A Test of Stakeholder Governance

In our paper, A Test of Stakeholder Capitalism, we argue that companies turn to stakeholders to obtain more information about how to deal with looming risks. Many corporate choices affect stakeholders, whose reaction, if assessed beforehand, can help the company in its decisionmaking. When management realizes that stakeholder feedback can help it prepare a more effective response to a business challenge, it launches initiatives seeking to better understand stakeholders’ perspectives and, if pertinent, adjust its choices. Many have defended stakeholder capitalism on other grounds, ranging from improving aggregate social welfare (Edmans 2020), to addressing externalities (Condon 2020), to aligning with shareholders’ long-term interests (Strine 2019, Lipton 2017). Others have criticized managers’ embrace of stakeholderism as paying lip service to lofty ideas while failing to follow through in practice (Bebchuk and Tallarita 2021a, Bebchuk and Tallarita 2021b) and instead using broad discretion to benefit executives and directors (Bebchuk, Kastiel, and Tallarita 2021). Finally, others have questioned whether lumping all stakeholder interests together provides any real guidance to management and boards (Davidoff Solomon & Fisch 2021). In contrast, we focus on ESG as a technology for extracting information from and managing interactions with affected parties – not as purpose, but as governance.

The arrival of Covid in March 2020 provides us with a unique setting for exploring our thesis. Stakeholder needs were urgent and critical, as the health and livelihood of many were in immediate threat. From individual employees to entire communities, from local authorities to national governments, from retail consumers to raw material suppliers, stakeholders saw their attitudes towards companies change dramatically. At the same time, almost every company had to adjust to pandemic realities, with some seeing their business crater due to changing habits, while others experiencing a boost in consumer interest. We conducted interviews with high-level executives (typically CEOs or General Counsel) in 14 large publicly traded companies: Salesforce, Clorox, American Airlines, Airbnb, Uber, Lyft, PepsiCo, Levi’s, Nestlé, Hershey, Mastercard, Millicom, Nokia, and MGM Resorts. All companies in our sample had made public commitments to promote stakeholder interests, so we capture how a relatively developed stakeholder apparatus, already in place before Covid, responded to the pandemic.

Our interviews unearth many instances in which management, recognizing that it would be making decisions in the dark without input from stakeholders, actively sought to gather their input and adjusted corporate choices to newly received information. For example, firms knew they needed to support employees working remotely, but who were those most in need, and what kind of support would be more helpful? When would employees feel safe returning to workplaces again, and under what conditions? Similar questions arose for stakeholders outside the corporation, such as governments and consumers. When highly regulated activities, like airline operations, ground to a halt, how would governments view any ongoing obligations of these companies towards them? Were telecommunications companies, faced with waves of consumer defaults, better off relegating consumers to debt collection, or should they preserve access to their services and help consumers overcome their financial troubles?

We find that companies that turned to stakeholders considered previously unknown perspectives and adopted novel, unanticipated solutions. To provide some illustrations: Clorox, experiencing a spike in demand for anti-bacterial products, opted to continue supplying hospitals and care facilities that reported difficulty in finding alternative sources, even when it would have to give up prized shelf space in large retailers like Target and Walmart. Levi’s, after years of fostering ethical and sustainable production practices throughout its supply chain, decided to support its faltering suppliers by helping them find additional credit when many in the industry were canceling orders. When the lockdowns were imposed, Airbnb found itself in a bind as hosts were keen to enforce strict cancellation policies, but consumers were complaining; but when local governments asked the company to help limit travel flows across locations, they decided to allow for relaxed cancellations.

Sometimes, stakeholder considerations failed to win the day in management deliberations. This was particularly true when stakeholders’ preferences conflicted with one another. During the fight to pass Proposition 22 in California, which characterizes gig economy workers as independent contractors, Uber repeatedly underlined that drivers’ preferences were divided. Moreover, when companies were faced with the prospect of laying off employees amidst a crisis, no piece of information from stakeholders was able to alter the outcome. In those cases, companies used ESG tools to mitigate the impact of the layoffs, such as by offering health coverage even after severance.

Whether swayed by stakeholder considerations or not, companies in our sample reported an increase in the frequency of communications with stakeholders, especially employees, governments, and suppliers. Virtual town halls with the CEO and thousands of workers became a weekly occurrence, especially at first. Consumer and employee surveys, which typically run monthly or quarterly, became weekly and more targeted. In some cases, stakeholder governance officers, who had established closer connections with government officials and academic experts, were promoted from mid-ranking roles into the firm’s core management team. Executives reported spending more time in meetings with industry peers, government officials and community leaders than any time before in their career. At the board level, directors demanded that they review stakeholder input directly and on an ongoing basis, and kept pressuring executives until, in some cases, management had to intervene. Overall, stakeholder governance became a key procedural tool for sourcing information that proved indispensable for executive decision-making and board monitoring under Covid.

The complete paper is available for download here.