The world's most influential executives will soon swarm the World Economic Forum in Davos, Switzerland, where they will embrace the idea that corporations no longer exist simply to funnel profits into the pockets of shareholders.
They will talk about how their companies have tackled societal issues — from diversity to climate change.
Powerful politicians, potentially including President Donald Trump, will also be at the five-day event, which begins Tuesday, laying out the way they have held companies accountable, all while populist rhetoric remains a heated topic during this year's campaign for the White House.
In the often-snowy Swiss village, stakeholder capitalism — a movement that redefines a company's purpose from serving only its shareholders to all stakeholders, including customers and communities — will be the dominant theme. It will be the first Davos meeting since the Business Roundtable, a group representing the CEOs of nearly 200 companies, embraced stakeholder capitalism as its new purpose in August.
But conversations with corporate advisors, investors and experts paint a more nuanced picture of how corporate America is taking on the issues. It is one in which Congress' ability to force corporate change is dwarfed by state governments. And the biggest driver of change originates from where it always has — investors. As some investors have shifted their focus to the public good, so have companies. Yet there will be limits to change as long as the largest investors care most about making money.
"So far, at most companies, their words are bigger than their actions," said Erik Gordon, a professor at the University of Michigan's Ross School of Business. "The other wordy people, politicians in an election year, aren't as big a force as socially activist stockholders are. Stockholders like endowments and pension funds, who are more interested in stakeholder effects than are stockholders who look solely for returns, are the ones the corporations cannot ignore."
Setting the stage for Davos and corporate America over the past few years is a generation for which social and economic issues have become nearly unavoidable. Issues like climate change are more tangible, due to disasters like the wildfires in Australia. Homelessness is more apparent to young urbanites as the problem swells in cities like Seattle and San Francisco. Income inequality is rising as technology and globalization alter the employment landscape.
With that, public pension funds are asking more questions — like whether private equity contributed to the demise of Toys R Us. Shareholder advocacy groups like As You Sow are pushing for shareholder votes on issues including climate change and human rights.
The country's biggest investors have joined in as well. Powerful names like ValueAct, Jana Partners and BlackRock have launched new funds that promote environmental, social and governance causes, known as ESG. The funds espouse the idea that investments that line up with public values are rewarded by the market place. Investing in alternative energy, for example, could be rewarded as countries move toward shifting their power standards.
It was with that view that BlackRock CEO Larry Fink announced that the world's largest money manager will exit investments with a high sustainability-related risk like coal. He attributed the move to "a fundamental reshaping of finance" and warned that climate change is a "defining factor in companies' long-term prospects." He also said the group will join the Climate Action 100+ investor coalition, which focuses on tackling greenhouse gas.
But for funds like BlackRock, profit will always be the driving goal. To that end, there are reasons beyond the public good for ESG funds. As passive investing overtakes active, they offer a way to stand out to the Street. ESG funds may also endear the big investors who back them to proxy advisory agencies like the Institutional Shareholder Services when they agitate for seats on company boards.
It is with that caveat that some question how far funds like BlackRock and Vanguard are willing to go.
As an example, the Sierra Club's Michael Brune applauded BlackRock's announcement, while also noting that the firm voted against every single resolution backed by the Climate Action 100+ investor coalition.
And behind the scenes, large funds like BlackRock are less focused on some of the demands that could create the most drastic change — like tying pay to ESG performance — than they are on shareholder return.
"When companies have to talk to their shareholders about ESG issues, risk management and culture are among the top topics," said Bill Anderson, global head of Evercore's Activism Defense business and Strategic Shareholder Advisory practice. "Despite the heightened focus on stakeholders, most companies provide near-term guidance and compensation continues to focus on short-term total shareholder returns."
Some executives argue that improved shareholder returns can help CEOs benefit society in other ways, like through charitable endeavors. But so long as CEOs' pay is tied to Wall Street performance, there is room for examples of discord between what benefits wallets and the world.
Boeing's former CEO Dennis Muilenburg, who was fired last month for his handling of the 737 Max crisis, walked away with more than $60 million, despite being denied severance. In 2018, the majority of his compensation was tied to performance-based bonuses linked to short-term incentives, like sales, cash-flow and earnings-per-share and longer-term metrics like its 3-year profit goal.
"Yeah, you killed 346 people," Rep. Peter DeFazio, D-Ore. recently told reporters, arguing that a disproportionate focus on share price "somehow has got to change."
Muilenburg was a board member of the Business Roundtable until he was ousted as Boeing CEO in December. At a press conference earlier that month, then-Business Roundtable Chairman Jamie Dimon, the CEO of J.P. Morgan, scoffed at the notion that there was a disconnect between the Business Roundtable's stakeholder capitalism and Muilenburg's board-seat.
The Business Roundtable is "not an enforcement group," Dimon said. "[...] And yes, companies are going to make mistakes and have problems and that'll never end — truthfully like any institution you'll ever see on the planet — including the press."
Business Roundtable CEO Joshua Bolten said at the same press conference that "every single one of the CEOs who are members" of the group is already engaged in supporting their customers, employees and communities, as well as shareholders. Its new purpose is a challenge to its CEOs to "do better and more," he said. From the Business Roundtable's standpoint, that means engaging in policy debates like its push for a federal increase in the minimum wage.
But the minimum wage debate — like climate change, board diversity and privacy — is already being tackled by the states, far ahead of federal regulation.
While the federal minimum wage has held steady at $7.25 an hour since 2009, nearly half of states raised their minimums in 2019. In turn, companies are already responding, with everyone from Walmart to Amazon having already announced plans to raise their wages.
"I think every CEO of a large company knows that it would be difficult to have big changes at the federal level, because most corporate law is done at the state level," said Michigan's Gordon. "It costs nothing for a CEO to throw out a bill proposal. You can't accuse them of doing anything other than what politicians try to do — you hold hearings — its Kabuki theater."
That's not to say the federal government has no powers, whether it be through investigations or lawsuits.
One of the tools the federal government has at its disposal to impact ESG is still little used: disclosure requirements imposed by the Securities and Exchange Commission.
A Dodd-Frank rule requiring the SEC to adopt rules that force disclosure of CEO pay ratio brought the issue to the forefront in boardrooms, corporate advisors have told CNBC.
There is no uniform SEC disclosure standard for most ESG issues, so there is no clear way to hold companies accountable beyond press releases and hard to parse ESG reports.
Without a clear public measuring stick, companies can more easily slip through the cracks of accountability, say industry experts. For that reason, there are pushes to force the SEC to impose such standards, like Sen. Elizabeth Warren's proposed Climate Risk Disclosure Act.
There are inherent challenges in creating such requirements. They would add more compliance costs as public companies are already arguing the costs of being public are too onerous. It is difficult to create a metric by which to measure issues like environmental impact that would work for an array of industries, from energy to services.
With that, the SEC is unlikely to impose such rules in the short term, industry experts say. The agency, led by Jay Clayton, a Trump appointee, has made simplifying corporate disclosures among its priorities.
Indeed in November, the SEC proposed a pair of rules that would raise the threshold for investors to call for a vote on specific issues, making it harder for them to press climate change and gender equity issues.
Among the groups that pushed for the SEC to raise that threshold was the Business Roundtable.
— CNBC's Leslie Josephs and Amelia Lucas contributed to this report