Stakeholder versus shareholder capitalism: The great debate

Professor A. Lucian Bebchuk of the Harvard Law School joined Professor Colin Mayer, CBE of Saïd Business School, Oxford in a debate of one of the great controversies in business today – should it be governed and run for shareholder or stakeholder interests? 

Following the Business Roundtable declaration on the purpose of the corporation in August of last year, the shareholder primacy view of the firm has been thrown into question around the world.  Should it be or should it remain as the dominant concept of the firm?  

Professors Bebchuk and Mayer have written extensively on this topic from different perspectives.  Professor Renee B Adams of Saïd Business School chaired this debate.

Summary

Should corporate leaders manage their business for all their stakeholders, or should shareholders’ interests come first? Two leading academics took opposing views – but both agreed that it is important to protect stakeholders.

Lucian Bebchuk argued that “stakeholderism” should not be benefit stakeholders and in fact would be counterproductive, making corporate leaders less accountable and chilling real stakeholder-protecting reforms. 

Colin Mayer backed a model promoting corporate purposes that produce profitable solutions to the problems of people and planet, and do not profit for producing problems for either.  

According to Bebchuk, managers should focus on serving long-term shareholder value but do so subject to  "very substantial constraints and regulations that would make them internalise externalities." With respect to the risk of climate change, he said, relying on corporate leaders using their discretion to contribute materially to saving the planet would undermine rather than advance meaningful efforts to do so. 

Bebchuk said that 'stakeholderism' brings real perils - "empowering corporate leaders and making them less accountable, dressed up in more appealing clothing." 

Stakeholderism also insulates executives from poor performance, encourages managerial slack, could have a 'chilling effect' on governmental reforms to protect stakeholders, and gives 'false hope' that executives would protect stakeholder interests. Holding such hope is inconsistent with his own research, which showed that in 100 US acquisitions of companies governed by constituency statutes authorizing managers to protect stakeholder interests, corporate leaders selling their companies to private equity firms used their bargaining power to the benefit of themselves and their shareholders but not to provide stakeholders with any material benefits. In addition, he said that the recent pact announced by the US Business Roundtable statement pacts to tackle stakeholder issues  "represent a public relations move, rather than a commitment to bring about meaningful changes."

Opposing, Mayer said that companies which promote the interests of stakeholders deliver superior performance - through, for example, motivating employees - in a way in whch shareholder driven companies do not. 

According to Mayer, purpose-focused businesses can solve problems profitably and sustainably, while improving the lives of both stakeholders and shareholders. This approach, when supported by clear metrics, also enables directors to manage 'trade-offs' between shareholder and stakeholder interests in a form that purely shareholder motivated firms fail to do.

Mayer said that regulation alone cannot fix a corporate culture that has prioritised returns to shareholders and "egregious" executive remuneration. Poor behaviour endures in the banking sector, because its purpose, culture and values have not changed, despite intensified regulation, he said.

He proposed an approach where profits are measured so that companies do not benefit from producing problems for people or the planet, and pay for remedying any damages they cause. Now is the time for companies to account for potential negative outcomes created by, for example, environmental detriments, he said.

Further reading: Bebchuk's analysis of stakeholderism, The Illusory Promise of Stakeholder Governance , with co-author Roberto Tallarita, and Colin Mayer’s critique of Bebchuk and Tallarita’s article – Shareholderism Versus Stakeholderism – A Misconceived Contradiction, ECGI Working Paper 522/2020.