October was to sign onto the new Statement on the Purpose of a Corporation promoted by the Business Roundtable.
A few months earlier, more than 180 CEOs had declared a new era in which they would pay more attention to stakeholders like customers, employees, suppliers and communities, as well as shareholders.
Now, it seems, Wells Fargo has decided, on the advice of its lawyers, to keep prioritizing shareholders over those other stakeholders, giving the lie to much of the talk around the new purpose of corporations.
Wells Fargo’s actions, in the form of a request to the Securities and Exchange Commission to bar a shareholder resolution from consideration at its annual meeting this spring, highlights a dubious claim hidden in the Business Roundtable’s statement.
The Statement and related material released by the Roundtable imply that, in the long run, the interests of a corporation’s shareholders and stakeholders never diverge; they are “inseparable.” The way to help shareholders, so the claim goes, is to help stakeholders, and vice versa.
If true, this would be very convenient. There would be no need to make any difficult choices between shareholders and stakeholders, and you might wonder what all the fuss was about.
Of course, the claim is clearly not true. Consider the extra profits created by the corporate tax cuts in the 2017 tax legislation. Share prices are way up, but not wages. The interests of workers and shareholders obviously diverge on this question.
There is no doubt that companies often can do well by shareholders by doing good for stakeholders. Companies and asset managers sometimes hail this somewhat banal idea as a new paradigm, reflected not only in the Roundtable’s statement but also in the Davos Manifesto and BlackRock CEO Larry Fink’s letters to clients and CEO’s. The pomp allows them to distract us from the fact that sometimes a business should indeed sacrifice even long-term shareholder value if that value is earned by exploiting common resources or vulnerable people.
If corporations actually intend to reject the doctrine of shareholder primacy, the rule that puts the financial interests of shareholders first, they can enshrine that commitment by becoming benefit corporations. Benefit corporations, allowed in most states, are required to account for the interests of all stakeholders, even if that means sometimes subordinating shareholders’ financial interests. (Editor’s note: state legislation that creates benefit corporations is distinct from certification as a ‘B Corp.’ by the nonprofit B Lab, where the author served head of legal policy).
And this is where it gets interesting: after Wells Fargo signed the statement, a shareholder asked the bank to hold a shareholder vote on a proposal to study becoming a benefit corporation. Rather than letting the shareholders speak, Wells Fargo commissioned the Richards, Layton law firm in Delaware to study the idea. This allowed them to argue to the SEC that there was no need for a shareholder vote.
The law firm reported it would be a mistake to become a benefit corporation and reject shareholder primacy.
“The directors of Delaware corporations . . . may (and often do) consider the interests of other stakeholders of the corporation so long as any decisions made with respect to such stakeholders are in the best interests of the corporation and its stockholders,” the report states.
“As a result, there would likely be some uncertainty regarding decision-making in a public benefit corporation . . . where the interests of stockholders and other stakeholders or the public benefit diverge.”
That is to say, contrary to the Roundtable claim, corporate law assumes that the interests of a company’s shareholders and its stakeholders do diverge. When that happens, Wells Fargo’s lawyers say, shareholders win.
By becoming a benefit corporation, Wells Fargo could reject shareholder primacy and follow a path to authentic change. Instead, Wells Fargo signed onto the Business Roundtable statement and claimed the mantle of stakeholder champion, but kept a legal structure that prioritizes only shareholders.
Why didn’t Wells Fargo let shareholders even consider the issue? As it happens, shareholders are beginning to notice that shareholder primacy isn’t so great for them. Most investors hold broadly diversified portfolios and rely on their job as their primary financial asset. They need a healthy economy and planet in order to have solid portfolio returns, decent wages and good lives. They know that some companies need to surrender shareholder value in order to preserve the critical systems we all rely on (think coal, oil, tobacco and, not coincidentally, large financial institutions that threaten systemic stability).
This broad perspective leads at least some shareholders to agitate for companies to put the planet and people before profits. So if shareholders might have been interested in legally rejecting shareholder primacy, why did the management of Wells Fargo resist? Who benefits from preserving the sole focus on the share value of individual companies?
And if company value and stakeholder governance diverge, why do the CEOs and billionaires who attend Davos insist they aren’t really so different?
Here’s a thought: unlike a Main Street investor, a corporate executive’s wealth often depends almost entirely on one company—the one they manage. This is certainly true of the new Wells Fargo CEO. In addition to $2.5 million in cash and a target bonus of $5 million, Scharf’s annual compensation will include up to $15.5 million in stock or stock equivalents. He also gets $26 million in stock for signing on, for a total of more than $41 million in stock in his first year.
This is not to single him out; that is what CEOs get these days. For all the talk about sustainability, it is still share price that is rewarded. This is true for CEOs, directors, money managers and many others in our financial system. They are judged on and rewarded for high stock prices at individual companies, even when those increased prices come at the expense of our planet and economy.
The Richards, Layton report and Wells Fargo have revealed the truth about corporate priorities. It may be time for more shareholders to start asking about the benefit corporation option.
Until corporations prioritize our environment and human beings over financial return, the chatter about stakeholders will be just so much noise.
Frederick Alexander is a founding partner and CEO of The Shareholder Commons and author of Benefit Corporation Law and Governance: Pursuing Profit with Purpose.