BRT’s Stakeholder Capitalism Exposed
Lucian Bebchuk and Roberto Tallarita recently published an op-ed in the Wall Street Journal, ‘Stakeholder’ Capitalism Seems Mostly for Show. “If CEOs really intended to amend their companies’ purpose, they’d at least consult their boards first.”
In an email with a link to the op-ed and the study upon which it is based, Bebchuk noted the following:
Based on inquiries sent to companies whose CEOs led the statement, we found that decisions to endorse the statement were generally made by CEOs without the approval of their board of directors. Because corporate decisions of significant importance generally receive such board approval, this reflects CEO perceptions that their pledges would not lead to meaningful changes in stakeholder treatment.
CEOs no longe appoint their boards directly, like they used to when I started as a shareholder advocate. But they still wield outsized influence. The “Statement of Purpose” was a PR stunt by the BRT to distract from efforts at the SEC.
That distraction put roadblocks in front of proxy advisors and is likely to soon disenfranchise retail shareholders.
Despite their “stakeholder” approach, Apple still funnels profits through Ireland to avoid taxes. Amazon still usurps the products of suppliers. Walmart still screws employees out of a living wage. Facebook continues to ignore its shareholders through its dual-class structure. That allows Mr. Zukerber to maintain his dictatorship, enabling the breakdown of our fragile civil democracy.
This will probably continue as long as 1% own 40% of corporate assets and the top 10% own 84%. We need a nation of small shareholders with tools to govern. One step would be to act on my rulemaking petition to foster competition among funds around proxy voting. Another would equalize some of that corp0rate power by sunseting dual-class shares. A third reform would be to broaden stock ownership.
BRT’s Stakeholder Capitalism: The Op-ed
What follows is at the heart of the op-ed, in case you dropped your subscription due to their right-wing editorial policies:
We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors…
The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders…
about 70% of the U.S. companies that joined the statement are incorporated in Delaware, which is widely viewed as a state with shareholder-centric corporate laws. In a 2015 law-review article, Delaware Chief Justice Leo Strine stated that “a clear-eyed look” at Delaware law “reveals that . . . directors must make stockholder welfare their sole end.”
BRT’s Stakeholder Capitalism: The Study
The Illusory Promise of Stakeholder Governance is forthcoming in Cornell Law Review, December 2020, but is available in draft at SSRN.
Bebchuk and Tallarita analyze CEO incentives, examine if they used their discretion to protect stakeholders, and discuss if we are likely to see meaningful change.
They find the public commitments less than credible. Additionally, “stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance.” Raising illusory public hopes will “impede or delay reforms that could bring meaningful protection to stakeholders.”
That seems to be the exact intent. They were enabled by BlackRock’s Larry Fink and by a memo from Wachtell, Lipton, which declared 2019 to be a “watershed year” in corporate governance due to “the advent of stakeholder governance.”
CEO pay in large corporations ($12M/yr) is linked to shareholder revenues, cash flow, or shareholder return – not stakeholder value. Pay was linked to other stakeholder metrics in only three cases. The link was weak, not strong. CEOs are fired for poor stockholder returns, not poor stakeholder returns.
The authors look at how companies have used their power to protect other stakeholders. For example, in negotiating with private equity firms during a takeover. It appears CEOs looked after themselves and top execs first, then boards and then shareholders. They demonstrated little if any concern for other stakeholders.
Bebchuk and Tallarita conclude with more speculative remarks, which appear to dismiss the possibility of power sharing among stakeholders. I am not so dismissive. I can more easily see power sharing with employees than with suppliers, customer and communities. Even with employees, the easiest form of power sharing would be through employee stock owneship plans (ESOPs). Far greater use of ESOPs would help solve a host of issues, but that is another discussion.
Thanks to Bebchuk and Tallarita for scholarly research. The BRT’s embrace of stakeholderism is largely a distraction. Perhaps they are taking a page from Donald Trump, who seems to use that tactic very effectively.