Shareholderism Versus Stakeholderism—A Misconceived Contradiction: A Comment on “The Illusory Promise of Stakeholder Governance” by Lucian Bebchuk and Roberto Tallarita

Colin Mayer is the Peter Moores Professor of Management Studies at University of Oxford Saïd Business School. This post is based on his recent paper. 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);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

There has recently been growing interest in stakeholder governance. The Illusory Promise of Stakeholder Governance by Lucian Bebchuk and Roberto Tallarita (BT) (discussed on the Forum here) is a thoughtful and carefully constructed critique of the subject. In a nutshell, BT’s critique is that “stakeholderism”—the idea of promoting the interests of the stakeholders of a firm (its customers, employees, suppliers, societies, and the environment)—is either just enlightened “shareholderism”, augmenting the value of shareholders’ investments, or it requires directors of companies to make near-impossible trade-offs. In the first case, stakeholderism as enlightened shareholderism, stakeholder governance is regarded as just good business that creates greater financial value for shareholders as well as benefits for stakeholders. By supporting their stakeholders, companies establish more loyal customers, engaged employees, reliable suppliers and sustainable environments. These generate greater revenues and lower costs for companies and therefore more profits as well as benefits for stakeholders. In this case, BT suggest that stakeholderism is no different from traditional shareholder governance.

In the second case of where there are trade-offs, companies go beyond the point of promoting the interests of shareholders and benefit their stakeholders at the expense of financial returns to their shareholders, even in “the long-term”. This is the case that concerns BT the most. They argue that it requires directors to make trade-offs based on insufficiently reliable measures and misaligned incentives. Furthermore, even in those states of the U.S. with constituency statutes enshrined in corporate law that expect directors to protect stakeholder interests, they don’t; and where directors say that they are adopting more stakeholder friendly policies, as in the 2019 Business Roundtable restatement of corporate purpose, there is no evidence that they do. BT state that it would not even be desirable for directors to adopt such policies because all that they would be seeking to do is to fend off threats of more stringent regulation, which would be a more effective way of protecting stakeholder interests.

So, BT conclude that anything other than shareholder governance is Infeasible, impractical, unrealistic and undesirable. However, in presenting their argument, all that BT demonstrate is that shareholder interests prevail in a country like the US in which superiority of shareholder value is presumed: incentives are aligned to shareholder interests; threats of takeovers, shareholder activism and proxy votes are motivated by shareholder value enhancement; corporate law imposes fiduciary responsibilities on directors to uphold shareholder interests; and regulation is used to align corporate with societal interests when competitive markets fail to do so. BT therefore simply describe the shareholder primacy system of the US as they see it. Even where it deviates from shareholder primacy in constituency states that enacted legislation to protect companies from threats of takeovers, companies are not immune from outside acquisitions that prompt responses from the targets that mirror those of shareholder value driven firms. And we should not be surprised that pro-stakeholder statements made by the BRT are greeted with scepticism and cynicism in the context of a shareholder primacy system when incentives, markets for corporate control and the law all promote shareholder interests.

What the paper entirely fails to do is to provide any evidence on the potential for change and the fact that there are alternative systems around the world that promote different types of corporate conduct and balances of interest in companies. BT look at the U.S. as they see it and conclude that this is the way it must be. They argue that it is impossible to change the system and in particular to relate incentives to non-financial measures of performance. In describing the world as they see it, BT fail to consider what it could be, and one might want it to be. In other words, their analysis lacks a benchmark against which to evaluate the merits or deficiencies of different corporate models and therefore fails to shed light on their relative merits. Suppose, for example, that we want business to promote the wellbeing and prosperity of individuals, societies and the natural world and to do so in a form that is commercially viable and profitable for investors. Does a system that focuses exclusively on shareholder interests, albeit in an enlightened form, deliver that? Does one that permits companies to promote stakeholder interests even at the expense of shareholder value yield better or worse outcomes?

Once we appreciate that trade-offs and judgments are inherent in any system then we should consider how we want business to make them. Do we really want companies to enhance quality of life in their local communities, their environmental protection, the safety and security of their employees and workers in their supply chains, and the health of their customers only to the extent that these increase their share prices? Put it another way, do we want companies to minimize expenditures on taxes, pollution abatement, training of their employees, the condition of workers in their supply chains and reducing the addictive nature of their products, so long as these yield increased returns for their shareholders? Would we have wanted companies to have responded to the coronavirus pandemic by producing testing and tracing equipment, ventilators, vaccines and cures for coronavirus only to the extent they resulted in higher returns for shareholders? By making corporate values explicit and measurable on their own terms, corporate purpose makes management accountable for its delivery in a way in which shareholder value cannot. In a world in which shareholders are interested in their stakeholders’ and their own welfare and wealth then companies should be answerable for meeting their targets on carbon emissions as well as financial returns, and for delivering employment to future generations as well as pensions to current ones.

The British Academy Future of the Corporation programme provides an evidence-led basis for determining what type of reforms are both desirable and feasible, and how in practice they should be implemented and evaluated. Crucially, the programme recognizes this as a “systems issue”. The existing system is a coherent and consistent formulation of law, regulation, ownership, governance, measurement, performance, finance and investment. It is the system that BT describe very clearly in the context of the US and presume to be the only system. But it is not the only system and it is one that is increasingly being found to be wanting and damaging. BT’s article exemplifies why partial remedies are not sufficient because systems of necessity have an internal consistency and robustness associated with them. They deliberately build in incentive, disincentive, legal, regulatory, ownership and governance arrangements that ensure that what is observed remains so. But those systems come up against boundary conditions, from the environment, societies and the political process, that eventually threaten their continuation and existence. We are at that point and require more than just a description of what is and has been, and instead must focus on what needs to be, can and should be done about it.

The complete paper is available for download here.

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