Last week the Law & Economics Center at George Mason University hosted a fascinating event here in Washington, D.C. on the debate over shareholder primacy and stakeholder capitalism. The occasion was the second anniversary of the Business Roundtable’s release of its “Statement on the Purpose of a Corporation.” I blogged about the Roundtable statement shortly after its released in 2019; the short version is that it wasn’t nearly as significant or revolutionary and most of the earned media coverage would suggest.
The event’s panelists covered a lot of territory in a little over an hour. Everyone who is concerned with the topic should watch the whole event, so I’ll just highlight a few topics that came to mind when listening to the perspectives presented.
The asserted dichotomy between shareholder primacy and stakeholder concerns has always been a false one. As many business leaders have emphasized over the past several decades, no corporation can be successful over the long term without having mutually beneficial relationships with stakeholders like its employees, suppliers, and customers. Corporate statements of purpose going as far back as the Johnson & Johnson “Credo,” first issued in 1943, state this explicitly. The J&J Credo specifically mentions the company’s responsibilities to customers, employees, communities, and (intentionally last) to stockholders.
Firms therefore have a self-interested motive to cultivate the goodwill of people in various stakeholder groups, but that does not mean that any one of those groups has, or should have, a legally enforceable right over the management of the firm itself. Formal control over the corporation and its assets is vested in a board of directors who act as stewards of the capital entrusted to the corporation by its shareholders. Directors and senior managers may choose to raise wages, sign more generous contracts with suppliers, or lower prices to customers, but those are prudential decisions based on an array on short- and long-term considerations. They are not subject to any positive rights claims by non-shareholding stakeholders.
Formal attempts to change this expectation are problematic for multiple reasons, but one of those reasons is more important than the others. All of the trillions of dollars of equity wealth now held by shareholders in U.S. companies were invested under the current system. When shareholders made the investments they now hold, they reasonably expected to be treated as shareholders always have, and for the companies in question to be managed to maximize risk-adjusted returns in their interest. Enacting new law and regulation to force a different hierarchy of beneficiaries now is not a natural evolution of the corporate form – it is changing the rules in the middle of the game.
For investors and entrepreneurs who want to play a different game, there are other options. As I wrote in my study published in May of this year, interested parties can seek out or start a business that is incorporated as a “benefit” or “public benefit” corporation. These corporations have different kinds of charters and explicitly disavow the shareholder-primacy model that is the default expectation of most Americans companies. They give managers much freer rein to prioritize the welfare of groups other than shareholders without worrying about being sued over allegations of breach of fiduciary duty.
To paraphrase panelist Robert Miller of the University of Iowa College of Law, corporate governance with shareholders as primary beneficiaries is a simple matter of contract law:
- Investors have given their money to various companies with an expectation of financial return and fair treatment.
- Changing the rules to benefit other groups, without an intervening agreement by the relevant parties, is and should be illegal.
- Directors have great discretion to spend investor money on many different things, some of which may generate benefits for non-shareholders stakeholders.
- However, categorically dethroning shareholders from their position as primary beneficiaries of the firm’s operations is not within a reasonable range of options.
- Pivoting from shareholder capitalism to stakeholder capitalism without the agreement of shareholders is a one-sided abrogation of contract.