A Stake Through the Heart of Stakeholder Capitalism
On August 19, 2019, The Business Roundtable, an association of CEOs from some of America’s leading corporations, issued an updated version of its Statement of the Purpose of the Corporation. While replete with the usual mixture of commonsense observations and platitudes that often characterizes such documents, this particular statement differed significantly from previous versions. For, as the subtitle of the BRT’s announcement noted, “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.”
Previous BRT statements about corporate governance had, as the 2019 statement acknowledged, “endorsed principles of shareholder primacy—that corporations exist principally to serve shareholders.” The 2019 statement abandoned that position. Instead, it stressed “a fundamental commitment to all of our stakeholders,” including customers, employees, suppliers, consumers, and “the communities in which we work.” Shareholders were listed last of all.
It would have been one thing if the BRT’s use of stakeholder jargon reflected the idea that businesses can only realize shareholder value maximization by managing “internal” constituencies (employees, etc.), “external” constituencies like customers, and the positive and negative externalities generated by any company’s activities. In the original 1997 statement, the BRT stated that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.” Nowhere, however, in the BRT’s 2019 statement was such a hierarchy of responsibilities stated. This left only one conclusion: the BRT was embracing a mild version of stakeholder theory.
By this, I mean the idea that companies’ decisions should be driven by reflection upon the effects of their choices on the interests of those affected by such decisions. In some instances, this extends to demanding that businesses consult with, if not receive approval from, numerous entities which claim to have a stake in the company’s operations before making any significant decisions. Maximizing shareholder value is thus thoroughly displaced from the CEO’s horizons.
How did we get here?
Needless to say, those scholars and assorted activists who have been arguing for decades in favor of stakeholder capitalism were pleased with the BRT’s volte-face. Others, however, were decidedly critical.
A particularly forceful critic was one of America’s leading corporate law scholars. In his new book, The Profit Motive: Defending Shareholder Value Maximization, Stephen M. Bainbridge has systematized his many criticisms of the BRT’s 2019 statement and used it as one of his “principal foils” for a systematic takedown of the very idea of stakeholder capitalism. This is accompanied by a rigorous defense of shareholder primacy on Bainbridge’s part. He not only shows that maximizing shareholder value is “descriptively accurate” of the corporation’s purpose. He also claims that it can be “normatively appealing.” Bainbridge thus seeks to steal the ethical thunder that stakeholder theorists generally assume to be their ace-in-the-hole.
An important feature of Bainbridge’s analysis is his contextualization of these debates. Corporate America’s contemporary flirtation with stakeholder capitalism didn’t emerge from a vacuum. Stakeholder theory has been around for decades. But the idea’s grip, Bainbridge illustrates, on many academics’ imaginations and its subsequent infiltration into the C-Suite has accelerated in recent years.
It could be, Bainbridge holds, that shareholder primacy defenders let down their guard, much as other adherents to various 1990s orthodoxies did. During this decade, many corporate law professors followed a path akin to those who adopted the key thesis of Francis Fukuyama’s 1992 book The End of History and the Last Man. Just as free markets and liberal democracy, it was argued, had triumphed via a type of Hegelian dialectic, so too, Bainbridge observes, did many corporate legal scholars conclude that there was no serious alternative to the proposition that corporate law’s primary purpose is to increase long-term shareholder value.
An Economic and Political Offensive
“Inevitability” grand narratives look rather tattered these days. In the case of shareholder primacy, it is under sustained attack everywhere. Two new fronts have opened up over the past decade.
One is economic. Stakeholder capitalism and its ESG handmaiden, it is argued, correlate with improved corporate performance. If that is true (and Bainbridge provides substantive evidence that it is not), insisting on shareholder primacy is redundant.
The second front is political. Skepticism about shareholder primacy now dominates the Left. We see this in the rhetoric and policy proposals of figures like Senator Elizabeth Warren. But such skepticism is also rife among sections of the Right, as exemplified by various statements made by Senator Marco Rubio. These developments reflect, Bainbridge states, the upsurge of political and economic populism on left and right across America and the usual diminution of attention to empirical evidence, the internal logic of law, and reason in general which invariably accompanies populist trends.
