The New Paradigm: A Toolkit For Balancing Conflicting Stakeholder Interests and Protecting Long-Term Business Value

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Carmen X. W. Lu. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaDoes Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, 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.

Companies today face pressure from stakeholders (including non-shareholder politicians and activists) to take positions on myriad issues. Some companies have found themselves swept into political, social and cultural conflicts. Others have been criticized for expending resources on issues that their boards and management have determined to have bearing on business value, but which some stakeholders regard as socio-political values. Climate and diversity, equity and inclusion (DEI) policies have faced particular scrutiny. The recent wave of demand letters, lawsuits and public clashes continue to stoke stakeholder divisions and draw scrutiny to board and management decision making.

Today’s stakeholder conflicts have raised questions as to how boards and management should best respond. The U.S. District Court for the Eastern District of Washington recently addressed this particular issue in its dismissal of discrimination claims brought against Starbucks’ DEI policies. In his oral opinion, Judge Bastian reaffirmed the business judgment deference granted to boards and denied the plaintiff’s efforts to advance what the court deemed to be a political agenda. “This is not a court of public policy,” Judge Bastian held, adding that “[c]ourts of law have no business involving themselves with legitimate and legal decisions made by the board of directors of public corporations.” See also, Pressure on DEI Initiatives Continues to Mount.

We believe that boards and management, in exercising their business judgment, should consider the principles set forth in The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth when responding to stakeholder pressure on hot-button issues such as climate, sustainability and DEI. The New Paradigm envisions the relationship between corporations and their stakeholders as one of collaboration and cooperation around the common goal of creating sustainable long-term value. Businesses need to proactively manage stakeholder (ESG) issues, as externalities and stakeholder conflicts can boomerang back as serious risks to the long-term health of the business. However, elevating, without sound reason, the interests of one stakeholder above the rest is not sustainable for businesses in the long run. See also, It’s Time to Adopt The New Paradigm.

Importantly, The New Paradigm underscores the need for long-term thinking by corporations and their stakeholders to avoid crises that threaten the survival of businesses and the welfare and prosperity of all market participants.

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