In August 2019, Business Roundtable issued a statement on the “Purpose of a Corporation”¹ and redefined
its longstanding position that corporations exist principally to serve shareholders. Instead, the association of
CEOs of leading U.S. companies emphasized the need to benefit all stakeholders: customers, employees,
suppliers, communities and shareholders. The reactions were immediate and occasionally extreme, with
many questioning the implications for capitalism or arguing that the statement merely served to entrench
management teams. We met with Brad Klapmeyer, CFA, portfolio manager of the Ivy Large Cap Growth Fund,
to review the details and the potential impact on business, industry analysis and corporate governance.
Q: Business Roundtable incited
a flurry of press reactions with
its latest statement, ranging
from “this is simply rhetoric” to
“this is the death of capitalism.”
What’s your reaction to the new
Klapmeyer: The list of corporations that are
signatories includes many of the world’s best
companies. That tells me there has to be something
in this pronouncement that we must consider as
fundamental investors. I think there is a lot of
importance in the things they said and we need to
recognize it as we consider each element.
Q: Let’s dig into the five specific tenets of the
statement and consider them one at a time. The first
is: Delivering value to our customers. We will further
the tradition of American companies leading the
way in meeting or exceeding customer expectations.
As a fundamental investor doing daily bottom-up
research to identify strong businesses, what’s your
reaction to the idea that delivering value to the
customer is a key corporate responsibility?
Klapmeyer: Consumer-facing products are the easiest
to understand in this context. However, if you
reverse the thought and ask how that ultimate value
to the customer is created, then you can uncover
the fundamental components required. Key inputs
in delivering value to customers include a strong
investment in research and development (R&D),
helping to generate innovation and diversity of ideas.
The ultimate value of a product would be realized
by the customer, and the company would benefit
through profitability and strong returns. It’s key to
understand how these things are connected.
We see it in the footwear industry, where there is
massive innovation on direct to consumer sales, and
there are software and health care companies that
drive significant innovation and generate strong
profitability and returns. On the other side, I covered
the pharmaceutical industry for years. There was
a period when certain specialty pharmaceutical
companies were pursuing financial engineering and
driving earnings through mergers and acquisitions.
We began to ask, “What is the ultimate value those
companies bring to consumers through that sort of
activity?” We found out that they weren’t investing in R&D. They were buying drugs, raising the prices
and investing zero in R&D and innovation. Those
companies eventually were exposed for what they were.
They were providing no ultimate value to consumers.
These are proof points that show how focusing on
delivering value to consumers has tangible benefits to
the sustainability and profitability of a business.
Q: The second tenet is: Investing in our employees.
This starts with compensating them fairly and providing
important benefits. It also includes supporting them
through training and education that help develop new
skills for a rapidly changing world. We foster diversity
and inclusion, dignity and respect. Does this seem
consistent with your approach of seeking high-quality
companies with strong business models or is this at odds
with being able to deliver value to shareholders?
Klapmeyer: I think it becomes more meaningful in
linking this statement to things that can be described
through fundamental components. Investing in
employees is taking consideration of employee turnover,
employee productivity, the ability to attract talent —
those are all key conversations we have with companies
when we’re doing deep fundamental research. I think it
would be difficult to say these attributes aren’t integral
to the durability of the company. One of the things we
worry about, for example, is the “talent bench.” If the
CEO leaves or if the head of R&D leaves, who’s on the
team to step up? Is external top talent attracted to work
at that company? These are crucial conversations to
have when conducting deep fundamental research.
I would say this lends itself to a bigger discussion
around corporate governance, and it also weaves into
compensation discussions and fair wages. For example,
you must ask whether all employees feel like they’re
being adequately compensated and valued by the
company. This could influence employee productivity.
I believe one could easily argue that investing in
employees starts with the actions of executives —
leading by example — which lends itself to a deeper
discussion on corporate governance and executive
Q: There is always that tension between running the
business for the profit-and-loss (P&L) statement —
and in the short term a business can drive profits by
not investing for growth — and investing for growth
to create competitive advantage. If it’s a talent-driven
business, it would be problematic if management was
not investing in a deep bench.
