We should beware the rise of stakeholderism
Muddling governance is likely to hurt those it purports to help
Every now and then, an idea comes along about how businesses should be run. And right now, the idea in vogue is “stakeholderism”.
Basically, it’s a response to the bashing business leaders have taken for the downsides of modern shareholder capitalism: whether the excessive pay of chief executives and fund managers, or the spillover effects from heedless shareholder-focused entities that can hurt communities by squeezing wages, closing factories or polluting the environment.
If you doubt the strength of feeling, look at the political campaign US advocacy groups have been running about private equity in the retail sector. In a document last year entitled “Pirate Equity”, they accused a greedy Wall Street of stripping 1.3m workers of their jobs.
Fearing for the future of their societal “licence to operate”, bosses have started promising to do better. They are vowing to focus less on shareholders, and more on the other constituents that their decisions affect.
So last summer, with a fanfare, the Business Roundtable of 181 US chief executives revised their concept of the purpose of corporations. They renounced “shareholder value” and swore to “lead their companies for the benefit of all stakeholders”, such as customers, suppliers, employees and communities.
Others have followed suit with similarly pious emanations. The World Economic Forum, a sort of Alpine Netjets affinity group, has urged companies to move to a model of “stakeholder capitalism”, while in January Larry Fink, billionaire boss of the world’s largest fund manager, BlackRock, issued a letter to all CEOs exhorting them to “be committed to embracing purpose and serving all stakeholders”.
But is there much more to all this gush than an urge for self preservation? Not according to a new working paper from the academics Lucian Bebchuk and Roberto Tallarita. They claim the public declarations are little more than PR releases. And thank goodness, say the authors, because real stakeholder capitalism would not benefit those it purports to help.
Their analysis divides stakeholderism into two categories. First, there’s the halfway house of “enlightened shareholder value” where directors still work for shareholders, but are supposed to “take into account” other interests. (This is the sort of “directors’ duties” regime the UK’s Companies Act prescribes). The authors regard it as being mainly wallpaper, with almost no direct effect.
After all, even Milton Friedman, in his famous 1970 article disavowing the social responsibility of business, did not rule out stakeholder-friendly actions when they aligned with profit-maximising goals.
The second, more full-bodied version, they term “pluralistic” stakeholderism, which is where directors try genuinely to weigh the impact of their decisions on the welfare of different constituents. This, as the authors show, is both extremely hard to measure and involves complicated trade-offs.
For instance, consider a plan to relocate a plant to another location. “Should the company’s leaders take into account not only the negative effects on the plant’s current workers but also the positive effects on the workers of the new plant and on the community in which the new plant would operate?” the authors ponder. “Would the answer to this question change if the new location was overseas?”
There is little evidence that pro-stakeholder CEOs are even thinking through how to resolve these knotty questions. Mostly, they simply dismiss the existence of trade-offs. The Business Roundtable’s Pollyanna-ish statement, for instance, explicitly denies that the interests of shareholders and stakeholders can ever clash in the long run.
But should executives even attempt to wade into this treacle? The authors are doubtful. They worry first that even sham stakeholderism might serve to insulate bosses from accountability. And if licence led to worse corporate performance, all constituents, whether shareholders or stakeholders, would be worse off.
A second, deeper worry, is the chilling effect that stakeholderism might have on regulation if politicians shirked decisions that could actually protect stakeholders, taking illusory comfort from the notion that companies were on the case.
It may seem a trivial example, but let’s take Mr Fink’s recent call for companies to back their pious words on climate change with action. He followed this statement by undertaking to increase the sustainable funds BlackRock offered and to divest a few coal-producing stocks.
This all might seem harmless, a bit of well-intentioned window-dressing. But it could be counterproductive if it led politicians to subcontract climate action to businesses, preferring self-regulation to policies that could really help.
None of this, of course, is an argument for unfettered shareholder primacy of the type popularised by the late Jack Welch. The duties of business clearly go well beyond the maximisation of short-term market value. Shareholder welfare is about more than a bloated market cap.
But stakeholderism isn’t some magic wand we can wave over the economy. Business leaders should remember the inadvisability of trying to serve two masters. Even with the best of intentions, you can end up very confused.