The Business Roundtable—an association of America's leading CEOs—committed itself in 2019 to "modernizing its principles on the role of a corporation." In the past, the group explained, it held that "corporations exist principally to serve their shareholders." But "it has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable."
That term—stakeholder—represents a significant shift. But it did not emerge from nowhere. There is an entire historical and political apparatus underlying it that has led to results that are decidedly unfriendly to free markets.
Who are these stakeholders? The Business Roundtable statement invokes "customers, employees, suppliers, communities, and shareholders," but that isn't the only definition. One scholar identified no fewer than 593 different interpretations of who qualifies as a stakeholder. R. Edward Freeman, a prominent stakeholderism booster, has argued that stakeholders include "any group or individual who can affect or is affected by the achievements of the firm's objectives." Such all-embracing conceptions underpin what is called pluralistic stakeholderism: the theory that companies must consider the effects of their choices on potentially infinite numbers of stakeholders—even to the point of requiring businesses to consult with, if not receive approval from, such constituencies before making any significant decisions.
Shareholders and investors are thus effectively reduced to one of several entities to whom boards of directors and CEOs are accountable. This is to be realized through "pluralistic governance structures," which might range from advisory boards to councils endowed with governance teeth.
From Voluntary to Compulsory
One way the stakeholder model is being advanced in American business, especially in publicly traded companies, is through efforts to mandate environmental, social, and governance (ESG) disclosures. For individual and institutional investors especially concerned about, for instance, how the companies they invest in treat the environment, ESG allows them to align their investment choices with their environmental commitment.
Many businesses have responded to investor demand for such alignments by setting up funds described as ESG-compliant. Other businesses have voluntarily embraced ESG disclosure principles put forward by nonprofit groups like the Sustainability Accounting Standards Board. These companies freely disclose how their internal practices and investment choices align with principles that such nonprofits regard as important. Examples might include sufficient adherence to transparency requirements, or whether a business has embraced quotas based on race, gender, etc., in its hiring practices.
If a business chooses to embrace such approaches to investment, to submit itself to assessment by various activist groups, or to adopt hiring practices that actively discriminate on grounds of race, gender, etc., it is free to do so—though it might find itself liable to anti-discrimination lawsuits for violating the equal protection principles of the Constitution and the Civil Rights Act of 1964. But what happens when these approaches are not voluntarily chosen?
ESG principles have been thoroughly incorporated into strategies for making businesses accountable to large numbers of stakeholders. One article in The Harvard Law School Forum on Corporate Governance outlined this possibility: "If the stakeholder model represents an emerging model for the strategic vision of a company, ESG…metrics can be used to assess and measure company performance and its relative positioning on a range of topics relevant to the broader set of company stakeholders in the same way that financial metrics assess company performance for shareholders." Some of the criteria the article identifies for assessing stakeholder performance include human rights, employee engagement, fair wages, minority representation, gender equality, sensitivity training, corporate philanthropy, equal opportunity and participation, and alliances with key organizations, councils, and institutions.
And this, in turn, can feed into efforts to mandate various ESG requirements as a way to force businesses to embrace expansive stakeholderism. Diversity requirements for work forces and boards of directors, for instance, feature prominently in ESG guidelines and have been embraced by institutions such as the Nasdaq stock exchange.
In December 2020, Nasdaq announced that it had filed a proposal with the Securities and Exchange Commission (SEC) to embrace new listing rules related to board diversity and disclosure. These included requirements "to publicly disclose consistent, transparent diversity statistics regarding their board of directors" and to adhere to rules requiring "most Nasdaq-listed companies to have—or explain why they do not have—at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+." The new rules required Nasdaq-listed firms to provide annual reports and aggregated statistical information about the self-identified gender and racial composition of their boards of directors using a board diversity matrix.
Nasdaq, it could be argued, is a privately owned financial services corporation and is free to require its members to embrace particular disclosure requirements. But it isn't as simple as that. Nasdaq has been designated as a self-regulatory organization and thus delegated a high degree of regulatory authority by the SEC and Congress. Some courts have held that this means Nasdaq is therefore a state actor and regulator and thus not purely a private entity.
Whatever the legal debates, eight months after Nasdaq announced its new diversity requirements, the SEC formally approved these rules. This didn't just give them legal teeth; it sent a message to the rest of the financial sector about the agency's priorities. This went together with efforts by social and environmental activists and particular institutional investors to persuade the SEC to mandate even wider ESG requirements across the entire investment industry.
As the legal scholars Paul G. Mahoney and Julia D. Mahoney noted last year in the Columbia Business Law Review, this would be a substantial and unauthorized departure from the SEC's "stated mission of 'protecting Main Street investors' and 'maintaining fair, orderly, and efficient markets'." It would, they argued, effectively require the agency to pursue public policy goals for which it "neither has expertise nor the political accountability to pursue."