The third tenet is: Dealing fairly and ethically with our
suppliers. We are dedicated to serving as good partners to
the other companies, large and small, that help us meet our
missions. Is that at odds with serving shareholder value?
Some might argue that a major company should exert its
customer power and squeeze its suppliers for margin. How
can dealing fairly with suppliers serve the bottom line?
Klapmeyer: I believe a strong collaborative and trusted
relationship with your suppliers is paramount for
any company. As an example, I covered the auto
manufacturing industry for several years. Those
manufacturers don’t build many of the components that
go into each vehicle; auto suppliers do. Components
including the suspension, electronics, powertrain, seats
— all can be engineered and innovated by the supply
chain. The auto manufacturers are leaning heavily
on the relationships with their suppliers to provide
innovation, logistics related to the components and
just-in-time supply management.
I once visited a manufacturing plant in Texas. It was what
I would call a new-age plant from a Japanese automaker.
This auto manufacturer was well ahead of domestic
automakers at the time in terms of manufacturing
productivity. You would see an ecosystem of suppliers
around that manufacturing plant, where a red leather
seat with white trim was being introduced into the
manufacturing facility at the exact time a truck coming
through needed a red leather seat with white trim. That is
not something you can execute productively if you do not
have excellent supplier relationships. It must be a trusted
relationship and those take years to cultivate. In doing
our fundamental research, those are things we should be
able to discover and understand because they have a real,
lasting impact on profitability and durability of businesses.
Q: That example highlights that there are businessmodel
specifics related to each of the tenets in the
Business Roundtable statement. But it is nuanced.
Management teams need to act on these things in ways
that can serve their businesses and can drive their
The fourth tenet is: Supporting the communities in
which we work. We respect the people in our communities
and protect the environment by embracing sustainable
practices across our businesses. What’s your reaction to
the idea that companies should be welcomed and seen
as positive actors in their communities?
Klapmeyer: I think this can even take a broader
lens. People often look at sustainability metrics and
wonder how emissions, waste and recycling relate
to analyzing a business. An example for me comes
from a transportation company I recently visited.
This company runs a large trucking fleet, so it’s
required to burn a lot of fuel in operating the business.
Understanding fuel economy is integral to its business
because it is a sizeable cost component of running the
fleet. The management team wants to improve fuel
economy as much as it can and supports natural gas
trucking and electric vehicle trucking. The potential
efficiencies that come from these technologies in the
form of fuel-cost savings and productivity are important
to the company’s competitiveness in a fragmented
industry. However, we can’t lose sight of the fact that
these business directives also align with lowering
emissions and waste, and thus link protecting the
environment to real business drivers.
The other thing this trucking company is doing for the
community more broadly is taking steps to improve
its safety record. Something the company doesn’t get
recognized for is the requirement of hair-follicle drug
testing for drivers, rather than urinalysis. It is a much
more stringent test that is not required, but management
believes there’s a real safety aspect to it. In the longrun
this should improve relationships with shippers
and position the company as a trusted, safe source of
transportation and improve road safety. This also has
ramifications on insurance costs related to a lower
number of accidents. There are real public relations
and P&L considerations in how a company works with
communities and protects the environment.
Q: From a bottom-up view of understanding the
fundamental drivers of a business, would you say
looking for sources of competitive advantage and
looking at the management to understand what has
matured in the business as well as whether it’s being
managed effectively — are those ingrained in how you
look at identifying business quality?
Klapmeyer: Yes, if you think about that specific example
in the transportation industry, there are reasons a lot
of these companies aren’t sustainable business models
and there is massive fragmentation in the industry.
There must be long-term planning around employee
engagement, continued innovation — especially
innovation that requires partnering with suppliers —
and ultimately a focus on the quality and desirability
of the product they are bringing to customers. You can
connect all these dots and find some companies do this
exceptionally well and it’s a focus for them. Ultimately
the same metrics that you would look at fundamentally
show up both in sustainability and profitability.
