It was one year ago that the Business Roundtable, an influential group of CEOs of large American companies, reversed its commitment to the “primacy” of shareholders, endorsing instead “a fundamental commitment to all of our stakeholders.” This pivot arose from a landmark shift in thinking about the role of corporations in a free market economy, in which corporate leaders are recognizing the importance of long-term value over short-term expediency and the absolute necessity of a more inclusive prosperity.

It’s well-settled law that directors and officers of Canadian companies owe no duty to shareholders in particular. They’re required to act in the best interests of the company itself, taking into account the interests of relevant stakeholders. But the debate over what a commitment to stakeholders other than shareholders actually means, how it can be enforced, and what “long-term value” and “sustainability” mean to any given corporation and the economy as a whole endures. And with global investors with significant capital now demanding that corporations demonstrate a commitment to sustainable and responsible environmental, social and governance practices, theoretical discussions of corporate value creation have moved to the forefront.

Corporations, corporate boards and corporate leadership will now have to discern more carefully what a corporation’s interests and impacts are in a way that guides their decisions. And if financial results are not the only measure of success in achieving a corporation’s purpose, they will have to find a reliable and consistent method of accounting for and disclosing non-financial results.

Into this unsettled time for corporate governance comes the “benefit company,” a new form of corporate vehicle in Canada, now available under British Columbia’s corporate statute. Following in the footsteps of 36 U.S. states, Canadian businesses now have a corporate vehicle for evolving stakeholder capitalism. Like a regular corporation that aims to generate profits, “benefit companies” must also promote one or more public benefits and, importantly, conduct business in a manner that is, in the words of the new law, “responsible and sustainable.” They must have a clear public purpose, enshrined in their articles, and they must pursue that purpose in a way that expressly takes into account the well-being of stakeholders and uses a fair and proportionate share of available resources, the determination of which is still to be interpreted.

Further, benefit companies are required to disclose an assessment of how they are meeting their stated public benefit objectives measured against a third-party standard. Unlike regular corporations, these are legal requirements, enforceable against the corporation by shareholders.

While the absence of the “primacy” of shareholders in our corporate law makes the need for benefit companies in Canada somewhat redundant, or at least less stark than in the United States, the deliberate push by global capital toward purposeful, long-term, sustainable corporate behaviour makes room for benefit companies even in Canada. The power of a benefit company’s shareholders to enforce the company’s commitments to purpose and sustainability, and the requirement to report publicly on non-financial results against a third-party standard, will add solidity and transparency to the goals and stakeholder considerations of benefit companies, even those that are not exposed to the same investor pressure as larger, public corporations.

In that sense, even if the need from a purely legal perspective is less pronounced, the benefit company comes to Canada at a convenient time.

The decision-making that lies at the heart of corporate governance has never been simple, and the resurgence of “stakeholder capitalism” is exposing some of the intricacies of how business judgment is, and should be, exercised when detached from shareholder primacy. Without considering other corporate stakeholders, Indigenous Peoples, the environment, as well as a range of social factors, focusing solely on “shareholder value” and “growth” fails to answer the key questions that corporate leaders inevitably face around “why” and “how” an organization should grow and generate value. The benefit company is aimed at answering those questions. And now Canadian corporations that choose to become benefit companies can give their boards and executives a purpose to guide their decisions.

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Some have passed the test with flying colours. The Business Roundtable itself formed a CEO COVID-19 Task Force dedicated to the crisis. One member, Salesforce, pledged not to lay off employees for 90 days, and Salesforce’s CEO spent $25 million on 50 million pieces of personal protective equipment for medical staff (with the help of Walmart, FedEx and others).

Many other CEOs have displayed an all-too-rare selflessness. Five senior executives at Comcast, the U.S. telecoms and media giant, including CEO Brian Roberts, said they would donate their entire salaries “for the duration of this situation” to charities supporting COVID-19 relief efforts. Twitter’s CEO, Jack Dorsey, pledged $1 billion (28% of his wealth) to fund global COVID relief efforts.

As of late April, only 6% of the 100 largest American companies had handed out pink slips to their workers, according to JUST Capital’s COVID-19 corporate-response tracker. Many have cut dividends, not only to bolster their cash flows and balance sheets, but also in response to pressure from social and governance activists.

Several companies in Canada and around the world have implemented raises for frontline employees, be they food processors, bank tellers or grocery and retail workers. The Business Council of Canada has been keeping a tally of Canadian members that are stepping up financial and community support or retooling to deliver critical supplies. GM Canada is manufacturing roughly one million masks per month at its Oshawa plant and delivering them at cost to the federal government. Bombardier is delivering 18,000 ventilators and 40,000 visors.

