Does Enlightened Shareholder Value Add Value?

Forthcoming, The Business Lawyer, Vol. 77 (2022).
Harvard Law School John M. Olin Center Discussion Paper No. 1077
Harvard Law School Program on Corporate Governance Working Paper 2022-5

European Corporate Governance Institute - Law Working Paper No. 643/2022

32 Pages Posted: 6 Apr 2022 Last revised: 24 Jun 2022

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law; Harvard Law School, Program on Corporate Governance

Roberto Tallarita

Harvard Law School; Harvard University - Harvard Law School

Date Written: April 6, 2022

Abstract

Unlike shareholder value maximization (SV), which merely calls on corporate leaders to maximize shareholder value, enlightened shareholder value (ESV) combines this prescription with guidance to consider stakeholder interests in the pursuit of long-term shareholder value maximization. ESV is being increasingly embraced by many actors: it was adopted by the U.K. Companies Act, is being considered for inclusion in the Restatement of Corporate Governance Law, and is broadly supported by both corporate leaders and institutional investors. This article examines whether replacing SV with ESV can be expected to benefit stakeholders or society.

We begin by arguing that the appeal of ESV and the enthusiasm for it among supporters is grounded in a misperception about how frequent "win-win situations" are. In reality, corporate leaders often face significant trade-offs between shareholder and stakeholder interests, and such situations are exactly those for which the specification of corporate purpose is important.

Furthermore, we explain that, under certain standard assumptions, SV and ESV are always operationally equivalent and prescribe exactly the same corporate choices. We then relax these assumptions and consider arguments that using ESV is beneficial in order to (i) counter the tendency of corporate leaders to be excessively focused on short-term effects, (ii) educate corporate leaders to give appropriate weight to stakeholder effects, (iii) provide cover to corporate leaders who wish to serve stakeholders, and/or (iv) protect capitalism from a backlash and deflect pressures to adopt stakeholder-protecting regulation. We show that each of these arguments is flawed.

We conclude that, at best, replacing SV with ESV would create neither value nor harm. However, to the extent that ESV would give the false impression that corporate leaders can be relied on to protect stakeholders, the switch from SV to ESV would be detrimental for stakeholders and could impede or delay reforms that could truly protect them.

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, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, and The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita.

Keywords: Corporate purpose, corporate social responsibility, stakeholders, stakeholder governance, stakeholder capitalism, stakeholderism, corporate constituencies, enlightened shareholder value, corporate governance, short-termism

JEL Classification: D21, G32, G34, G38, K2

Suggested Citation

Bebchuk, Lucian A. and Kastiel, Kobi and Tallarita, Roberto, Does Enlightened Shareholder Value Add Value? (April 6, 2022). Forthcoming, The Business Lawyer, Vol. 77 (2022).
Harvard Law School John M. Olin Center Discussion Paper No. 1077
Harvard Law School Program on Corporate Governance Working Paper 2022-5
, European Corporate Governance Institute - Law Working Paper No. 643/2022, Available at SSRN: https://ssrn.com/abstract=4065731 or http://dx.doi.org/10.2139/ssrn.4065731

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

HOME PAGE: http://https://en-law.tau.ac.il/profile/kastiel

Harvard Law School, Program on Corporate Governance ( email )

1575 Massachusetts
Cambridge, MA 02138
United States

Roberto Tallarita

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

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