Bainbridge’s response to this situation is to provide a far-reaching corrective. There are three theses that he wants to prove to academic audiences and “anyone who is interested . . . in how corporations work and how corporate governance can be improved”:
- First, that “any conception of corporate purpose that embraces goals other than creating value for shareholders is inconsistent with the mainstream of US corporate law.”
- Second, that “directors do—and should—have wide and substantially unfettered discretion as to how they go about generating shareholder value.”
- Third, that “a shareholder-centric conception of corporate purpose is preferable to stakeholder capitalism.”
Taken together, Bainbridge claims that these principles reflect “fundamental normative principles deeply embedded in US corporate law.” But what holds them all together, he says, are the disciplines that flow from pursuing profit.
Definitions, Laws, and Merits
Bainbridge’s unfolding of his argument begins with a careful definition of terms. Competing definitions of “the corporation,” “corporate purpose,” “shareholder value maximization,” “stakeholders,” “stakeholder capitalism,” “corporate social responsibility,” and “ESG” abound. Bainbridge addresses this by unpacking formal legal references expressed in statute and case law as well as assessing specific interpretations outlined by business theorists.
Having sorted out the wheat of truth from the chaff of ideology, Bainbridge specifies that his focus is the legal and policy dimensions of the shareholder-stakeholder controversy as found in “US law and practice.” This, however, does not give Bainbridge’s argument a legal positivist flavor. His exploration of the legal materials brings to the surface the particular moral norms at work in legislation and judicial rulings which he later integrates into a powerful normative argument about the corporation’s nature and purposes.
Bainbridge’s general approach is reminiscent of the classic scholastic method: he states a clear proposition, the best case for views contrary to his own, critiques their arguments, answers objections, and then explains why his own position meets the tests of reason. Much of this involves examining existing corporate law concerning directors’ fiduciary responsibilities.
In Part I, Bainbridge shows that, whatever the assertions made by stakeholder capitalism’s proponents, “shareholder value maximization is the core principle of corporate director and officer’s fiduciary duties under the law.” Bainbridge also concludes that any attempt to prioritize stakeholders over shareholders would effectively necessitate changing almost all of corporate law.
Part II’s content is more political insofar as Bainbridge’s focus is “the question of why the BRT changed position.” Again, he methodically addresses the arguments for and against shareholder primacy and stakeholder capitalism respectively in order to assess the different explanations offered for what is going on in corporate America.
Among the theories considered are the following: that corporate America has gone woke; or that CEOs are caving to demands from unions, consumers, investors, and environmental activists; or that these individuals mostly live in blue-bubbles and fear rocking the boat in these increasingly intolerant environments. Bainbridge even speculates that some CEOs are simply tired of being browbeaten at home by their woke children and have chosen to secure domestic peace by engaging in virtue-signaling at shareholders’ expense.
Bainbridge doesn’t rule out any of these phenomena as exerting some sway on CEOs. Nevertheless, he suggests that two factors are more salient than others.
According to Bainbridge, CEOs’ worries about demands for expansive regulation coming from a Democratic Party moving towards Elizabeth Warren’s economic views, provide an “entirely plausible” rationale for the BRT’s 2019 Statement. In this scenario, the BRT’s embrace of stakeholder rhetoric is about preempting efforts at regulation, thereby allowing CEOs to get on with their core business of making a profit. Here Bainbridge highlights research by legal scholars indicating that hardly any BRT CEOs who signed the 2019 Statement changed their emphasis upon shareholder value when communicating to shareholders, let alone altered their bylaws to accord recognition of stakeholders. This indicates that many CEOs believe they can satisfy stakeholder activists by talking the talk without walking the walk. Alas, that is a common mistake made by people who think that appeasement works with ideologues.
The second element identified by Bainbridge is a desire to resurrect the days of the “Imperial CEO”: something bound to appeal to many BRT members. It is, after all, an association of CEOs rather than businesses or shareholders per se.
The Imperial CEO describes situations whereby the CEO becomes all-powerful in a company, whatever the bylaws might say. In the past, this occurred through the accumulation of functions, like CEOs also serving as board chairman. Today, Bainbridge suggests, stakeholder language is often invoked by CEOs to insulate themselves from pressures from shareholders, directors, and hedge funds by “remov[ing] CEOs from the impersonal discipline of the job and capital markets.”
