Corporate Expansion and Shift Has Investors Concerned

The Business Roundtable (BR) revised its statement of purpose in August; serving shareholders will no longer be corporations’ main purpose. Instead, the scope has been expanded to include customers, employees, suppliers and communities. As a result, investors are concerned about this change, and how it may affect financial reporting and directors’ legal obligations.

An Overview

With more than 15 million employees and $7 trillion in annual revenues, the BR is an association of CEOs from America’s largest companies. Its new statement of purpose calls for corporations to:

• Deliver value to customers
• Invest in employees
• Deal fairly and ethically with suppliers
• Support their communities
• Generate long-term value for shareholders

The BR reaffirmed members’ commitment to shareholders in a recent blog: “We fully expect that shareholders will continue to hold companies accountable if they fail to generate long-term returns. However, our companies are also challenging themselves to do more,” it stated.

CEOs Take on Investors

Investors are increasing demands for improved and more social responsibility from corporations. The Council of Institutional Investors (CII), however, took issue with characterizing shareholders as capital providers, rather than owners. The CII, which represents pension funds, endowments and charities with combined assets of more than $4 trillion, criticized that the BR statement undercuts board and CEO accountability to shareholders.

“[The CII] believes boards and managers need to sustain a focus on long-term shareholder value,” said Kenneth Bertsch, Executive Director. “To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.”

The BR announcement stated that all of its stakeholders would be accountable. However, accountability to everyone means accountability to no one, responded the CII. The CII contends that government, not companies, should shoulder the responsibility of addressing societal objectives with limited or no connection to long-term shareholder value.

“While it is important for boards and management to have and articulate long-term vision, and sustain focus on the long-term strategy where they have strong conviction, a fundamental strength of the U.S. economy has been and continues to be efficient allocation of equity capital,” added the CII. “If ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.”

How CEOs will resolve conflicts between stakeholder and shareholder interests remains unclear. A recent BR blog responded to that concern, stating, “while we acknowledge that different stakeholders may have competing interests in the short term, it is important to recognize that the interests of all stakeholders are inseparable in the long term.”

When a company decides to raise the minimum wage, for example, it may affect short-term profits at first. But the new policies could also provide a substantial value to the company because it attracts and retains long-term employees.

Link to ESG Disclosures

Some legal experts believe the new BR statement could potentially affect corporate environmental, social and governance disclosure (ESG) matters and board of directors’ fiduciary duties. They hypothesize that the BR’s new statement of purpose could fuel investors’ expectations for more-detailed ESG disclosures about human capital management, political lobbying and spending and climate change.

The BR statement does not alter a director’s duty of care — that’s in the hands of legislatures and courts. But it could evolve into a separate duty that would require boards to balance corporation and shareholder related responsibilities with its duties to other stakeholders.

Also, the business judgement rule is not affected by the BR statement. Directors should be protected under the law as long as they act in good faith, on a fully informed basis and aren’t grossly negligent when making decisions.

Times Have Changed

Even if a company is not large enough to be a part of the BR, corporations in the 21st century must consider social responsibility when making new decisions.

Determining Materiality

More disclosures are expected from the BR statement of purpose regarding the environmental, social and governance issues. However, when CPAs attest to subject matters that can’t be measured — such as sustainability programs, employee education initiatives or fair labor practices — how do they determine materiality?

That question is at the heart of a recent AICPA discussion paper, “Materiality Considerations for Attestation Engagements Involving Aspects of Subject Matters That Cannot Be Quantitatively Measured.” Comments on the paper are due by October 31.

“In today’s world, stakeholders are placing great importance on information about an entity in addition to that which is traditionally provided in historical financial statements,” said Robert Dohrer, AICPA Chief Auditor. “When providing assurance services, it’s important that practitioners understand what information will most significantly impact stakeholders’ decision-making process, which is central to a practitioner’s consideration of engagement materiality. In that spirit, we are asking for comments about how users of such information and practitioners consider ‘materiality’ with respect to subject matter that cannot be quantitatively measured.”

The term “stakeholders” under the expanded BR statement could refer to more than just investors; it could also mean customers, employees, suppliers and communities ― many groups to consider when determining materiality.

If you have questions or concerns regarding the decision that serving shareholders will no longer be the main purpose for corporations, contact us and we can help explain how it could potentially affect financial reporting and directors’ legal obligations.

© 2019