Stakeholder Capitalism in the Time of Covid

In a study we recently released on SSRN, Stakeholder Capitalism in the Time of Covid, we use the COVID-19 pandemic to test the claims of supporters of stakeholder capitalism empirically.

The pandemic was preceded and accompanied by peak support for stakeholder capitalism, with corporate leaders broadly pledging to look after the interests of stakeholders. Our investigation, however, casts doubt on whether such rhetoric was matched by actions.

We conduct a detailed examination of more than 100 public company acquisitions, with an aggregate value exceeding $700 billion, that were announced during the first twenty months of the pandemic. We find that the contractual terms of those acquisitions provided large gains for target shareholders and corporate leaders themselves. However, even though the pandemic heightened risks for stakeholders, corporate leaders negotiated for little or no stakeholder protections.

In particular, although many transactions were viewed as posing significant post-deal risks for employees, corporate leaders generally didn’t bargain for any employee protections, including any compensation to employees that would be fired after the acquisition. And corporate leaders also didn’t negotiate for any protections to customers, suppliers, communities, the environment, or other stakeholders.

We conclude by discussing the implications of our findings for public policy and the heated debate on stakeholder capitalism.

Here is a more detailed account of our analysis:

After introducing our subject in Part I, Part II discusses the debate on stakeholder capitalism (“stakeholderism”) and why examining large corporate acquisitions during the COVID pandemic could inform this debate. We discuss, in particular, the implications that two key versions of stakeholderism have for corporate acquisitions.

Supporters of the purpose-based version of stakeholder capitalism (such as Mayer (2019)) argue that corporate leaders should and do give weight to stakeholder interests because delivering value to stakeholders is a major element of corporate purpose. According to this view, corporate leaders with such a sense of purpose should and do pay attention to ensuring that stakeholders share in the larger pie produced by the sale of the company.

Supporters of the implicit-promise theory and the team-production theory (such as Shleifer and Summers (1988), Coffee (1988), Blair and Stout (1999), and Stout (2012)) maintain that corporate leaders should safeguard stakeholders in acquisition decisions, and indeed do so, because such behavior serves the ex-ante interests of shareholders. Stakeholders, it is argued, would be encouraged to invest more in their relationship with the company, and thus to contribute to the company’s success, if they could expect to be treated well in the event of an acquisition down the road. Therefore, the argument continues, corporate value and the ex-ante interests of shareholders would be served by corporate leaders fulfilling “implicit promises” to treat stakeholders well when considering an acquisition.

Both these versions of stakeholderism thus hold that corporate leaders should and do look after the interests of stakeholders when selling the firm. By contrast, the agency critique of stakeholder capitalism (Bebchuk and Tallarita (2020), Bebchuk, Kastiel and Tallarita (2021)) argues that corporate leaders have incentives not to protect stakeholder interests beyond what would serve the interests of shareholders. According to this view, regardless of how desirable it would be for corporate leaders to protect the stakeholders’ interests when selling the company, corporate leaders should not be expected to do so.

Part II also explains why the COVID pandemic provides a good context for testing these alternative predictions regarding the behavior of corporate leaders selling their companies. First, stakeholderism was recently embraced by many CEOs of large companies and prominent business groups, and it has become pervasive in business discourse. Second, the COVID pandemic heightened employees’ and other stakeholders’ concerns and uncertainties, thus arguably increasing their need for protection. Third, shareholders, after an initial value shock, enjoyed a soaring stock market and significant acquisition premiums, and were therefore likely to have prospered even if corporate leaders had allocated part of the acquisition gains to stakeholders. Finally, the pandemic period was accompanied by a large number of acquisitions of significant companies, and the transactions and choices we empirically investigate are consequently quite meaningful economically.

Part III describes the construction of our dataset and the universe of cases it includes. Our study provides a detailed examination of all the acquisitions of U.S. public companies with a value in excess of $1 billion that were announced during the first twenty months of the pandemic. The acquired companies in our sample employed in the aggregate more than 400,000 employees and were sold for an aggregate consideration exceeding $700 billion. Our sample includes both strategic and non-strategic buyers, and both Delaware and non-Delaware targets. For each transaction, we hand-collected and examined securities filings and other materials for each of the deals to study in detail the deal and the terms produced by it.

Part III also documents the significant bargaining that led to the agreed upon terms of the deals. Deals were commonly negotiated over a long period of time, often involved multiple offers (including improved terms obtained by target corporate leaders during the process), and frequently included deal protection provisions in return for the terms extracted from the buyers. The key question, of course, is for whose benefit corporate leaders bargained and what they obtained.

