U.S. Business Roundtable New Statement in August 2019 ~From the point of Japanese law

28 Pages Posted: 13 Nov 2020 Last revised: 13 May 2021

See all articles by Hiroyuki Watanabe

Hiroyuki Watanabe

University of London, School of Advanced Studies, Institute of Advanced Legal Studies, Students; Waseda University

Date Written: September 12, 2020

Abstract

In the United States, in August 2019, the Business Roundtable, business organization of major companies, issued a new Statement that it should commit to management that aims for the interests of all stakeholders not for the shareholder supremacy. It seemed that they sent a sign of fundamental change to the world. However, recently some scholars have expressed extremely skeptical views on this new Statement. Also, not a few scholars have published papers that severely criticize such a tone regarding the harmful effects of short-termism in the stock market etc. Under these circumstances, I will comment also on recent Criticisms of "Stakeholderism" and "Anti-Criticism of Short-Termism" etc.

In Japan, in 2015, based on the Japan Revitalization Strategy, the Japan’s Corporate
Governance Code was formulated as part of Japan’s economic growth strategy. The subtitle of this Code is "sustainable growth of the company and improvement of medium- to long-term corporate value." Also, General Principle 2 of this Code is titled “Appropriate Cooperation with Stakeholders Other Than Shareholders”. Therefore, it is very important in Japan how to accept the significance of the "US Business Roundtable Statement in 2019", especially in relation to this General Principle 2.

Regarding the U.S. Business Roundtable New Statement in 2019, it is important to recognize that the U.S. corporate society etc. are not yet fully prepared to realize a new Statement’s policy. In addition, regarding the structural problems and possible hurdles of so-called stakeholderism, those who truly aim to realize the interests of various stakeholders should be listened to it seriously. However, it seems that the shareholder-first principle, which is the premise of such a comprehensive criticism of stakeholderism, also includes various "illusions" and "myths." Rather, it should be returned to the way of thinking that the company grows its pie (social welfare) by working to achieve its "purpose" under the supervision of shareholders and, as a result, enhances the interests of its stakeholders. Recently, many studies have showed the superiority of these policies as a business model.

In the United States, the ongoing "Restatement of Corporate Governance" project seems to introduce a provision regarding the corporate purpose, but the draft states that, in line with the case law of the Delaware corporate law, it is possible to take into account the interests of various stakeholders as long as the long-term shareholder’s interests are not impaired. It should be noted here that, according to Professor Edward Rock who is the reporter of “Restatement of Corporate Governance” project, "shareholder supremacy" means "priority is given to the interests of shareholders when the interests of other stakeholders of the shareholders are fundamentally conflicting." It means "the principle of adjustment of conflicting aspects". The Delaware corporate case law is also correct in this sense, and does not mean the idea of "maximizing shareholder value" or "shareholders is the owners of the company."

Based on the legitimate way of thinking above, such a "grow the pie" perspective in company management as mentioned does not contradict "shareholder supremacy". The problem is that it is not easy to properly understand the above legitimate idea of "shareholder supremacy", and many lawyers (as well as me) have been misunderstood and confused about the concept. However, it can be said that there was a problem in expressing the above idea under the name of "shareholder supremacy". Probably more serious problem is that in addition to the idea of "shareholder supremacy", the "agency theory" that directors and managers represent shareholders is persistent. It can be said that "shareholder supremacy" is justified if it has the above idea by Professor Rock, but on the other hand, the above "agency theory" lacks a clear basis and it is nothing more than "one influential idea". And here I see the remnants of "shareholder supremacy" that goes beyond the legitimate framework of corporate law.

Also, (1) giving priority to the interests of shareholders when there is a “conflict of interest between shareholders and other stakeholders” is not the same as (2) setting “shareholders' benefits” as the “objective of the corporation”. Theoretically there is a big gap between the two. Therefore, if Restatement introduces the provision of position (2), it can be said that a big leap is occurring even from the case law theory of the Delaware corporate law.

Regarding the recent "anti-criticism of short-termism" mainly from U.S. scholars, there are not a little reasonable criticisms of the recent EU Report(so called “EY Report”), which is the main target of criticism. We should be aware of the focus of the discussion and to be careful not to confuse and discuss issues of different dimensions. However, the view that short-termism has little harm is lacking in good ground. And even if short-termism has certain advantages, it does not mean that short-termism doesn’t have harmful effects.

In Japan, in 2015, based on the Japan Revitalization Strategy, the Japan’s Corporate
Governance Code was formulated as part of Japan’s economic growth strategy. The subtitle of this Code is "sustainable growth of the company and improvement of medium- to long-term corporate value." Also, General Principle 2 of this Code is titled “Appropriate Cooperation with Stakeholders Other Than Shareholders”. Therefore, it is very important in Japan how to accept the significance of the "US Business Roundtable Statement in 2019", especially in relation to this General Principle 2.

There are some view that Japanese companies should not lightly follow the new position of the Business Roundtable because the new emphasis on the broad interests of stakeholders other than shareholders could weaken their management discipline. By doing so, the view holds, Japanese businesses would lose the power to earn money and gain international competitiveness, since their capital efficiency (e.g., ROE=return on equity) and labor productivity are generally lower than in other major economies. However, management and financial technics that focus on improving the return on equity, as emphasized by such advocates, among others, have not led to long-term growth and profitability of Japanese businesses.

For example, the low level of financial indicators such as ROE in recent years in Japan is mainly due to the low rate of return on sales, which means that Japanese companies in recent years have not been able to create many innovations that generate high profits. Therefore, even if ROE has been improved in the short term by buying back shares, the essential problem has been hardly improved. Also, the same is true for the issue of labor productivity. In recent years, it is often pointed out that Japanese companies have low labor productivity from an international perspective. However, labor productivity is also closely related to industrial structural issues. The problem is not that simple, and enhancing management discipline by shareholders alone will not increase labor productivity. The key is how to create innovations that generate sufficient profits and regain the original “earning power”.

In the first place, it is important to think again about the beneficiaries of the company’s earning power. The ideology that shareholders are the owners of a company has been spread around the world, especially in the US, and has had a great influence on Japan and distorted the theory of corporate law. In recent years, such an ideology may be even more prevalent in Japan and that has resulted in too much activism by some shareholders. However, legal provisions to that effect do not exist even in U.S. (Delaware) corporate law, and the idea cannot be established as a legal theory because company property belongs to a legal entity in the first place.

We must move away from the concept of earning power that is biased in favor of shareholders based on the incorrect idea that shareholders are the owners of a company. In essence, to grow the pie (social welfare) through the long-term growth of a company and appropriate distribution to stakeholders will ultimately benefit the interests of shareholders.




Keywords: Shareholder Supremacy, Us Business Roundtable, Statement, Restatement of Corporate law, Japan's Corporate Governance Code, Illusory Promise, Stakeholderism, Lucian A. Bebchuk, Short-termism, Ito Review

JEL Classification: D21, G32, G34, G38, K22

Suggested Citation

Watanabe, Hiroyuki, U.S. Business Roundtable New Statement in August 2019 ~From the point of Japanese law (September 12, 2020). Available at SSRN: https://ssrn.com/abstract=3689516 or http://dx.doi.org/10.2139/ssrn.3689516

Hiroyuki Watanabe (Contact Author)

University of London, School of Advanced Studies, Institute of Advanced Legal Studies, Students ( email )

Charles Clore House
17 Russell Square
London, WC1B 5DR
United Kingdom

Waseda University ( email )

1-6-1, Nishi-Waseda
Shinjuku-ku
Tokyo, 169-8050
Japan

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