Stakeholder arguments thus function to bolster CEOs’ autonomy by diluting the grounds upon which boards and shareholders can question whether CEOs are fulfilling their fiduciary responsibility to realize profits. By definition, stakeholder capitalism creates numerous groups to whom CEOs are responsible and, as Bainbridge writes, “CEOs who are responsible to everyone are responsible to no-one.” Moreover, the displacement of the profit motive via adoption of stakeholder logic risks generating seriously dysfunctional sets of relationships that could result in entire business enterprises imploding in ways that Marxists can only dream of.
Between the Right Scylla and Left Charybdis
Here we find one of Bainbridge’s key reasons for believing that it was a serious mistake for the BRT to adopt stakeholder language. Whether it functions at the level of law or rhetoric, stakeholder capitalism corrodes the series of contractual obligations that define the relationships between shareholders, directors, and managers, thereby establishing the accountability vital for the modern corporation’s long-term success.
The sheer number of competing interests that stakeholder language implies that corporations should acknowledge—and, eventually, satisfy—can only make the corporation, in Bainbridge’s words, “a most fractious community.” Establishing an agreement about what decisions will maximize wealth would be difficult enough in conditions of stakeholder capitalism, let alone agreeing on how to divide the wealth among stakeholders.
What’s key here is the disciplines imposed by the profit motive upon all the contracting parties in a corporation—shareholders, managers, and directors—start to disintegrate whenever stakeholder theory becomes a reference point. There is evidence, Bainbridge notes, of significant upticks in the percentage of managers who appeal to vague obligations to generic stakeholder interests (“the climate,” “diversity,” “inclusion,” etc.) whenever company performance falls short of market expectations. CEO accountability to investors is thus blurred, even in the absence of stakeholder capitalism ideas being integrated into corporate law.
Then there is the way that CEOs who use stakeholder language expose corporations to political backlashes. Progressives will complain that their pet causes are only being given lip service precisely because the stakeholder language is largely formulaic. That generates pressure from the left to have regulators do what CEOs won’t. On the other side of the aisle, conservatives will insist that corporate America’s acceptance of stakeholder logic necessarily takes businesses into areas where they lack competence, such as the formulation of election laws.
Either way, CEOs will find themselves dragged into political fights they need not have and to which they have little to contribute qua CEOs. The end result is that corporate America risks becoming despised across the political spectrum.
What’s a CEO to do?
Instead of engaging in what he calls “corporate puffery,” Bainbridge maintains that CEOs serious about securing the corporation’s legitimacy should focus on elucidating two things. One concerns the very real material and non-material goods that corporations realize, directly and indirectly. The second is the indispensable role played by the profit motive in making this possible.
Drawing on thinkers like the late Michael Novak, Bainbridge lists some of these goods that corporations committed to shareholder value maximization can realize. They include the efficient resource allocation and subsequent economic growth promoted and incentivized by profit, the innovation that profit spurs, the social mobility that pursuing profit often facilities, and the voluntary cooperation between complete strangers which profit encourages.
Wealth isn’t an end in itself. But creating and accumulating wealth gives people the resources they often need to do things, ranging from cultivating beauty to starting a family, that are worthwhile undertakings for their own sake. Other goods realized through profit-seeking corporations, such as work and people exercising their creativity, are valuable in themselves. Additionally, Bainbridge stresses, CEOs should affirm how the profit motive “affirmatively promotes freedom.” Successful pursuit of profit helps undermine “arbitrary class distinctions by enhancing personal and social mobility,” incentivizes people “to resist both statism and socialism,” and requires societal-wide respect for economic freedom. While economic liberty doesn’t guarantee that freedom will prevail in other realms of life, it is hard to sustain limits on state power without substantial economic freedom.
Thus, having put a stake through the heart of stakeholder capitalism, Bainbridge provides a powerful moral rationale for shareholder primacy—one far more robust than those which underpin stakeholder theory. Ironically, the argument which gives proper due to profit’s significance as an ordering mechanism for economic behavior turns out to provide a more coherent moral grounding for the corporation than those theories that would reduce profit to just one of the CEO’s many concerns. The BRT, I’d suggest, should take note.