Part IV examines whether and to what extent the deal terms served the interests of shareholders and corporate leaders. Our data show that shareholders obtained significant premiums, with a mean of 34% of the pre-deal market capitalization and aggregate value exceeding $160 billion across all deals. Corporate leaders, in turn, received large payoffs, both as shareholders and as executives or directors; in many cases, they also negotiated for continued positions after the sale.

Part V turns to the heart of our inquiry, examining whether, and to what extent, corporate leaders also bargained for stakeholder benefits and protections. We first examine whether stakeholders were expected to face clear post-deal risks at the time the deals were concluded. To this end, we hand-collected and analyzed press releases, Q&A sessions, conference call transcripts, investor and analyst presentations, and media coverage of the deals. We found that acquisitions were often expected to be followed by cost-cutting, closing or relocation of facilities and offices, and risks to continued employment of some employees.

Part V then proceeds to show that despite clear and present risks to employees, corporate leaders largely did not negotiate for any protections for employees, including any payments to employees in the event of post-deal termination. Part V also examines the extent to which corporate leaders protected the interests of stakeholders other than employees, including suppliers, creditors, customers, local communities, and the environment. We find that corporate leaders chose to provide little or no protection to these or any other stakeholders.

Our findings are consistent with the view that corporate leaders face structural incentives not to benefit stakeholders beyond what would serve shareholder value. However, in Part VI we examine whether the general lack of stakeholder protections that we found could have been driven by factors that might have led otherwise stakeholder-oriented corporate leaders to agree to the terms we have documented. To examine each alternative potential factor, we identify a subset of our sample in which this factor was not present, and we examine whether substantial stakeholder protections are present in this subset of deals.

In particular, we examine subsamples based on: (i) deals not driven by economic distress: (ii) deals announced in later stages of the pandemic in which economic activity was returning to normalcy; (iii) deals that received shareholder support by a large margin, so securing some stakeholder protections by reducing premiums somewhat may not have threatened obtaining shareholder approval; (iv) deals to which the Revlon doctrine did not apply; (v) deals governed by constituency statutes; (vi) deals in which the target was represented by “stakeholderist” legal counsel that could have been relied on not to discourage corporate leaders from seeking stakeholder protections; (vii) deals to purchase targets that had high Environmental, Social and Governance (ESG) ratings and whose leaders could thus be expected to be more stakeholder-oriented; and (viii) deals with acquirers with low ESG ratings and thus might have posed especially significant post-deal risks for stakeholders. We find that each of these subsamples was still characterized by a general lack of stakeholder protections.

Finally, to explore whether our findings could have been driven by some pandemic-related factors that the above testing did not address, Part VI concludes by examining the terms of a set of significant deals that closed during the year preceding the pandemic. This period, during which the BRT issued its stakeholderist statement on corporate purpose, was characterized by strong public stakeholderist rhetoric. Nonetheless, we find a pattern of lack of stakeholder protections in this pre-pandemic period similar to that documented for the pandemic period deals, suggesting that this pattern is not due to some unidentified pandemic-related factor.

We therefore conclude in Part VII that our findings are best explained by the incentives of corporate leaders rather than by other factors. We also discuss and respond to a number of objections to this conclusion. Among other things, we examine arguments that corporate acquisitions present a selection bias problem, that stakeholder protections are prohibitively costly, and that the lack of stakeholder protection could have been the result of inertia among deal designers. We also discuss the argument that stakeholder protections were unnecessary because stakeholders received sufficient protection through soft pledges, the selection of a stakeholder-friendly buyer, or their own contracts with the company. Finally, we discuss the objection that our findings are limited to corporate leaders’ choices in final-period situations and explain that these findings have implications for the choices that corporate leaders should be expected to make in ongoing-concern situations.

Part VIII concludes. Overall, our findings cast doubt on the claims made by supporters of stakeholder capitalism that corporate leaders can be expected and relied upon to use their discretion to protect stakeholder interests. Thus, those who are concerned about the protections of stakeholders, as we are, should not rely on corporate leaders’ stakeholderist pledges but instead focus on external governmental actions that would provide real protection for stakeholders in a wide range of areas. For example, those who are concerned about the effects of corporations on, say, climate change or employees should not harbor illusory hopes that corporate leaders will address such effects on their own; they should instead focus on obtaining government interventions (such as a carbon tax or employee-protecting policies). The failure of stakeholder capitalism during the COVID pandemic should give pause to all those attracted by the siren songs of stakeholderism.

Our study is available here.