Well before the Covid-19 pandemic, policymakers and scholars were focused on the debate over corporate purpose and the fragility of an economic system marked by stagnation and runaway inequality. As a solution, many urged a shift from shareholder primacy (the credo that the main duty of corporate directors is to maximize wealth for shareholders) to a stakeholder approach, under which directors must create value for all constituencies of the corporation, including employees, customers, suppliers, and local communities. Such an approach—which promotes a seemingly radical change in how boards of directors make decisions—has historically appealed to two very distinct groups: progressives who welcome a switch to a more holistic view of the enterprise and incumbent executives and their supporters who believe the stakeholder approach would provide greater relief from shareholder pressures.
In a new paper, 'Can a Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera', forthcoming in The Journal of Corporation Law, we show how the debate on stakeholderism is at best inconsequential and probably counter-productive—especially in light of current stimuli and reforms in the aftermath of the Covid-19 pandemic. We posit that corporate scholars, including those concerned about inequality, have remained trapped in a debate about corporate purpose. In doing so, they have neglected the far more important questions of why workers and other weaker constituencies are faring so badly in modern day capitalism, and what can actually be done about it.
The paper illustrates that the belief that stakeholder theory helps weaker constituencies and addresses inequality and economic stagnation must be confronted with a harsh corrective: allowing or even requiring managers and directors to consider the needs of all stakeholders does not guarantee any meaningful rebalancing of power and resources to weaker constituencies. The existing proposals offer no mandates, let alone enforcement mechanisms, that would protect constituencies at the heart of stakeholderism’s purpose, but rather give carte blanche to directors. Tellingly, proposals to broaden the scope of fiduciary duties to cover weaker constituencies offer no specific measures or initiatives that boards should undertake to benefit such constituencies. And this is a missed opportunity, because there are plenty of areas in which directors could act: unionization efforts, collective bargaining, at-will employment, layoff practices, pay policies for lowest and highest earners, increasing concentration via acquisitions, political spending, lobbying efforts, and so forth. The lack of proposals may reveal the true reason that management teams and boards of directors are backing the policy: by embracing stakeholder theory, they can maintain control through uncertain times while resisting progressive demands for more far reaching changes in policies affecting business firms.
Our paper also rebuts the premise that shareholder primacy is a key contributor to economic stagnation and inequality. To be sure, shareholder primacy may have contributed to concentration and monopsony in labor markets, excessive executive compensation, the decline in workers’ prerogatives, and tax cuts. But so might the stakeholder approach. Note that a stakeholder approach can hardly fix the central drivers of stagnation and inequality. Globalization, technology, and education cannot be addressed by corporate boardrooms alone. Similarly, collective action dynamics suggest that we cannot expect boards to retreat from further concentration. Experiences with constituency statutes and the battles between large corporations and organized labor tell us that boards won’t improve worker protections without regulation. Implementing legislative or regulatory measures would be much more effective in addressing stagnation and inequality than would be a change in corporate purpose.
In fact, stakeholderism is likely counter-productive. It would give corporations both a sword and a shield with which to defend the status quo.
First, managers and directors can play offense by expanding lobbying efforts, purportedly in the interest of all stakeholders, thus risking corporate capture of the reformist agenda. Second, corporations can deploy stakeholderism defensively by arguing that no direct regulation is needed. Like others, we take a cynical view of the Business Roundtable’s Statement on Corporate Purpose and Martin Lipton’s ‘New Paradigm’, which includes regulatory preemption as an express purpose. Meanwhile, a switch to a stakeholder approach would require diverting momentum for change into significant political capital in order for it to be adopted—and once adopted, enshrined in against further change. Thus, the pursuit of a stakeholder approach would deplete time, energy, and resources necessary to pass reforms to reduce inequality, such as tax, antitrust, and labor measures—precisely the changes most likely to meaningfully distribute power and resources to employees and other weaker constituents.
The Covid-19 pandemic exacerbates this concern. As many businesses cannot survive without government aid, some have accepted conditions for receiving bailout money, primarily with respect to stock buy-backs and dividend payouts. We speculate that, at some point, businesses might find it convenient to simply offer, in exchange for further government relief, a formal adoption of a stakeholder approach in their charter. This would preempt more onerous restrictions while preserving the status quo.
As disastrous as the current economic situation is, it also offers a rare opportunity to rethink and possibly reset certain policies. There is little choice but to depart from the tradition of tinkering with corporate governance and instead identify more effective tools to address inequality (mainly in labor, antitrust, and tax laws). This will undoubtedly require greater collaboration across fields and disciplines.
Matteo Gatti is Professor of Law at Rutgers Law School
Chrystin Ondersma is Professor of Law and Judge Morris Stern Scholar at Rutgers Law School
This post was originally featured on the Columbia Law School Blue Sky Blog, and is based on Professors Gatti and Ondersma’s recent paper, ‘Can a Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera’, available here.