Business people are preparing a graph about “Stakeholder” on the desk
The debate over the purpose of corporations is over—or at least it appears that way.
Like in a plot twist, shareholders are now widely perceived as the best advocates of stakeholders’ interests.
This new phenomenon should be labeled “shareholders stakeholderism,” better representing the pursuit of stakeholders’ good by shareholders. Here’s why.
For those tuning in now and not understanding what this all means, I’ll try to simplify it.
There is a long-running and ongoing debate between corporate law scholars on the theory of the firm and the purpose of the corporation. This debate is not new. The great debate hinges on the purpose of the corporation – Stakeholder Capitalism versus Shareholder Capitalism.
The purpose of the corporation
This debate includes a dispute about the roles and responsibilities of corporate managers and directors and continues to this day. The debate takes place in the law, labor, finance, and management literatures.
If you are a corporate legal scholar, you know that it is part of a 1930s Harvard Law Review debate between two notable corporate law scholars: Adolfe A. Berle, Jr. and Merrick E. Dodd.
This question is still very much relevant today. My late mentor, Lynn Stout, was one of the prominent legal scholars who called for a radical change in the theory and philosophy of current corporate governance theory.
Since the end of the twentieth century, the views of Milton Friedman and Michael Jensen have become popular in the United States for using shareholder primacy as a corporate governance model. These theories mandate that management of large public firms maximize managerial opportunism, “shareholder (read Wall Street) supremacy” and short- termism.
Critics of this view maintain that management cannot realistically pursue long-term projects, such as research and development, because such projects cannot produce instant financial returns to the shareholders.
Stakeholder scholars, like Stout, criticize shareholder scholars for advocating for shareholder primacy, which centers solely on the interests of shareholders as the “sole residual claimants” and “owners” of the corporations, ignoring all the other stakeholders.
Some scholars attribute the rise of shareholder primacy thinking to the 1970s and the rise of the so-called “Chicago School of free-market economists.” The Chicago School philosophy is that management should focus on and be evaluated based on economic analysis, and that the corporate purpose or goal is to make shareholders as wealthy as possible.
For the past 20 years, corporate governance scholars and practitioners required managers of public companies to maximize shareholder value by putting emphasis on short-term results.
Today, this debate continues with different prominent actors, generally represented by Lucian Bebchuck, Martin Lipton, Alex Edmans, Colin Mayer, Ed Rock and others.
A paradigm shift
The tides are shifting in the USA. There is a recent surge in activism, with an embedded social purpose and value creation. Some scholars believe that it is a direct result of a market, government, or even philanthropic organizations’ failure to respond to and alleviate social problems.
Academics, business leaders, policymakers and legislators continue to grapple with how to respond to this relatively new phenomenon. One thing is clear though: There is a paradigm shift in thinking about the purpose of corporate law, talent management and corporate culture.
Change is afoot
In his 2022 Letter to CEOs, Larry Fink, the co-founder, Chairman, and CEO of Blackrock, concentrated on the role of stakeholder capitalism in furthering a corporation’s profitability.
More remarkably, it appears that academic experts, part of the current debate on shareholders versus stakeholders, appear to have come to terms.
Symbolically, last week, the University of Chicago, held a symposium, where Lucian Bebchuk, a leading global expert and advocate of shareholder primacy, called himself a stakeholderist. Perhaps, shareholders are now expected to advance the interests of stakeholders?
If the debate is over, let’s now turn to other pressing, issues. Managers are asked to take all stakeholders into account. And, increasingly management compensation is being linked to stakeholder-and-ESG-related performance. For example, last week Starbucks shareholders voted to approve an executive bonus plan incorporating ESG criteria. Why are changes like this taking place?
This short piece does not aim to answer all the questions. Perhaps, we can start with understanding the factors that are pushing for these changes – the shareholders, who are the new investor groups?
There are new groups of shareholders—specifically, retail investors—transforming several norms concerning traditional investing. Sergio Alberto Gramitto Ricci and Christina Sautter, in their article Corporate Governance Gaming: The Collective Power of Retail Investors, argue that Millennial and GenZ investors—who they call “wireless investors”—are leading the charge in bringing new values to investing and corporate governance. They further argue, in The Wireless Investors Movement, that wireless investors can cause lasting paradigm shifts in corporate governance.
There are other groups of investors, Margaret Blair and Lynn Stout, in their seminal article A Team Production Theory of Corporate Law, warned us that employees as stakeholders who contribute firm-specific investments are not fully protected by their employment contracts.
I have written extensively on the need to protect employees and firm-specific investments, as is evident in tech companies, in my article Unicorn Stock Options.
In a new piece, Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information, I further describe how tech employees are not only stakeholders, but can become shareholders. They typically receive option grants and can become shareholders in the firm that they work for.
Not surprisingly, in a “war for talent,” skilled tech workers strive to accumulate power by organizing, unionizing, and forming tech cooperatives, as I explain in Times They are a Changin’: When Tech Employees Revolt! The insights of Blair and Stout’s A Team Production Theory of Corporate Law are, therefore, as relevant as ever.
Nevertheless, with respect to the underlying rationales that should inform policy making, structural adjustments that nurture a more stakeholder-and-ESG-oriented corporate governance remain relevant.
This article is based on a blog post featured on Duke Law’s FinReg Blog written with Sergio Alberto Gramitto Ricci and Christina Sautter. Sergio Alberto Gramitto Ricci is the Jacobson Fellow at NYU School of Law and Christina M. Sautter is the Cynthia Felder Fayard Professor of Law, the Byron R. Kantrow Professor of Law, and the Vinson & Elkins Professor of Law at the Louisiana State University Paul M. Hebert Law Center. For comments or questions, feel free to reach us on Twitter: @anatalonbeck, @ProfSautter and @sergioalberto_ .