Stakeholder Capitalism’s Greatest Challenge: Reshaping a Public Consensus to Govern a Global Economy

Michael P. Klain is an Associate at Wachtell Lipton Rosen & Katz, and Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

The Berle XIV:  Developing a 21st Century Corporate Governance Model Conference asks whether there is a viable 21st Century Stakeholder Governance model.  That important question challenges all of us to think more like Adolf Berle himself:  to confront the world as it is, to move beyond the trivial, and to address the deeper implications of corporate power for our world.  In our keynote article for the conference, [here], we argue that to answer that question yes requires, to use Berle’s term, restoring a “public consensus” throughout the global economy within which corporations and institutional investors now exert power, supporting not just stakeholder governance, but the balanced capitalism system associated with the New Deal in the United States, and social democracy in the wider Organization for Economic Cooperation and Development community.  We call that system “New Deal capitalism,” because Berle viewed New Deal capitalism as creating a structure within which corporations could operate in a way good for all their stakeholders.

In 2023, the world faces problems directly related to, and often caused by, corporations and the large institutional investors who dominate their governance.  The growth of the real economy and huge corporations has diminished the ability of any single nation to create a public consensus safely constraining corporate power.  The influence of large institutional investors has grown exponentially and internationally and has globalized corporate governance policies that make corporations more subject to the immediate demands of the stock market.  These developments have helped create two fundamental problems threatening societies across the globe:  inequality and climate change.

Within our own nation, inequality has grown enormously as the share of the gains of capitalist success going to the workers most responsible for creating corporate profits has dwindled, with stockholders taking more of the pie.  Inequality has also soared internationally, with wealth shifting toward the few and in particular the world’s richest 1%, and the many suffering from stagnant real wages.

Meanwhile, human-caused climate change presents an existential threat to the physical safety of many societies and species, while also posing a huge economic problem.  Responsible estimates suggest that by 2030, developing nations alone must invest at least $1 trillion dollars into energy infrastructure each year to mitigate the potential harm from climate change to these vulnerable nations, to reduce pressures on rainforests and other at-risk ecosystems, and to build a clean energy production system.  These costs, generated by select corporations across select sectors, largely to the benefit of people in nations like the United States, have been disproportionately borne by the people in developing nations – in other words, climate change creates substantial socialized global costs in exchange for private benefits in the wealthier nations where these companies’ stockholders and consumers are concentrated.

The traditional response by many corporate law scholars is that these are not corporate law’s problems.  If society wants to reduce inequality, it can simply tax the haves and redistribute.  If society wants to address climate change, it can adopt environmental regulations and energy taxes.  Corporate law accepts that corporations must follow the law, so if the consequences of corporate activity are not socially optimal, then it is not corporate law itself — which simply allocates power between stockholders and corporate management and allows for the creation of artificial citizens — but other bodies of law that bear responsibility.

Blinkered thinking like that was alien to Berle.  He risked addressing how the regulation of corporations mattered to society.  He grappled with the distributional effects of corporate power, and the need for structures ensuring corporate power would be exercised consistent with the broader public interest.  Berle was an architect and strong supporter of the New Deal policies protecting stakeholders and society from corporate overreaching and sharp practices.  Berle was pleased that a public consensus comprised of formal laws and societal norms had been forged during his lifetime that channeled corporate conduct in a positive direction beneficial to the many, in stark contrast to the pre-New Deal period of American history.  But Berle also recognized that even a nation as powerful as the post-WWII United States could not avoid an increasingly global economy, and that corporate power was outgrowing purely domestic constraints.  Berle thus supported the extension of New Deal values into the international economy.

Much has changed since Berle’s lifetime.  A viable modern system of stakeholder corporate governance cannot be met without acknowledging that the different corporate law power dynamics of the 21st century contribute to some of humanity’s deepest problems.  Stakeholder governance is not viable absent the supportive structure of a public consensus Berle wrote about, and that public consensus must now be re-instilled, not just within the United States, but across a global economy.  Corporate power has outgrown any single nation’s reach, even one as powerful as the United States.  International understandings have given primacy to the interests of stockholders, not workers, communities of operation, or the environment.  Regulatory arbitrage has put downward pressure on New Deal capitalism and stakeholder protection domestically and internationally.  Restoring an effective public consensus requires constraining the huge investors whose emergence Berle predicted, and who have pushed corporations to obsess over stockholder returns and to subordinate other stakeholders.  And it also requires confronting the reality that corporations do not passively follow rules of the game.  Corporate law itself has helped corporations erode rules of the game protecting workers, consumers, and the environment, to shift wealth away from workers to investors, and to escape fair taxation, thus undermining the capacity of governments to address the serious externalities that corporate power has itself generated.

The implications of these and other changes since Berle’s death are profound and make more challenging the accomplishment of what is necessary to make a modern form of stakeholder corporate governance viable:  globalizing New Deal capitalism and a public consensus for holding businesses accountable for making money the right way.  To exemplify that corporate law is not a policy bystander, but a contributor, to the erosion of the public consensus favoring stakeholder governance and the New Deal capitalism Berle supported, we identify five core issues of substantial social importance with a direct connection to corporate governance that must be addressed to restore a public consensus supportive of stakeholder governance and New Deal capitalism:

  • the powerlessness of workers in comparison to institutional investors and the corrosive effects of this imbalance on inequality, fairness, and social stability;
  • the realities of corporate externalities such as climate change and their implications for the residual claimant concept and corporate accountability;
  • corporate law’s facilitation of tax avoidance, and thus in the undermining of governmental capacity to address issues like climate change, poverty, and consumer harm;
  • the mismatch between the capacity and reach of the regulatory structures and social consensus that constrains corporate power and the scope of the markets in which corporations exert power; and
  • the tolerance of corporate law for the unconstrained use of corporate power for political purposes, and the negative effect this has on the ability of government to implement stakeholder-protective policies.

We use these core issues to identify elements of domestic and international policy critical to reshaping a public consensus supportive of stakeholder governance and New Deal capitalism.  We do so to encourage scholars, practitioners, and policymakers to think more innovatively about how corporate governance incentives might be improved to produce the socially beneficial outcomes stakeholder governance seeks to achieve, and at the least, ameliorate some of the poor incentives our current corporate governance approach creates.  We do not expect even those who generally share our values and view of the problems to agree with all our suggestions.  What we do hope is that our examination of the things that matter most about the effects of our corporate governance system will encourage thinking of the kind that Adolf Berle did.  It is easier to obsess about minutia than to tackle what really matters.  But if corporate law is to be a force for good, and not fuel irreversible harm, then it must address the big issues and stop pretending that those issues are for others to grapple with.  If our answers are not the right ones, then don’t just naysay, say what you think will work.  The momentous impact of corporate conduct from generations ago is affecting our planet in dangerous ways, and so is the unfairness and divisiveness that comes with growing inequality.  The impact of more and more of us now, acting on each other and the planet through corporate power, will be even more substantial.  If we don’t take commensurate action to address the use of that power and to channel it in a fair and sustainable direction, all of our descendants will be the residual claimants of our excesses and inequities.

And if you think we believe that what it takes to reshape a public consensus supportive of stakeholder governance is a U.S. commitment to forging a global New Deal, well you understand us . . . and Berle himself.

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