April 15, 2020

COVID-19 Pandemic Highlights Need for Stakeholders to Be Considered

Jessica C. Pearlman

Those who follow the topic of corporate governance are well aware of an ongoing ideological battle regarding the responsibilities of corporations.[1] For those who do not follow this battle, a quick synopsis:

On the one side, the shareholder reigns supreme. Proponents of this view believe that fiduciary duties are owed to the corporation’s shareholders only. Thus, the shareholders’ interests are necessarily paramount. This position gives rise to short-termism, the approach of operating the corporation to maximize today’s profits for today’s shareholders. Much of shareholder activism is based upon this view (or, at least, on benefitting from it).

On the other side, corporate responsibility is to a broader set of stakeholders. In this view, corporations have responsibility to consider the interests of all stakeholders, including shareholders. Stakeholders are specific to a given situation, but generally can include the community around that corporation, its employees, and even those affected by that corporation’s impact on the environment.

(For more on this ideological battle and its history, please see the author’s interview of Marty Lipton of Wachtell, Lipton, Rosen & Katz in the upcoming Spring 2020 75th Anniversary issue of The Business Lawyer.)

On April 8th, 2020, in the midst of the global novel coronavirus pandemic, the Chairman of the Securities and Exchange Commission (“SEC”) and the Director of the SEC’s Division of Corporation Finance released a statement advising U.S. public companies regarding public disclosure of the impact of the novel coronavirus on their businesses (the “SEC Statement”).

The SEC Statement asserts that “broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19” and elaborates as follows:

Investors are not the only ones who are interested in how companies will adjust their affairs as we pursue our collective fight against COVID-19. …[B]road and extensive coordination across workers, firms, investors and governmental officials will be critical to successfully emerge from this fight. ...[W]hen a company articulates its strategy publicly, it gives investors and the public a heightened level of confidence and understanding. This increased confidence and understanding reduces risk aversion and facilitates action. This type of positive dynamic plays out across our economy in countless ways and further demonstrates the need for, and the power of, a coordinated, dynamic and forward-looking public-private strategy for fighting COVID-19.

The SEC Statement illustrates this point (“one of millions of examples”) by noting that a laundry might be able to rehire laid off employees if the owner knew hotels were developing a plan to operate.

By acknowledging the impact of operations on the broader community, the SEC Statement implicitly (but not necessarily intentionally) highlights the need for corporations to adopt a stakeholder approach.

For some, the interconnectivity of various aspects of the economy is more apparent now during our current global health crisis. For others, this interconnectivity has long been apparent. (In August 2019, The Business Roundtable released a new Statement on the Purpose of a Corporation, signed by 181 chief executive officers who committed to lead their companies for the benefit of all stakeholders.[2])

This interconnectivity means we are all the stakeholders. Short-termism hurts us all. We cannot focus on short-term profits alone over the long-term health of the business or over the needs of employees, the needs of the planet, or the needs of the community to be able to get back to health.

[1] Jessica Pearlman is a corporate partner in the Seattle office of the global law firm K&L Gates LLP, and serves as a vice chair of the M&A Committee of the American Bar Association’s Business Law Section. The views expressed here, however, are her own and do not purport to represent the views of the firm or of anyone else.

[2] Statement on the Purpose of a Corporation, Bus. Roundtable (Aug. 19, 2019), https://opportunity.businessroundtable.org/ourcommitment.

Jessica C. Pearlman

K&L Gates LLP

Jessica represents emerging and established companies in various corporate, securities, and finance matters, with an emphasis on mergers and acquisitions for both public and private clients, domestic and international. She has particular depth of experience in various technology sectors, including healthcare applications, software, social media, data security, data storage, mobile applications, and search and search engine optimization, as well as in digital and traditional media, biotechnology, and transportation. Jessica is a frequent presenter on mergers and acquisitions topics and has been selected for inclusion in The International Who’s Who of Merger and Acquisition Lawyers, Who’s Who Legal (2015-present) and as a Washington Super Lawyer and one of the Top Women Attorneys in Washington (2013-present). She was also selected by Lawyer Monthly for a Women in Law 2017 Recognition Award. Jessica has served as an adjunct professor at the University of Washington School of Law and Seattle University School of Law, is active in leadership roles with the Mergers & Acquisitions Committee of the American Bar Association’s Section of Business Law (including serving as Chair of the Private Target M&A Deal Points Study) and is a member of the Thomson Reuters Business Law Solutions Advisory Board and the Practical Law Company Corporate Advisory Board. Jessica received her B.A. from the University of Washington (1996) and her J.D. from Georgetown University Law Center (1999).