Going in circles – Academics make an empirical case again stakeholderism | Business
“EACH OF OUR stakeholders is essential.” Those words were part of a declaration signed last August by 181 bosses of big American companies belonging to the Business Roundtable (BRT), an eminent lobby group. It seemed to represent quite a U-turn—nothing short of a repudiation of America Inc’s shareholder-first orthodoxy. As investors pour billions into funds promoting environmental, social and governance objectives beyond profitability, a vision of a cuddlier capitalism has taken hold.
Or has it? In a new paper Lucian Bebchuk and Roberto Tallarita of Harvard Law School pore over data from the companies of some of the BRT signatories and find little evidence (so far) that the declaration has altered corporate behaviour. For example, they found that only three of the 20 companies whose CEOs sit on the BRT’s board—Boeing, Stryker and Marriott—have amended their corporate-governance guidelines in any way since the declaration. And none of the amendments had anything to do with stakeholder welfare, the authors say.
The latest data on incentives suggest shareholders come first. The 20 firms’ non-executive directors earn an average 56% of their compensation in the form of equity stakes, which are by definition driven by shareholder value; 87-95% of their bosses’ pay is tied to performance. Only Duke Energy, Eastman and Marriott tie bonuses to a quantified stakeholder metric—and only in a limited way. Eastman includes three measures of employee safety, but it is up to the compensation committee to decide what weight to assign to each.
The firms’ hands may have been tied. Fully 70% of the BRT statement’s signatories are incorporated in Delaware, whose corporate law is shareholder-friendly. The state’s former chief justice goes so far as to argue in a recent article that “within the limits of their discretion, directors must make stockholder welfare their sole end”.
This need not be a problem, Messrs Bebchuk and Tallarita think. Farsighted bosses have always known that promoting long-term shareholder value requires delivering for customers and treating workers and suppliers reasonably. It is unclear if the same can be said of championing fuzzy stakeholderism.
This article appeared in the Business section of the print edition under the headline “Going in circles”