European heavyweights have been rallying, too. Unilever, the consumer-goods giant, has not only donated US$155 million of soap, sanitizer, bleach and food, but also set aside US$775 million for early payments to small suppliers, and to extend credit to small retail customers. “Our strong cash flow and balance sheet mean that we can, and we should, give this support,” CEO Alan Jope said.

Zeroes

Sadly, plenty of bosses have unashamedly put their own interests first during the pandemic. Take Disney, which suspended pay for 100,000 workers at its theme parks but protected executive bonuses. Bob Iger, Disney’s chairman, earned US$47 million in 2019, or 900 times more than the median earnings of the company’s workers, the Financial Times calculated.

Similarly, the board of Denver-based shale oil producer Whiting Petroleum approved US$14.6 million in cash bonuses for top executives in late March, just days before it filed for bankruptcy protection. The CEO collected US$6.4 million, paid immediately.

Even where executives have made sacrifices, “I have a sense boards are doing the minimum necessary to shield themselves from reputational damage,” wrote Andrew Hill, the Financial Times’ management columnist. Examples abound of bosses taking 20% pay cuts, while junior staff have been laid off with nothing more to fall back on than government relief programs.

Some companies deserve a zero not so much for what they have done as how they did it. Bird, a Los Angeles–based start-up in the forefront of the scooter craze, invited staff working from home to log in to a Zoom session, whereupon an unnamed woman told them that more than 400 no longer had jobs. “Like everything we’re experiencing now, this is a suboptimal way to deliver this message,” the bearer of the bad news confessed. She allowed no questions.

Aramark, a big food and uniform services provider and a signatory of last year’s Business Roundtable pledge, is one of numerous companies that have laid off contract workers with no severance pay or rehiring timeline. Marriott, another Business Roundtable member, has told tens of thousands of hotel workers to take unpaid leave.

On another front, it’s hard to feel much sympathy for corporate leaders who have spent their lives telling government to get off their backs, only to pull out the begging bowl when the going gets tough.

Exhibit number one in the COVID-19 era is Sir Richard Branson, founder of the sprawling Virgin empire. Branson has paid no tax in his native U.K. since he moved his principal residence 14 years ago to the British Virgin Islands, where he owns a private island. Yet he has been quick to ask the British government for hundreds of millions of pounds to bail out Virgin Atlantic Airways. Virgin Australia asked a similar favour, but the government turned it down, forcing the airline into bankruptcy in late April. Alas, Virgin’s employees are set to suffer far more hardship than their boss.

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During this period of turbulence, stakeholders are looking to boards of directors to address the impacts of the coronavirus. How boards balance and prioritize those stakeholders has to shift with shifting circumstances, just as boards are forced to think about the long-term sustainability of their business.

Management and boards of directors will need to answer many complex questions:

• How does a corporation practise “social distancing” when not everyone can work at home (think manufacturing, hospitals, retail)?
• How can a company cope with radical decreases in demand (think hotels, airlines, oil and gas)?
• When production rates go down (think automotive manufacturing), how should companies treat their workforces?
• How can companies maintain robust supply chains when they can’t place any orders in the short term?
• How can companies satisfy specific covenants relating to their debt and manage the risk of default?
• If corporations address the interests of these other stakeholders, what does that mean for the shareholders – especially when these shareholders constitute the principal assets in everyone’s pension plans and retirement savings plans?

In what seems like a millennium ago, 181 CEOs of the U.S. Business Roundtable announced last August that they were disavowing shareholder primacy in favour of addressing the needs and interests of all stakeholders.

With the landmark 2008 BCE decision by the Supreme Court of Canada, corporate Canada already has the legal infrastructure it needs to account for the variety of often conflicting stakeholder interests. It held that the board of directors must act in the best interest of the corporation – a decision that gives boards of directors all the legal tools they need to address the needs of all stakeholders affected by their companies’ operations.

Yet, while the court held that “the duty of the directors to act in the best interests of the corporation comprehends a duty to treat individual stakeholders affected by corporate actions fairly and equitably,” the BCE decision was, in the end, a “board-friendly” decision. It would ultimately defer to the “business judgment rule,” providing that the directors’ decision is found to have been within the “range of reasonable choices that they could have made in weighing conflicting interests.”

The pandemic may cause us to rethink what a “reasonable choice” might be.

