Stakeholder Capitalism in the Time of COVID

Abstract

This Article tests the claims of supporters of stakeholder capitalism (“stakeholderism”) in the context of the COVID pandemic. Supporters of stakeholderism advocate encouraging and relying on corporate leaders to use their discretion to serve stakeholders such as employees, customers, suppliers, local communities, and the environment. The pandemic followed and was accompanied by peak support for, and broad expressions of commitment to, stakeholderism from corporate leaders. Nonetheless, and even though the pandemic heightened risks to stakeholders, we document that corporate leaders negotiating deal terms failed to look after stakeholder interests.

We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced from April 2020 to March 2022, totaling 122 acquisitions with an aggregate consideration exceeding $800 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders.

After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives not to benefit stakeholders beyond what would serve shareholder interests. While we focus on decisions in the acquisition context, we explain why our findings also have implications for ongoing-concern decisions, and we discuss and respond to potential objections to our conclusions.

Overall, our findings have significant implications for long-standing debates on the corporate treatment of stakeholders. In particular, our findings are inconsistent with the implicit-promises/team-production view that corporate leaders of an acquired company should and do look after stakeholder interests; on this view, fulfilling implicit promises to protect stakeholder interests serves shareholders’ ex-ante interest in inducing the stakeholder cooperation and investment that are essential to corporate success. Our work also supports the agency critique of stakeholder capitalism which suggests that, due to their incentives, corporate leaders cannot be relied upon to look after stakeholder interests and to live up to pro-stakeholder rhetoric

An Appendix to this Article is 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 The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita, 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, The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita, Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, and How Twitter Pushed Stakeholders Under The Bus by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo.

Keywords: Stakeholders, stakeholderism, stakeholder governance, stakeholder capitalism, corporate social responsibility, corporate purpose, COVID-19, employees, accountability, managerialism, mergers & acquisitions

JEL Classification: D21, G32, G34, G38, K22