Investor Respect for Human Rights and the Case for Stakeholder Primacy

A response by the team at the Investor Alliance for Human Rights to the updated Business Roundtable Statement on the Purpose of a Corporation.

On Monday, August 19, 2019, the Business Roundtable (BRT), one of the largest corporate lobbying groups in the United States, released an updated Statement on the Purpose of a Corporation. The statement received support from 181 CEOs, including the leaders of major multinationals such as Amazon, Apple, Chevron, The Coca-Cola Company, Dell, Exxon, Ford, PepsiCo, Procter & Gamble, and Walmart. Notably, the group of signatories also includes the heads of large financial firms such as Bank of America, BlackRock, Citigroup, Goldman Sachs, JPMorganChase, Morgan Stanley, and Vanguard. 

The statement takes a significant step away from the long-standing business mantra that shareholder profit is the sole purpose of corporations, a philosophy often known as “shareholder primacy” and popularized by economist Milton Friedman in the 1970s. Widening the lens from shareholders to all stakeholders (defined by the BRT as also including customers, employees, suppliers, and communities), the lobbying group admits that its past “language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all of our stakeholders, whose long-term interests are inseparable.”

Over the past week, media and civil society commentary in response to this shift in the BRT’s stance has largely focused on whether or not the signatory companies will walk their seemingly new talk. And while the Council of Institutional Investors (CII) has responded with criticism, saying it “respectfully disagrees” with the statement, several socially responsible investors have been quick to point out their realization early on that fueling inequality and negatively impacting people and planet has long been out of line with both their values and their bottom lines.

What has so far been missing from the conversation, particularly when it comes to the CII reponse, is a clear articulation of the responsibility that even shareholders have to respect stakeholders’ fundamental human rights throughout their investment choices and activities.

By fueling the economy and businesses within it, shareholders pose risks to the broader interests of society in the same way portfolio companies might. In response, authoritative global standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises have since 2011 established that all companies, including investors, have a responsibility to respect human rights throughout their operations and broader value chains. Investors also have fiduciary responsibilities for ensuring that portfolio companies respect human rights since where there are the most severe risks to people and planet, there are material risks to business, including reputational harm, financial loss, and legal liabilities.

A distinctive characteristic of institutional investors is that they may hold shares in a wide range of companies, across many sectors and different regions. This increases the risk that investors may be directly linked or contribute to a wide range of adverse human rights impacts. While investors are not responsible for providing remedy when only directly linked to human rights harms, they in all cases have a responsibility to: (1) develop and embed their own human rights policies, (2) assess and prioritize the most severe risks to people throughout the investment lifecycle, (3) build and use their leverage to influence investee companies to prevent, mitigate, and where appropriate address adverse impacts, (4) track outcomes, (5) disclose their policies and practices, (6) provide remedy when they have caused or contributed to abuses, and (7) engage with impacted stakeholders (meaning rights-holders, their credible representatives, and expert organizations) all along the way. 

Investor leverage can be exercised in a number of ways, including through investment decision-making that factors in environmental, social, and governance (ESG) performance; positive and negative screens; engaging in company dialogues and multi-stakeholder platforms; filing shareholder proposals that seek to promote responsible business conduct and voting in favor of such proposals when put forth by other investors; and engaging government institutions and other standard-setting bodies on policies and standards that create enabling environments for responsible business conduct. 

Shareholders themselves thus have a responsibility to take a stakeholder primacy approach. Members of the Investor Alliance for Human Rights recognize this and are already doing the critical work of engaging with this responsibility in practical and meaningful ways. For instance, the 2019 proxy season ended in June with investors having voted on 177 shareholder resolutions addressing environmental and social concerns. And in March, investors with nearly US$2 trillion in assets under management called on: (1) all investors to set up and carry out robust due diligence processes to manage risks to people and the environment, and (2) all governments to support investor due diligence through better regulation of financial systems.

While it is critical that the BRT statement’s signatory CEOs follow through on their words, the pressure from financial markets will remain. For the system to meaningfully change, shareholders must accept their own responsibilities and be held accountable for their investment practices. This means a changing of the tide away from shareholder primacy and toward stakeholder primacy for all business actors. It also means going beyond shareholder advocacy efforts to a world in which all investors actively, holistically, and meaningfully engage with their responsibility to respect human rights. Conversations around the purpose of the corporation will, at least in the foreseeable future, continue to focus on shareholders. The key next step is ensuring that this focus is the right one -- where investors are also accountable for their impacts on society and where they also put broader stakeholder interests first.

The Investor Alliance for Human Rights is a collective action platform for responsible investment that is grounded in respect for people’s fundamental rights. We are a membership-based, non-profit initiative focusing on the investor responsibility to respect human rights, corporate engagements that drive responsible business conduct, and standard-setting activities that push for robust business and human rights policies. Our members represent US$4 trillion in assets under management and include asset management firms, trade union funds, public pension funds, foundations, endowments, faith-based organizations, and family funds. We work systematically with civil society and other allies to build expertise and collaborations on responsible investment.