Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies?

Matteo Gatti is Professor of Law and Chrystin Ondersma is Professor of Law and Judge Morris Stern Scholar at Rutgers Law School. This post is based on their 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (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).

Broadening the corporate purpose to embrace stakeholderism has been a staple of corporate governance discussions in the last few years, especially after endorsements by the likes of Larry Fink, the Business Roundtable, Elizabeth Warren, and Bernie Sanders. Of particular interest are some recent reexaminations of stakeholderism, which rate it as a more realistic path to improvement for weaker constituencies than direct regulation. In particular, stakeholderism is considered to be a more feasible substitute to alternative reform routes, as recent impasses on the minimum wage and labor reform can attest. Also, by promoting an environment more conducive to passage of direct regulation, the theory goes, stakeholderism is a necessary first step for future incremental change.

In a new paper, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies?, we show the structural shortcomings of stakeholderism in the context of one constituency—workers. Worryingly, not only do we see no evidence that stakeholderism can advance their cause, but we fear that such a stakeholderist regime would instead give corporations more leeway to pursue an agenda at odds with the interests of the workforce.

In the paper, we explore some key known contributors to workers’ economic disadvantage, such as concentration and monopsony in labor markets, weak collective action protections for workers (together with a diminished enforceability of employment rights), a declining minimum wage, and the harsh reality of outsourced and gig work. We devote the thrust of our paper to surveying policy initiatives in selected areas that, according to specialists in those fields, would be capable of directly empowering workers and offering them better tools for bottom-up initiatives. In particular, we consider heightened antitrust enforcement in labor markets, bolstering the ability to unionize and benefit from collective bargaining, increasing the minimum wage, and tackling abuses in labor outsourcing and in the treatment of gig workers. We compare and contrast such proposals with the stakeholder approach, which would instead privilege top-down change from within (actually at the top of) corporate power—the boardroom.

After evaluating evidence supporting the merits of such policy initiatives, we consider whether stakeholderism can be a more feasible substitute to such reforms or otherwise assist in achieving them. We first review the behavior of corporations as relates to workers, and show that, in addition to lobbying, often opaquely, to retain and expand their share of influence to avoid liability, corporations persistently thwart efforts to increase workers’ power and resources. In particular, we look at efforts to prevent unionization, the widespread use of mandatory arbitration, and the refusal to extend benefits and protections to gig workers and other outsourced labor. Then, in gauging whether stakeholderism can advance the interests of workers, we posit that any policy that purports to be effective must be mandatory, enforceable, and specific, and note that merely altering the boundaries of corporate purpose and broadening the reach of fiduciary duties does not have such characteristics. We ask if, despite lacking these qualities, a stakeholder approach may still create a fertile landscape for worker advancement, including via direct regulation. We argue that stakeholderist corporate governance changes have little role to play in shifting the cultural landscape in favor of regulation; in fact, when corporations cede power to workers, it is generally in response to public pressure (for example, in the wake of #metoo movement). In fact, there is a risk that corporations will simply coopt a stakeholderist agenda, just as they have coopted progressive agendas in the past, as in the case of arbitration and, to some extent, antitrust.

Exploring antitrust and labor initiatives in the context of the ongoing debate on stakeholder capitalism, and from the vantage point of a corporate lawyer, is critical for two reasons. First, it repositions the conversation to focus on why directors should be the ones supporting weaker constituencies. Second, it offers a litmus test on how they should operate—what to expect, in other words, from corporations if they truly embraced stakeholderism. For instance: Will stakeholderism contribute to a more collaborative stance towards unions and collective bargaining? Will stakeholderism call for increasing the minimum wage? Will it result in any significant change in the ways corporations routinely outsource tasks that are traditionally carried out by employees? Will it pause the impetus of firm concentration? Crucially, can any of the foregoing issues be worked out solely thanks to the broadened corporate purpose without any legislative/regulatory involvement, as some proponents have suggested? A stakeholderist movement serious about caring for its employees should bring less friction in industrial relations and a more welcoming stance on unions and other labor market institutions protecting workers. If stakeholderism could offer that, the approach would be much less objectionable—in fact embracing it could lead to success. However, there is little indication that this is happening or is the direction stakeholderism is moving towards.

In the end, time, resources, and political capital are not put to their highest and best use when directed at stakeholderist corporate governance proposals. Instead, proposals for direct regulation that will protect workers are more worthy of consideration. We fear that rather than pave the way for these proposals, stakeholderism will instead serve as a roadblock: outsourcing the protection of weaker constituencies to directors and managers, the very power structure that has been vexing worker prerogatives, seems not only disingenuous but also dangerous.

The full paper is available here.

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