The Illusory Promise of Stakeholder Governance
Cornell Law Review, Volume 106, 2020, pp. 91-178
Harvard Law School John M. Olin Center Discussion Paper No.1052
Harvard Law School Program on Corporate Governance Working Paper 2020-1
81 Pages Posted: 27 Feb 2020 Last revised: 24 Mar 2022
Date Written: February 26, 2020
To address growing concerns about the negative effects of corporations on their stakeholders, supporters of stakeholder governance (“stakeholderism”) advocate a governance model that encourages and relies on corporate leaders to serve the interests of stakeholders and not only those of shareholders. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. Stakeholderism, we conclude, is an inadequate and substantially counterproductive approach to addressing stakeholder concerns. To assess the promise of stakeholderism to protect stakeholders, we analyze the full array of incentives facing corporate leaders; empirically investigate whether they have in the past used discretion to protect stakeholders; and show that recent commitments to stakeholderism were mostly for show rather than a reflection of plans to improve the treatment of stakeholders. Our analysis indicates that, because corporate leaders have strong incentives not to protect stakeholders beyond what would serve shareholder value, acceptance of stakeholderism should not be expected to produce material benefits for stakeholders.
Furthermore, we show that acceptance of stakeholderism could well impose major costs. By making corporate leaders less accountable and more insulated from shareholder oversight, acceptance of stakeholderism would increase slack and hurt performance, reducing the economic pie available to shareholders and stakeholders. In addition, and importantly, by raising illusory hopes that corporate leaders would on their own protect stakeholders, acceptance of stakeholderism would impede or delay reforms that could bring real, meaningful protection to stakeholders.
The illusory promise of stakeholderism should not be allowed to advance a managerialist agenda and to obscure the critical need for external interventions to protect stakeholders via legislation, regulation, and policy design. Stakeholderism should be rejected, including and especially by those who take stakeholder interests seriously.
Presentation slides for this paper are available on SSRN here.
This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Other parts of this research project include Will Corporations Deliver Value to All Stakeholders? by by Lucian A. Bebchuk and Roberto Tallarita, For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita, and Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.
Keywords: corporate purpose, corporate social responsibility, stakeholders, stakeholder governance, stakeholder capitalism, corporate constituencies, enlightened shareholder value, corporate governance, Business Roundtable, constituency statutes, entrenchment, accountability, managerialism
JEL Classification: D21, G32, G34, G38, K22
Suggested Citation: Suggested Citation