Following up on my post last semester about the Business Roundtable's recent announcement about the purpose of a corporation (see Strategic CSR – Business Roundtable), the article in the url below reports the results of research designed to learn more about the firms that signed-up to the statement:
"The Business Roundtable made a big splash in August by 'modernizing its principles on the role of a corporation.' No longer stressing the unique importance of maximizing shareholder value, the organization got 181 CEOs to sign a statement outlining a corporate commitment to various 'stakeholders.' … Why did they sign? We see two possibilities. Either they are genuinely committed to lead in socially conscious business practices, or they are trying to pre-empt criticism. One way to determine which explanation fits better is to compare the behavior of publicly listed signatory firms to that of public nonsignatory firms in the same industries."
Needless to say, the data suggest that any hope invested in the Business Roundtable's statement is probably optimistic. Specifically, looking at the five-year period leading up to the statement release (2014-2018), the researchers identified four dimensions along which the signatory firms performed in ways that, at best, suggest they are seeking to atone for past behavior. At worst, the data suggest the firms were using their Business Roundtable allegiance as cover for their transgressions. First, legal compliance:
"… from 2014-2018 signatory firms report a higher incidence of compliance-related violations than the nonsignatory firms, reported by federal agencies such as the Environmental Protection Agency and the Occupational Safety and Health Administration."
Second, share buybacks:
"Signatories have brought back a larger proportion of their shares—even as buybacks are increasingly condiment by politicians."
Third, predatory market dominance:
"[Business Roundtable] signatories have amassed market shares 5 percentage points higher than those of peer firms, on average, assessed based on sales. … Such market power increases the probability of regulatory scrutiny. … Thus Business Roundtable signatories may have greater reason than their peers to convince regulators of their benevolence."
Fourth, executive compensation:
"Business Roundtable signatories pay CEOs 4% more on average than peer firms but achieve lower stock returns relative to their benchmarks."
The researchers' conclusion suggests the Business Roundtable statement was not quite the revelation it was presented as at the time and that the group's commitment to a firm's broad set of stakeholders is less convincing, at least based on prior performance:
"These findings suggest that Business Roundtable signatories aren't leaders in socially conscious environmental, social or governance practices or stakeholder orientation. Instead, the average signatory is more likely to enjoy a larger market share, and has an incentive to pre-empt regulatory scrutiny that might expose rent-seeking behavior."
Take care
David
David Chandler
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Is There Real Virtue Behind the Business Roundtable's Signaling?
By Aneesh Raghunandan and Shiva Rajgopal
December 3, 2019
The Wall Street Journal
Late Edition – Final
A15
