A Comment on the Test of Corporate Purpose Study

On August 19, 2019, Business Roundtable CEOs — the leaders of some of the largest U.S. companies — signed a new Statement on the Purpose of a Corporation that committed companies to serve not only their shareholders, but also to deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate. The CEOs who signed the updated Statement believed then, as they do now, that considering the interests of all of their stakeholders, not just shareholders, is the best approach for securing their companies’ long-term success.

Consistent with the Statement, Business Roundtable CEOs have taken action to invest in worker training and education, raise wages, support new employee health and wellness benefits, promote more sustainable businesses and give back to the communities they serve.

During the pandemic, Business Roundtable CEOs have further demonstrated their commitment to their stakeholders by providing facilities for testing, revamping manufacturing lines to produce critical medical equipment and donating supplies to communities. Companies have raised wages and delivered bonuses to frontline workers and have prioritized the health and safety of their employees and customers. Business Roundtable CEOs have also used their influence to press policymakers for assistance to individuals and small businesses hard hit by the pandemic.

In response to the latest chapter in the country’s struggle for racial equity, CEOs have made new commitments to diversity and inclusion in their firms, have contributed to groups working to advance racial equity and have been at the forefront of efforts to pass policing reform.

The efforts of Business Roundtable CEOs have been recognized by a number of independent groups, including JUST Capital, an independent think tank, which last month released a report that compared Business Roundtable Statement signatories to their non-signatory counterparts and found that signatories have outperformed their peers on issues related to back-up dependent care, personal protective equipment, paid sick leave, financial assistance, customer accommodations and community relief funds.

Recently, The New York Times reported on a study by a group called Test of Corporate Purpose that used artificial intelligence to look at news reports, social media and other public materials to determine how Business Roundtable companies who signed the updated Statement compare with non-signatory companies in the U.S. and Europe in their responses to COVID-19 and racial equity issues. The study doesn’t evaluate whether Business Roundtable companies met their commitments under the Purpose of a Corporation statement. In fact, it is unclear what the study evaluates. Neither what this study measures nor how it is measured is disclosed.

Data Transparency

There is little additional information about the underlying data used and analyzed for the report, making it impossible to know what was analyzed in the report apart from broad categories of common ESG terms. The study also provides no quantitative breakdown of key metrics for companies — only a final rank by quartile based on an aggregated total score. In addition, a total of 68 Business Roundtable companies — or one-third of the Roundtable membership — were not included in the study, in part because some are privately-held companies and this report only looked at publicly-traded companies, but also due to a failure to collect comprehensive data.

Industry Bias

Although the study does not disclose the metrics it used or any company specific data, the report seems to build in a clear industry bias. The report finds that companies with minimal physical human interaction, such as technology, finance, business and professional services, rate well as a group. By contrast, businesses that require more human contact — notably, those dependent on travel and tourism — have demonstrated, according to the study, poor behavior toward its stakeholders. In what can only be a design flaw, the study appears to equate the impact of COVID-19 on a business sector over the past half year with poor treatment of its stakeholders.

Some airline and hotel companies experienced unprecedented 90 percent reductions in revenues for a period of time. It is not realistic to expect companies fighting for their very survival to have the same ability to invest in their workers or in their local communities as companies with healthy balance sheets, and nothing in the Statement on the Purpose of a Corporation suggests that companies should act with disregard for their continued viability. Indeed, disregard for the companies survival would undermine the interests of every stakeholder. Rather, the Statement commits companies to build toward long-term success by considering the interests of all of the stakeholders who make success possible. There is no indication in the report that the authors seriously considered the difficult issues facing a CEO in the hotel, airlines or recreational industries today, including how to keep a business afloat so it exists on the other side of this crisis and for the benefit of all of its stakeholders.

Methodology and Short-Termism

In addition, the report’s methodology — a limited, short-term snapshot of corporate behavior, according to news reports and similar sources — is flawed. The report authors note that because the data they used are “dynamic and continuously changing,” the rankings “are best interpreted as a snapshot in time of the company’s average performance on COVID-19 and inequality issues, not as a reflection of companies’ absolute long-term performance.”

Short-term snapshots are exactly the wrong measure of a company’s performance. In fact, the Statement was intended to move past short-termism in corporate decision-making. For decades, companies operated under principles of “shareholder primacy,” which considered stock price the singular measure of a company’s success. Not surprisingly, this caused some companies to manage toward short-term benefits to the stock price, sometimes at the expense of the long-term health of the company. The report authors seem to be comfortable replacing one short-term measure with another, which, if taken seriously, would incentivize other kinds of short-term behavior that Business Roundtable CEOs reject.

More information on what companies are doing to address the challenges of COVID-19 is available here and on racial equity and justice is available here.


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Business Roundtable

Business Roundtable is an association of CEOs of leading U.S. companies working to promote sound public policy and a thriving U.S. economy.