Some Thoughts for Boards of Directors in 2020

By Martin Lipton, Steven A. Rosenblum,
Karessa L. Cain, and Kathleen I. Tatum

December 9, 2019

In hindsight, 2019 may come to be viewed as a watershed year in the evolution of corporate governance.  After years of growing alarm about endemic short-termism, the sustainability and competitiveness of businesses over a long-term horizon, and the role of corporate policies in contributing to socioeconomic inequality, there has been an emerging consensus that the prevailing corporate governance system is broken.  Initially, in the aftermath of the financial crisis of 2008, this critique was focused on short-termism as a root cause of systemic destabilization and decay.  In subsequent years, the concept of sustainability gained traction, and ESG (environmental, social and governance) principles were embraced by shareholders and corporations alike as the next frontier in corporate governance best practices.  This in turn laid the foundation for the latest iteration of corporate governance modernization:  the advent of stakeholder governance, and the realization that the pursuit of wealth maximization for shareholders as the sole raison d’être of corporate governance has been a principal accelerant of short-termism and socioeconomic inequality.

Perhaps remarkably, the key proponents of stakeholder governance – which posits that the fiduciary duty of management and the board of directors is to promote the long-term value of the corporation for the benefit of all its constituents and not solely to maximize shareholder wealth – have been a subset of institutional shareholders, namely, the major index funds such as BlackRock, State Street and Vanguard, as well as other shareholders with a long-term investment horizon.  Their reasoning has generally been that, in order to thrive, corporations must focus not only on profitability but more broadly on their social purpose and sustainability, and in that regard, it is essential to consider the interests not only of shareholders but also those of employees, customers, suppliers, the environment, communities and other constituencies who are critical to the success of the corporation.

In the last few months, several milestones have solidified this formulation of corporate governance.  In August, the Business Roundtable embraced stakeholder governance in a statement signed by 181 high-profile CEOs:  “[W]e share a fundamental commitment to all of our stakeholders….  Each of our stakeholders is essential.  We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”  In November, the British Academy echoed this theme in its “Principles for Purposeful Business,” and earlier this month, the World Economic Forum issued its “Davos Manifesto 2020:  The Universal Purpose of a Company in the Fourth Industrial Revolution,” which states:

The purpose of a company is to engage all its stakeholders in shared and sustained value creation.  In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.  The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.

At this point, much of the focus on stakeholder governance has shifted from the question of whether a board of directors should take into account the interests of other stakeholders, to how a board should do so.  In the coming year, directors will need to grapple with a host of questions about the practical implications of this new paradigm – such as how to adjust existing board functioning to reflect stakeholder governance, questions about the contours of the board’s legal obligations, and what, if any, modifications should be made to communications and engagement efforts with shareholders and other stakeholders.

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