Historically, the determination of whether a board is discharging its duties responsibly has been assessed with reference to whether its actions would be consistent with general common practice. But the pandemic highlights that common practices, such as payment of extraordinary dividends or buying back shares that favour the shareholder, may have disadvantaged many other stakeholders in the past.

What does it mean to treat all stakeholders fairly and equitably? And how then does the corporation organize itself to respond to these unprecedented circumstances? We believe that companies should come up with a set of principles and practices to help them navigate these choices.

Setting up principles

Every choice that a board or management makes has trade-offs between the stakeholders embedded in it. The question is: how to break those trade-offs, or what to do when you can’t? In these circumstances, and especially at this moment of pandemic, we argue that the bottom line should not take priority but rather the sustainability of the corporation.

At the extreme, the current crisis may cause some corporations that are overleveraged to “hit the wall.” Even with the government supports being proposed, long-term sustainability may not be possible. Even here, the board should give serious consideration to human issues, such as stability of employment for workers.

Constructive practices

Boards can develop explicit and coherent plans for addressing the tensions created by trade-offs and standards for resolving competing stakeholder interests. We recommend that boards create social responsibility committees, much like audit committees and compensation committees that are already in place, to dissect the relationship of their corporations to their stakeholder groups. For companies that already prepare corporate responsibility reports (about half of TSX-listed companies do), this information is a good starting point.

To truly understand the trade-offs that company choices and operations create, the boards will likely have to engage directly with stakeholders to understand their needs and work collaboratively to generate resolutions to trade-offs. In the short term, these committees should enable corporations to be nimble and to move quickly to deal with the volatility generated by the pandemic.

These principles and practices would enable boards to see this crisis as an opportunity to explore innovative solutions that might be better for everyone, or for many.

Being forced to think hard about the needs of stakeholders may generate ideas that would not have been considered in the past. Addressing these trade-offs thoughtfully can be a source of organizational transformation. For example, many companies have managed to “keep the doors open” – providing continued employment for their employees – by altering their product offerings: hand sanitizers instead of whisky, protective gear instead of auto parts, takeout food instead of table service.

We are also discovering that new “work from home” practices are more inclusive for many people with disabilities, creating new methods for increasing workforce diversity. Telecommuting may help improve long-term efficiencies in the healthcare system, avoiding unnecessary trips to the doctor just to get a prescription, for example. Reductions in trade may shorten our supply chains, keeping our economies local.

Initiatives such as these reflect creativity and sensitivity in dealing with stakeholders. Shareholders may have to be patient to enjoy the benefits of this creativity.

In simple terms, the board has to act in the best interest of the corporation. The best interest of the corporation is not just to increase share price but to position the corporation to achieve its purpose: to continue in business. Maybe this crisis is, when it comes to corporate governance, a blessing in disguise: will it be the one that will finally gets Canadian companies to manage beyond the pressures of quarterly earnings calls and short-term stock performance?

Research suggests that companies with better performance on corporate social responsibility are also those that weather crises more successfully. At a time of crisis, trust from stakeholders is what really matters and is earned over time. These stakeholders may prove to be a better lifeline than any government crisis subsidy.

Acting in the interest of the corporation sounds simple, but it is far from simple. It requires a board that is knowledgeable, diligent and willing to use its best efforts to treat all stakeholders fairly. Boards that use this challenge as an opportunity to drive innovation will create the greatest success for the companies they guide.

Peter Dey is the chairman of Paradigm Capital and the author of the 1994 report “Where Were the Directors?”

Sarah Kaplan is a distinguished professor at the University of Toronto’s Rotman School of Management and author of The 360º Corporation: From Stakeholder Trade-offs to Transformation.

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Sadly, there is no shortage of choice for the title of Worst Company on Earth. A host of sweatshops surely qualify, as do any number of corrupt corporate kleptocracies, mismanaged monopolies, climate-action-obstructing fossil fuel companies, price-gouging pharmaceutical companies, weapons manufacturers…the list goes on.

The Washington, D.C.-based advocacy group Mighty Earth recently took a stab at identifying the ultimate bottom-feeder in environmental governance and decided to award the dubious honour to Cargill, the agri-food giant.

The rap sheet against Cargill, the U.S.’s largest privately owned company, is a long one. In the foreword to Mighty Earth’s 7,000-word report, former U.S. Democratic Congressman Henry Waxman writes: “The people who have been sickened or died from eating contaminated Cargill meat, the child laborers who grow the cocoa Cargill sells for the world’s chocolate, the Midwesterners who drink water polluted by Cargill, the Indigenous People displaced by vast deforestation to make way for Cargill’s animal feed, and the ordinary consumers who’ve paid more to put food on the dinner table because of Cargill’s financial malfeasance – all have felt the impact of this agribusiness giant. Their lives are worse for having come into contact with Cargill.”

