Stock market response to the statement on the purpose of a corporation: A vindication of stakeholder theory

• Published date: 01 November 2023
• Author: Mina Glambosky,Surendranath Rakesh Jory,Thanh Ngo
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/corg.12508

ORIGINAL ARTICLE

Stock market response to the statement on the purpose of a

corporation: A vindication of stakeholder theory

Mina Glambosky

1

|Surendranath Rakesh Jory

2

|Thanh Ngo

3

1

Brooklyn College, New York City, New York,

USA

2

University of Southampton, Southampton,

UK

3

East Carolina University, Greenville, North

Carolina, USA

Correspondence

Surendranath Rakesh Jory, University of

Southampton, Southampton, UK.

Email: s.r.jory@soton.ac.uk

Abstract

Research Question/Issue: On August 19, 2019, the Business Roundtable (2019)

released a statement signed by 181 chief executive officers (CEOs) of well-known

US corporations, in which they pledged “a fundamental commitment”to “deliver

value to all”stakeholders. This study examines the stock market reaction to this new

statement on the purpose of a corporation.

Research Findings/Insights: Based on a sample of 163 publicly listed companies that

signed the pledge, the results show that investors react positively to a firm's pledge

in the days surrounding the statement release. The consensus among stock market

investors was robust, characterized by the low volatility in the share price post-

announcement date. The decision by these companies, though intended to maximize

the wealth of all stakeholders, rather than shareholders alone, carries an opportunity

cost. Specifically, a post-announcement decline in share buybacks by pledge firms rel-

ative to control firms is observed, though investors embracing stakeholder theory

appear undeterred by the reduction in distributions.

Theoretical/Academic Implications: This study provides empirical support that, in

the evolving business environment, companies must emphasize issues that concern

customers, employees, non-governmental organizations (NGOs), and the govern-

ment. Failure to prioritize these issues may engender public backlash, especially in

the age of social media. However, the attention to stakeholders is compatible with

the focus on shareholder performance. Performance suffers when customers leave,

workers feel dissatisfied, NGOs call for boycotts, and governments levy fines. Corpo-

rations seeking to increase shareholder wealth will need to fully embrace stakeholder

concerns.

Practitioner/Policy Implications: This study shows that adopting a stakeholder per-

spective unlocked value that would not have been achieved had the focus remained

on shareholder primacy. The excess values may derive from greater customer loyalty,

improved employee motivation, better supplier relations, supportive financiers, maxi-

mizing revenue, minimizing costs, and/or yielding higher profits. Shareholders antici-

pate greater long-term value from companies emphasizing employees, communities,

supply chain, financiers, and shareholders.

Received: 20 January 2022Revised: 22 October 2022Accepted: 30 November 2022

DOI: 10.1111/corg.12508

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

892 Corp Govern Int Rev. 2023;31:892–920.

wileyonlinelibrary.com/journal/corg

KEYWORDS

corporate governance, business roundtable, event study, purpose of a corporation, shareholder

primacy, stakeholder theory

1|INTRODUCTION

The Business Roundtable (BRT), established in 1972, is “an associ-

ation of chief executive officers of America's leading companies,

working to promote a thriving U.S. economy and expanded oppor-

tunity for all Americans through sound public policy.”It is a plat-

form for chief executive officers (CEOs) of some of America's

foremost corporations to reflect on business issues and engage

with policymakers. On August 19, 2019, 181 CEO members voted

to adopt the innovative “Statement on the Purpose of a

Corporation,”declaring that companies should serve their share-

holders and deliver value to their customers, invest in employees,

deal fairly with suppliers, and support their communities.

1

This

signifies a marked change from a 22-year-old BRT policy that

defined the principal purpose of a corporation as “maximizing

shareholder return.”Several BRT members did not sign the state-

ment (Harrison et al., 2020) but did not issue an affirmative

denial.

