(This blog was originally published as part of the FT Moral Money Forum’s report, “Stakeholders Incorporated: Can capitalism change if company charters stay the same?” co-sponsored by High Meadows Institute. The full report can be read here.)
Some people say the solution to the ESG challenge is to embed social-purpose statements into corporate charters, and that this will oblige companies to consider all stakeholders and to measure and report on their social effect.
This sounds good – but as we engage business in trying to meet the sustainability challenge, is corporate structure the right place to focus?
The leading model for reform is the benefit corporation. In companies that amend their governance, directors have to consider their group’s effect on all stakeholders. They must publicly state their social and environmental performance measured against a third-party standard.
B Lab, a non-profit that certifies benefit corporations, says 3,500 such companies exist worldwide. This is encouraging but the truth is that most of these companies are small, and only 10 are publicly traded. Set against the global economy, in which the US alone has 1.7 million C corporations, the effect of the benefit corporation is at best negligible.
The late Lynn Stout, a corporate law scholar, noted in The Shareholder Value Myth: “There is no solid legal support for the claim that directors and executives of US public corporations have an enforceable legal duty to maximize shareholder wealth.”
Stout recognized that the challenge is not corporate structure but moving purpose and opinion away from the Friedman doctrine, which says that the only rationale of a company is to maximize shareholder value.
To move forward, we have to change this view at scale. This is where our focus should be.
Fortunately, with public expectations for corporate responsibility and leadership increasing, we are starting to see significant progress on this, with business organizations such as Business Roundtable and the World Economic Forum making public declarations on sustainability and stakeholder capitalism – unthinkable a decade ago.
Most importantly, large institutional investors have pushed investee companies to commit to sustainability. As was shown at the Exxon annual meeting in May, investors will support the removal of directors who block progress.
Keeping up the pressure on companies to operate sustainably is our best opportunity to advance the ESG agenda. Regardless of corporate form, all companies must be held accountable.