The report is especially scathing in regard to Cargill’s role in vast deforestation in Brazil by farmers from whom it buys massive amounts of soybeans (which largely become livestock feed).

Nonetheless, the choice of Cargill is somewhat surprising. Environmental activists even lauded it in the past for agreeing to a moratorium on buying soybeans grown on land stripped of trees in the Amazon rainforest. Cargill received a Leadership in Environment award in 2015 from the Keystone Policy Center, a non-profit.

Cargill stoutly defends itself against Mighty Earth’s charges. It noted in a statement that it donated almost US$60 million to charities in 54 countries and has agreed to a zero-deforestation commitment over a period of time in its cocoa, palm oil and soybean supply chains.

“It’s hard to hear,” Ruth Kimmelshue, the company’s chief sustainability officer, told the New York Times. “It doesn’t feel very good.”

Indeed, some may argue that other companies have a stronger claim to be the world’s worst. But in an era when business people constantly pat each other on the back with awards for excellence, no matter how obscure the achievement, it’s not a bad idea to highlight at least some of those that fall short.

Heroes: Business Roundtable

In August 19, more than 180 of the U.S.’s most powerful businesses broke with a long tradition by pledging to serve not only their owners, but also workers, customers, suppliers and communities. The Business Roundtable, America’s most influential lobby group of corporate leaders, retreated from its longstanding position that corporations exist principally to serve their shareholders.

Yet even as they did so, there was no shortage of evidence that many of these companies – and others – remain squarely focused on maximizing profits and driving up the price of their shares.

On the very same day as the announcement, three tech giants – Amazon, Facebook and Google – vowed to fight a 3% “digital” tax that France imposed earlier this year to counter the companies’ unrelenting efforts to avoid paying their fair share of taxes. A week later, an Oklahoma judge ordered another Roundtable signatory, the pharmaceutical group Johnson & Johnson, to pay US$572 million for its role in causing the opioid crisis that, in his words, had “ravaged” the state.

These are hardly the signs one would expect of a more caring and inclusive business community.

Even so, the Roundtable’s statement signals a welcome break from the past. Its original 1997 mission statement declared, “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” The interests of other stakeholders, like employees or local communities, were only “relevant as a derivative of the duty to stockholders.”

Now, says the Roundtable, “Each of our stakeholders is essential.” To its credit, the new approach recognizes that rising public anger over issues like executive pay (and, more broadly, income inequality), climate change and the opioid crisis has sullied the reputation of business. As Jamie Dimon, JPMorgan Chase’s CEO and Roundtable chair, put it, “the American dream is alive, but fraying.”

The question is how effective the Roundtable’s new approach will be. Corporate Knights has suggested following up on the statement of purpose with concrete commitments to carbon-zero business plans and paying a living wage, for starters. Without these kinds of concrete commitments, World Resources Institute’s Kevin Moss says the Roundtable’s new statement “shows 200 CEOs are stuck in yesteryear’s (corporate social responsibility).”

However true that may be, the Roundtable’s new approach at least enables society to hold businesses to a standard based on more than quarterly earnings and return on investment. Let the scrutiny – and the consequences that flow from it – begin.

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“It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders,” wrote the Business Roundtable. “The American dream is alive, but fraying,” said Jamie Dimon, chair and CEO of JPMorgan Chase and chair of Business Roundtable.

There’s no denying the shareholder-first mantra has led CEOs to prioritize share buybacks over productive investments and to squeeze out short-term profits by continually shaving off jobs, outsourcing production to ever-cheaper, underregulated pastures and whittling tax returns down to (in Amazon’s case) zero or close to it.

In walking away from the shareholder primacy model, Dimon and the Business Roundtable maintain that their “modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”

But reception to the statement has been mixed. “Do CEOs mean what they say?” asked one media outlet. Others have accused them of purpose-washing, falsely embedding a higher purpose into branding exercises. Having climate action-obstructing Exxon Mobil and Chevron as signatories doesn’t help optics. Nor does having Johnson & Johnson’s CEO Alex Gorsky as the statement’s lead author just a week prior to J&J being found guilty of fuelling the opioid crisis.

One Globe and Mail op-ed suggested CEOs are turning against shareholders because “share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.” As law professor Katharina Pistor wrote, “For CEOs, the emergence of powerful shareholder blocs has changed the corporate-governance game,” adding, “Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that the best defence is a good offence.”