This study examines how adopting an increased focus on stake-

holders, evidenced by voting to adopt the BRT statement, impacts

stockholders. BRT's 2019 statement suggests increased recognition

of the importance of corporate social responsibility (CSR). The new

statement was met with mixed reactions (Colvin, 2020;

Eccles, 2020; Firestone, 2019; Winston, 2019); some parties

expressed reservations about its merits, while others questioned its

authenticity. For many years, the stakeholder approach had been

primarily associated with business ethics and businesses' social and

environmental impact (Freeman et al., 2018). Notably, stockholders'

investment in stocks with a focus on CSR has increased. The Global

Sustainable Investment Alliance

2

reports investment in sustainable

investing assets had risen by 34% to $31 trillion from 2016 to

2018.

From a corporate governance standpoint, the new statement

contradicts the widely accepted “shareholder primacy”model exem-

plified by Milton Friedman (Friedman, 1962). Friedman (1970)

argues that executives are employees (agents) and answer to their

employers (principals) and should be engaged in maximizing share-

holder interests. Friedman (1970) emphasizes that serving stake-

holders includes three simultaneous functions: legislator, executive,

and jurist. The assumption of multiple roles is not only impractical

and unsustainable but would cause resource allocation to become

politically driven rather than based on market mechanisms and

forces.

Corporations serve essential functions, and reassessment of

purpose can signal changes to the rationale for their existence.

BRT views regarding purpose of the corporation have evolved over

time. In 1981, the BRT stated that companies should balance

shareholder interests with the “legitimate concerns of other

constituencies,”approaching a stakeholder approach. However, in

1997, the BRT endorsed “shareholder primacy,”identifying the

principal purpose of the corporation as maximizing shareholder

wealth. BRT (1997, p. 3) stated that: “The notion that the board

must somehow balance the interests of stockholders against the

interests of other stakeholders fundamentally misconstrues the role

of directors.”The 2019 statement, with an emphasis on stake-

holders, stands in sharp contrast to the previous position. CEOs'

endorsement of the new statement signals a significant break from

previous practices.

Uncertainty exists regarding how CEOs would address the new

emphasis on stakeholder interests. First, the reward system for

many CEOs is tied to stock performance, not multiple stakeholder

interests, limiting the economic incentive to align the firm with

stakeholder interests. Benson and Davidson (2010) find no link

between changes in stakeholder management and CEO compensa-

tion. Additionally, company boards represent the interests of the

stockholders, who elect the board of directors. If directors are per-

ceived as failing to prioritize stockholder interests, they may risk

their positions. Second, standards to measure various stakeholder

interests are ill-defined (Amel-Zadeh & Serafeim, 2018). Reporting

on stakeholder interests is applied selectively and is overwhelmingly

positive, insinuating that firms engage in systematic greenwashing

practices (Cho et al., 2012; International Monetary Fund, 2019). The

real-world application of the 2019 BRT statement is uncertain, given

the prevailing CEO pay structure and the practices of company

boards.

The 2019 BRT statement focuses on the need for corporations

to declare their orientation, either to shareholders only or to all

stakeholders. This topic has long been debated, and debate con-

tinues today with proponents on both sides of the argument. In

1932, the Harvard Law Review published a debate between

Adolph Berle (1931), advocate of the “shareholder primacy”model,

and Merrick Dodd (1932), advocate of the social function of com-

panies encompassing the interests of employees, customers, and

the community. Stout (2002) presents a comprehensive review of

the debate and developments from that time. Several noteworthy

examples elucidate the evolution of the BRT statement: First, the

1916 Dodge Brothers versus Ford Motor Company landmark law-

suit (Henderson, 2007), where plaintiffs contended that Ford's deci-

sion to withhold special dividends for reinvestment was an

idiosyncratic preference of Henry Ford. They claimed Ford was

attempting to bring social good for workers and customers by pro-

viding work and cheap cars rather than maximizing shareholders'

wealth. Ford defended the policy as doing “as much good as we

can, everywhere, for everybody concerned …and incidentally to

make money.”The Michigan Lower Court ordered the dividend pay-

ment and upheld shareholder primacy over stakeholders. Ford

GLAMBOSKY ET AL.893