Is There Real Virtue Behind the Business Roundtable’s Signaling?

When you break out the data, ‘stakeholder capitalism’ appears to fail on its own terms.

By Aneesh Raghunandan and Shiva Rajgopal. Mr. Raghunandan is an assistant professor at the London School of Economics. Mr. Rajgopal is a professor at Columbia Business School and a senior scholar at the Jerome A. Chazen Institute for Global Business. Excerpt:

They compared "the behavior of publicly listed signatory firms to that of public nonsignatory firms in the same industries, matched by firm size and financial performance."

"• More violations of federal compliance. We obtained comprehensive data on compliance violations from the nonprofit group Good Jobs First. According to its violation tracker, from 2014-18 signatory firms report a higher incidence of compliance-related violations than the nonsignatory firms, reported by federal agencies such as the Environmental Protection Agency and the Occupational Safety and Health Administration. This finding holds true whether we consider all violations or only labor and environmental violations. BRT signatories are 16 percentage points more likely to commit at least one federal compliance violation in any given year. This seems inconsistent with the Business Roundtable’s explicit references to the importance of the environment and investing in employees.

• Increase in share buybacks. We used S&P’s Compustat database to assess share buybacks over the same period. Signatories have bought back a larger proportion of their shares—even as buybacks are increasingly condemned by politicians such as Sen. Bernie Sanders, who released a plan to ban them. Whether share buybacks are good or bad for the country, the elevated recent volume of buybacks by signatories cuts against the progressive current.

• Larger market shares. Compustat data reveals that Business Roundtable signatories have amassed market shares 5 percentage points higher than those of peer firms, on average, assessed based on sales. This result holds even after controlling for the level of concentration in each industry. Such market power increases the probability of regulatory scrutiny, especially when antitrust approvals for large future acquisitions are on the line. Thus Business Roundtable signatories may have greater reason than their peers to convince regulators of their benevolence.

• Weaker association between CEO compensation and stock-return performance. We obtained executive compensation data from S&P’s Execucomp database and stock-return data from the Center for Research in Security Prices. Business Roundtable signatories pay CEOs 4% more on average than peer firms but achieve lower stock returns relative to their benchmarks. A weak association between CEO pay and stock-return performance falls short of the BRT’s professed goal of “returning value to shareholders.”

These findings suggest that Business Roundtable signatories aren’t leaders in socially conscious environmental, social or governance practices or stakeholder orientation. Instead, the average signatory is more likely to enjoy a large market share, and has an incentive to pre-empt regulatory scrutiny that might expose rent-seeking behavior."