Kevin Thomas, CEO of the Toronto-based Shareholder Association for Research & Education doesn’t mince words. “I see this as the wolf in sheep’s clothing,” he said. He told Corporate Knights, “Sure, we can agree that shareholders are not the only or even the most important stakeholders.” But he added, “What the Business Roundtable is doing is mounting a massive lobbying campaign to limit shareholder rights, focusing particularly on stripping shareholders of our right to hold corporations accountable through shareholder proposals on issues like environmental and social responsibility.”

The problem, says Thomas, is the world they’re talking about is one where they’re “theoretically responsible to everyone but legally and practically accountable to no-one.”

In the short-term, the statement may be aimed at  heading off regulatory proposals to legislate the end of shareholder supremacy, most notably from Senator Elizabeth Warren, a leading contender for the Democratic presidential nomination.  This August, Senator Warren proposed an Accountable Capitalism Act that would require U.S. corporations with over $1 billion in revenue to obtain a federal charter of corporate citizenship requiring directors to consider the interests of all relevant stakeholders. This includes shareholders, customers, employees and the communities in which the company operates. The legislation would also require these companies to:

• Allow their workers to elect 40% of the membership of their board of directors
• Limit corporate executives’ ability to sell shares of stock that they receive as pay, instead requiring that such shares be held for at least five years after they were received and at least three years after a share buyback to disincentivize stock-based compensation in general as well as the use of share buybacks as a tactic for executives to maximize their own pay
• Require corporate political activity to be authorized specifically by both 75% of shareholders and 75% of board members (many of whom would be worker representatives under the full bill) to ensure that corporate political activity truly represents a consensus among stakeholders.

Global corporate governance expert Ed Waitzer, a senior lawyer who holds the Jarislowsky Dimma Mooney Chair in Corporate Governance and is a director of the Hennick Centre for Business and Law at Osgoode Hall Law School and Schulich School of Business at York University, has been tracking the evolution of corporate law for several decades. He sees the Business Roundtable statement as consistent with the global trajectory of the law to require powerful actors to treat stakeholders fairly.

However, he notes, “The U.S. is one of the few jurisdictions left in the modern capital markets world where the courts still interpret corporate law being that the best interests of the corporation means the best interests of shareholders.”  In that sense, the U.S. business community is also stepping out ahead of the courts.

Waitzer adds, “It’s not surprising that the business community decided to put a marker acknowledging that corporate purpose extends to stakeholders beyond shareholders. It reflects an understanding by most senior business leaders that we have a sustainability problem—that the market system is no longer working for the vast majority despite it being a huge generator of wealth for those at the top.”

Words alone not enough

In the long-term, the Business Roundtable’s repudiation of shareholder supremacy should no doubt have important implications for the norms that govern corporate behaviour. But “words alone won’t make necessary system change happen,” wrote B Corporation movement founders. They invited the Roundtable to get B Corp certified (like Corporate Knights did in 2012) in a full-page ad in The New York Times. The ad was signed by the CEOs of B Corp-certified Ben & Jerry’s, Patagonia, Seventh Generation and Dannon, among others.

In addition to booking a meeting with B Corporation representatives, CEOs may want to have a chat with Bob Eccles. For the past six years, Eccles, founding chairman of the Sustainability Accounting Standards Board, and Tim Youmans of Hermes Investment Management, have been working on a campaign to get every listed company’s board of directors to publish a “Statement of Purpose” by 2025 along with as many private ones as possible. The Statement of Purpose campaign, formally launched in August, calls for a company specific “Statement of Purpose” followed by “concrete actions and transparent reporting on what the company is doing to accomplish its purpose.”

A strong statement of purpose could include corporate commitments to, say, a science-based carbon-zero business plan, paying a fair share of taxes as well as a living wage to employees, for starters.

And, as Thomas suggests, ensuring board level accountability for the workforce, something that isn’t normally considered part of a board’s mandate, would be a welcome addition. “Once directors are formally responsible for how the workforce is treated, then shareholders can use a legal mechanism — their votes — to hold them accountable.”

The World Resources Institutes’ Eliot Metzger and Kevin Moss have further suggestions for that statement of purpose, including embracing circular economy models (designing for longevity and reuse) and “lobbying for climate-positive legislation.”

Moss says without these kinds of concrete commitments, the Roundtable’s new statement “shows 200 CEOs are stuck in yesteryear’s (corporate social responsibility).”

He may not be wrong, but neither is Rep. Joe Kennedy (D-Mass.) who called the statement, “A welcome step toward a more moral capitalism.”

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