The Pandemic is the Litmus Test of Stakeholderism

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Over the past years, the shareholder primacy model has received a death sentence from private and public sector leaders across the developed—and to a lesser extent—the developing world. With this, corporate boards and executives became responsible not only to shareholders for financial performance but also to stakeholders for environmental, human rights, diversity and other objectives. At the same time, institutional investors became the guardians of the corporate temple, expected to monitor companies’ behavior on an array of these—notoriously difficult to quantify—areas.

Indeed, the transition from the shareholder to the stakeholder model was a key promise of the corporate world to the society—underpinning the new the social contract—called for by the dramatic erosion of trust in enterprise over the past decade. This reformulation was embodied in commitments by prominent business bodies such as the Business Roundtable in the United States and reflected in corporate law amendments in countries such as France. The result is that directors are now responsible not only to shareholders for the bottom line but to stakeholders for the triple bottom line.

The economic crisis engendered by the current pandemic is the perfect litmus test of this promise and a reality check on the change of corporate behavior that can be expected from this transition. If corporations are now anticipated to engage with their stakeholders and communities, there is no better time than the present to do so, as the current economic crisis is already estimated to have repercussions greater than the financial crisis a decade ago—on par with the Great Depression which unraveled a decade short of a century ago.

Already before the current crisis, the tangible impact of the stakeholder model has been put to a test with unconvincing results. A recent study by Lucian Bebchuck and Roberto Tallarita shows that following the adoption of the Business Roundtable Statement by over 180 leading American companies, very few of them amended their corporate governance guidelines to incorporate stakeholder welfare as an explicit objective.

Thus, only a handful of companies incorporated stakeholder interests in their executive remuneration—a key governance culprit identified after the last financial crisis—at the time recommended to be better aligned with shareholder interests. While stakeholder impact metrics are more challenging to devise that financial performance ratios, this far from a Herculean task. At Marriott, for example, metrics determining the CEO’s bonus include employee and guest satisfaction.

Although the stakeholder model has permeated corporate and policy discourse in recent years, the current crisis demonstrates that its actual implementation is at best ad-hoc. While countless companies have pledged philanthropic contributions, their environmental, social and governance (ESG) footprint does not appear to follow and can be judged as short-termist if seen through the stakeholder prism.

Certainly from an environmental perspective, given the decline of travel and consumption in most sectors, the crisis has brought a respite. One study has estimated that 77,000 lives were saved as a result of lower pollution during China’s lockdown. While the G and the E of the ESG equation appear to broadly well respected, the S—which arguably underpins the new social contract post the financial crisis—is currently under tremendous stress.

Only a few weeks into the lockdown, millions of employees—arguably one of the most important stakeholder groups—were dismissed worldwide, in particular in the United States. 10 million unemployment claims, close to the population of the entire New York City, were filed in America in the past two weeks alone. While European data highlights a similar trend, it is so far less dramatic and so will be its consequences in countries with stronger social protection mechanisms.

Corporate attitudes towards employees are revealing significant variances in the application of the stakeholder governance model, even in the same countries. While Visa has committed to no layoffs this year and Danone has specified a period during which it promises to do the same, these examples are unfortunately outliers as the unemployment data highlights. Few companies have so far decided to sacrifice the remuneration of their senior management or the board to preserve employee contracts as have Lululemon or Marriott.

Similarly, bold moves by Ferrari which decided to produce medical equipment or LVMH which started manufacturing disinfectant, appear to be somewhat rare examples of corporate citizenship. Certainly, as the pandemic unfolds, stories of corporate and personal philanthropy will abound. Corporate social responsibility (CSR) will wish to dress itself up as ESG stewardship, however, the two need to be clearly differentiated.

Donating a small percentage of revenues is by no means the same as retaining a commitment to the labour force at a great cost to the bottom line, and hence, shareholder value. Whether companies will self-discipline to retain employees without applying for state aid unless necessary will be an important test. This decision is not a given, as highlighted by Louis Vuitton’s reversal of its application for state aid in France last week.

Today, companies are given a cruel and stark choice to protect their employees versus their shareholders, who appoint their boards, which in turn appoint executives. As the stakeholder model is taken for a test drive in the real world of the unfolding economic crisis, it is becoming painfully clear is that government policy cannot be delegated to corporations since the incentives of senior executives and boards are not legally aligned with stakeholder interests.

The political background to the current corporate drama also begs the question whether the expectations placed on boards in terms of stakeholder responsibilities are realistic. As governments are turning towards protectionism—placing investment restrictions and even issuing orders to specific firms (i.e. American administration’s order to GM to produce masks cases or 3M not to export them)—stakeholderism will become even more complicated.

How can directors be held responsible towards stakeholders, located in different countries, whose interests are subject to trade-offs is an unresolved dilemma. To begin with, do directors of a US company owe a greater duty to the American public or to stakeholders in other countries most endangered by the pandemic? Until boards and executives are provided with conceptual and legal answers regarding their responsibilities, stakeholderism maybe stillborn: for whom the bell tolls, as Hemingway once wrote.

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