Q: The final tenet is: Generating long-term value
for shareholders, who provide the capital that allows
companies to invest, grow and innovate. We are
committed to transparency and effective engagement
with shareholders. I think Business Roundtable is
saying that — the customers, employees, suppliers,
communities, shareholders — each of those stakeholders
is important in different ways to different business
models. It is not a one-size-fits-all approach. By
proactively managing those relationships in a way
that can serve the business franchise, reputation and
competitive advantage, the company has the potential
to deliver better levels of profit over the long term. It may
be that a long-term view is the key versus a short-term
financial engineering approach. In the short term, those
costs and benefits don’t show up. But over the long term
we think they will come home to roost.
Klapmeyer: Agreed, I think you said it very well.
Q: As a fundamental investor looking to deliver returns,
you don’t seem to believe that the new statement from
Business Roundtable is turning capitalism upside down.
Klapmeyer: Not at all. We’re already looking at specific
companies in terms of how they treat their suppliers,
how they engage with their workforces, what their talent pools are like and whether they are polluting
their communities. These things are embedded in our
fundamental research process and how we conduct due
diligence on a company.
I also have the sense that there is a real opportunity
for Ivy to do something different as it relates to
sustainability. In my view, we have longstanding, solid
relationships with companies because we’ve been
good, long-term shareholders and they have welcomed
this discussion with us. I think you’ll find that many
companies achieve sustainability effectively. We can
learn from them and they can learn from us, but there
are also many companies that don’t know what they’re
doing right or wrong. It’s not because they are ignoring
these issues or running the business incorrectly. It just
hasn’t been the focus.
We can engage with those companies more deeply and
help steer their businesses in a direction that not only
makes them better corporate citizens, but also enhances
growth and profitability and helps them create more
sustainable and durable business models. We focus on
the strength of the business and we think all these things
ultimately get us there. The practices detailed in the
Business Roundtable statement are intended to make
good businesses better. We believe we can create value
for shareholders by actively participating in this effort.
The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to
change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to
purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Ivy Investment Management Company and Ivy Distributors, Inc. are not affiliated with or members of Business Roundtable.
1 - Business Roundtable: “Statement on the Purpose of a Corporation,” August 2019.
- The New York Times, ““Shareholder Value Is No Longer Everything, Top C.E.O.s Say,” by David Gelles and David Yaffe-Bellany, Aug. 19, 2019
- Los Angeles Times, “CEOs say they care about customers and workers. Propaganda experts are unimpressed,” by David Lazarus, Aug. 21, 2019
- Los Angeles Times, “Jeff Bezos becomes the first CEO to break his pledge to dump the ‘shareholder value’ model,” by Michael Hiltzik, Sept. 16, 2019
- The Wall Street Journal, “Milton Friedman on CEOs: The late, great economist anticipated the Business Roundtable,” by The Editorial Board, Aug. 20, 2019
- The Wall Street Journal, “The Business Roundtable’s Recipe for Confusion: When companies try to do the government’s job, inefficiency and uncertainty result,” by Richard J. Shinder, Sept. 17, 2019
- The Wall Street Journal, “CIO Journal: The (Updated) Purpose of the U.S. Corporation,” by Irving Wladawsky-Berger, Aug. 30, 2019
- Financial Times, “Directors have a duty to look beyond their shareholders,” by Martin Lipton and William Savitt of Wachtell, Lipton, Rosen & Katz, Sept. 17, 2019
- Harvard Business Review, “Is the Business Roundtable Statement Just Empty Rhetoric?,” by Andrew Winston, Aug. 30, 2019
- Musings on Markets (Blogspot), ”From Shareholder wealth to Stakeholder interests: CEO Capitulation or Empty Doublespeak,” by Aswath Damodaran, Professor of Finance, Stern School of Business, NYU, Aug. 28, 2019
- Harvard Law School Forum on Corporate Governance and Financial Regulation, “It’s Time to Adopt the New Paradigm,” by Martin Lipton of Wachtell, Lipton, Rosen & Katz, Feb. 11, 2019
Risk factors: Investment return and principal value will fluctuate and it is possible to lose money by investing. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile
than an investment with greater diversification. These and other risks are more fully described in the Fund’s prospectus.