Armanino Blog

Investors Critical of Expanded Corporate Purpose

by Paul Peterson
October 15, 2019

In August, the Business Roundtable (BR) revised its statement of purpose. Its members decided that serving shareholders will no longer be the main purpose of their corporations. Instead, they’ve expanded the scope to include customers, employees, suppliers and communities. Here’s why investors are concerned about the shifting corporate mindset — and how it could potentially affect financial reporting and directors’ legal obligations.

Broader scope

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

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

In a recent blog, the BR reaffirmed members’ commitment to shareholders. The blog says, “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.”

Investors vs. CEOs

Investors have increasingly demanded more and better social responsibility from corporations. However, the Council of Institutional Investors (CII) took issue with the characterization of shareholders as providers of capital rather than as 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 Executive Director Kenneth Bertsch. “To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.”

The BR said it would be accountable to all of its stakeholders. But the CII responded that accountability to everyone means accountability to no one. 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,” the CII added. “If ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.”

It’s also unclear how CEOs will resolve matters if the best interests of any stakeholder conflict with those of shareholders. The BR’s recent blog answered that concern, stating that, “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.”

For example, when a company decides to raise the minimum wage of its employees, it may initially affect short-term profits. But, in the long term, the new policies may provide a substantial value to the company because it attracts and retains employees.

Link to ESG disclosures

Some legal experts think that the new BR statement could potentially affect corporate disclosure of environmental, social and governance (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 doesn’t 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 duties to the corporation and its shareholders with its duties to other stakeholders.

The BR statement also doesn’t affect the business judgment rule. As long as directors act in good faith, on a fully informed basis, and aren’t grossly negligent when making decisions, they should be protected under the law.

Changing times

Even if your company isn’t large enough to be part of the BR, the tides are changing. In the 21st century, corporations must consider social responsibility when making decisions and reporting financial performance.

Auditing sustainability: How to determine materiality

The Business Roundtable’s (BR’s) expanded statement of purpose is expected to lead to more disclosures about environmental, social and governance issues. (See the main article.) But, 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 AICPA Chief Auditor Robert Dohrer. “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.”

Under the expanded BR statement, the term “stakeholders” could refer to more than just investors. It also could mean customers, employees, suppliers and communities ― a lot of groups to consider when determining materiality.

October 15, 2019

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