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Did Business Roundtable Just Break a Fiduciary Oath?

Did Business Roundtable Just Break a Fiduciary Oath?
August 27
00:03 2019

Business Roundtable calls itself “an association of chief executive officers of America’s leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy.” Its CEO members “lead companies with more than 15 million employees and more than $7 trillion in annual revenues.”

If the purpose of Business Roundtable is still not clear, the organization’s “About Us” page ends with this: “For more than 45 years, the membership of Business Roundtable has applied CEO expertise to the major issues facing the nation. Through research and advocacy, Business Roundtable advocates policies to spur job creation, improve U.S. competitiveness and strengthen the economy.”

It’s obvious the association’s purpose has more to do with public policy and less to do with specific duties to one’s corporation. Still, it’s long been understood, while public policy is an ideal, it’s also a luxury compared to the individual company’s business sustainability. You can’t save the world if you’re too worried about where the next meal will come from.

The issue of which constituency – or “stakeholder” – has the highest priority has long been a classic corporate governance conundrum. Still, the prevailing consensus, as espoused by Milton Friedman in his September 13, 1970 New York Times Magazine article, has been corporate executives work for their owners (i.e., shareholders) and have a responsibility to do what those owners desire, which is to make as much money as (legally) possible.

That all changed on August 19, 2019. Here’s an excerpt from the press release issued by Business Roundtable that Monday:

“Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.”

There’s much leeway for the owners of private companies to do what they please. But the CEOs of the Business Roundtable are, for the most part, officers of publicly traded companies.

This raises the following question: Are there fiduciary implications for officers of companies that no longer prioritize shareholders?

“It may surprise some, but there are no laws or statutes that prioritize shareholders, and officers owe no independent fiduciary duty to the maximization of profits for shareholders,” says Braden Perry, a regulatory and government investigations attorney with Kansas City-based Kennyhertz Perry, LLC. “The duty owed is the standard of care, meaning the executives must show good business judgment on behalf of the corporation and thus the shareholders.”

This may sound contrary to the understanding that the SEC is responsible for protecting shareholder interest. While that is among its charges, how it protects shareholders isn’t as might be imagined. “The SEC’s rules and regulations are disclosure oriented, not action oriented,” says Attorney Chris Hewitt, a partner at Tucker Ellis in Cleveland, Ohio. “That is, they are supposed to be designed to provide disclosure to shareholders. They do not proscribe how directors are supposed to act. That said, the SEC frequently drafts disclosure rules that have the effect, purposeful or not, to influence behavior. For example, way back in the day, Y2K disclosure rules about preparedness for Y2K were designed to get companies to be prepared. Similarly, conflict mineral disclosure was designed to get companies not to buy conflict minerals and to make sure their suppliers didn’t either. In effect, the entire disclosure regime from the SEC influences directors to act in the best interests of shareholders so they don’t have to disclose their failures.”

Indeed, the SEC has, on occasion, made it clear that failed to promote a favored social responsibility issue when, according to Richard Trimber, Senior Counsel, Business Group at General Counsel, P.C. in McLean, Virginia, “a recent SEC ruling prevented a shareholder proposal from Exxon shareholders regarding climate change.”

If the SEC does not speak to this potential fiduciary issue, who does? “Depends on the jurisdiction,” says Frederick Alexander, Founder of The Shareholder Commons in Wilmington, Delaware, “but in the US, the main jurisdiction is Delaware, which is still a shareholder primacy jurisdiction.”

Each state treats the matter in a slightly different way. “Under state corporate law,” says Hewitt, “directors are required to perform duties in a manner they reasonably believe to be in, or not opposed to, the best interests of the corporation (or in some states, shareholders). Depending on the state, this requirement is either provided for statutorily (e.g., Ohio) or through case law (e.g., Delaware). Some states, e.g., Ohio, have enacted so-called stakeholder statutes. These provide that in determining the best interests of the corporation, the board shall consider the interests of shareholders and may consider the interests of other stakeholders. In short, their fiduciary duties require directors to give primacy to shareholders when making corporate decisions.”

But that is not all. Hewitt continues, “In addition to the requirement to act in the best interests of the corporation, known as the duty of loyalty, directors are also required to act with the care that an ordinarily prudent person in a like position would use, known as the duty of care. If a shareholder were to prove that the board failed to meet either duty in taking board action, the shareholder could seek to enjoin the action, and in certain circumstances, seek to hold the director personally liable for any damage cause to the corporation or the shareholders. Certain states, e.g., Delaware, permit a corporation to exculpate directors from liability for a breach of the duty of care. However, the breach of the duty of loyalty cannot be exculpated. Thus, any breach of the duty of loyalty could lead to personal liability for the directors of the company.”

Where case law has dominated, we’ve seen a recent shift in sentiment. “The oft-cited cases are Dodge v. Ford, where in 1919 the Michigan Supreme Court ruled that a company must act in the best interest of its shareholders, as opposed to an altruistic cause,” says Perry. “Courts today generally disagree with Dodge, and the cited cases include AP Manufacturing v. Barlow and Shlensky v. Wrigley for the premise that a corporation owes more than financial fiduciary obligations, but more of an expansive duty as a whole.”

It can be argued that, by satisfying all stakeholders, executives increase a company’s long-term value, and that the profits of that benefit accrues to the shareholders. “A company that seeks and receives investment of capital from shareholders state that they will and covenant to act in the best interest of the Company and thereby the Shareholders as owners of the Company,” says Trimber. “Company’s exist to operate a business and generate profit – that is why properly incentivized Management places a premium on shareholder value – they are also shareholders. Why? It is the reason companies exist. I do not think the new Business Roundtable Statement is in conflict with Shareholder interests. The statement is the proper means to maximize value of the company long term – not just earnings on a quarterly basis.”

But, then again, isn’t this what Milton Friedman said? Here’s the complete quote from his New York Times Magazine article:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom…”

That sounds compatible with the statement of Business Roundtable. But then Friedman adds this common sense dictum: “…in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions… the use of the cloak of social responsibility, and the nonsense spoken in it name by influential and prestigious businessmen, does clearly harm the foundations of a free society… They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general…”

It is Friedman’s conclusion, however, which Business Roundtable may want to re-read:

“But the doctrine of ‘social responsibility’ taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a ‘fundamentally subversive doctrine’ in a free society, and have said that in such a society, ‘there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.’”

With this in mind, the next question might be: What potential fiduciary liability might an investment adviser have by knowingly using client assets to purchase shares of companies whose CEOs are on record of subordinating shareholder interest?

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary Solutions,  Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

 Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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