It would also give executives and corporate boards more opportunities to ignore shareholder expectations by claiming their hands are legally tied. Indeed, in the 1980s and 1990s, many boards and CEOs lobbied for laws to let them appeal to stakeholder interests as a means of warding off investors demanding better performance or even to resist hostile takeovers. After all, the more stakeholders there are for a company's management to answer to, the less accountable those executives can be to any one in particular.
Corporatism, Hard and Soft
The goals of those seeking to entrench political agendas into business operations do not stop here. While running for president in July 2020, Joe Biden declared it "way past time we put an end to the era of shareholder capitalism." That same year, Rebecca Henderson of Harvard Business School contended that America needed a new capitalism with "a pro-social purpose beyond profit maximization and taking responsibility for the health of the natural and social systems." Similar sentiments have been echoed by progressive senators such as Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.), by conservatives who want employees to be allocated seats on company boards, and by World Economic Forum chief Klaus Schwab.
Schwab effectively revealed what he has in mind by reminiscing about postwar Europe: "There was a strong linkage between companies and their community. In Germany, for example, where I was born, it led to the representation of employees on the board, a tradition that continues today."
Here Schwab is alluding to "corporatism": an approach to organizing society whose roots can be traced back at least to the Middle Ages. As a modern set of ideas, it emerged in the 19th century, shaped by such thinkers as the French sociologist Emile Durkheim and the German theologian Heinrich Pesch. It attracted support from socialists, nationalists, Christians, progressives, and fascists.
Though there were many schools of corporatist thought, they have several prominent sentiments in common. Corporatists generally hold that private enterprise and markets generate excessive wealth disparities, weaken communities, diminish security, and undermine "solidarity." They believe that private property and free exchange are useful, but that they must be embedded in a legal and political framework that builds a consensus around specific social and economic goals. Corporatists often espouse the notion that every industry and profession should have organizations that embrace everyone who works in it. These corporate bodies would have the prime responsibility for deciding wages and conditions, and they would be the principal place for resolving disputes within industries, assisted by special tribunals that issue binding resolutions. These corporate bodies' activities would be coordinated by the state.
Different corporatists emphasized some of these ideas more than others. Many focused on establishing "codetermination," in which employees (invariably union officials) are allocated seats on company boards. Others were more concerned with creating those industry-wide, government-guided corporate bodies pursuing national goals.
That often included goals of an authoritarian nature. In a 1935 article for the journal Economica, the German economist Wilhelm Röpke demonstrated how Benito Mussolini was using corporatism to reinforce his fascist regime's grip on the economy and society. What might be called "hard corporatist" policies were also pursued in other fascist countries—Spain, Austria, Vichy France—and, following World War II, in Juan Perón's Argentina.
After 1945, European corporatism took softer forms. Christian Democrat–led governments sought to foster consensus among employers and workers within industries. They consequently established structures like work councils (whose leadership was dominated by union officials) that management was legally bound to consult.
In some nations, soft corporatism achieved constitutional expression. Article 41 of Italy's 1947 Constitution states that the "law shall provide for appropriate programs and controls so that public and private-sector economic activity may be oriented and coordinated for social purposes." Another corporatist provision appears in Article 46: "For the economic and social betterment of workers and in harmony with the needs of production, the Republic recognizes the rights of workers to collaborate in the management of enterprises, in the ways and within the limits established by law." Corporatist aspirations have even been integrated into the European Union's Charter of Fundamental Rights. Article 27 refers to the right of workers "or their representatives" (union officials) to be consulted about an enterprise's operations.
Some historians argue that soft corporatism helped Western Europe recover from World War II. Such arrangements, they maintain, secured the buy-in of businesses and unions into policies that helped many European nations overcome their grave postwar challenges. Over time, however, the same corporatist arrangements have had, or are likely to have, seriously negative effects.
Is Woke Capitalism Just for Show?
When businesses endorse progressive positions on political and social issues—as when Nike recalled its Betsy Ross flag–emblazoned shoes in 2019 after being counseled by activist advisers that the flag represented slavery, or when almost 200 CEOs of major firms signed a full-page New York Times ad that year describing abortion restrictions as "bad for business"—it is sometimes called "woke capitalism." In some cases, internal activism within these companies likely dovetailed with pressures from institutional shareholders who wanted their investments to cohere with progressive priorities.
Amid those developments, it's telling that corporate America's dalliance with the language and priorities of stakeholderism often turns out to be largely rhetorical. In their analysis of the corporate documents of the over 130 U.S. public companies that signed onto the 2019 Business Roundtable statement, the Harvard legal scholars Lucian Bebchuk and Roberto Tallarita found that none had added "any language that improves the status of stakeholders and, indeed, most of them chose to retain in their guidelines a commitment to shareholder primacy." The statement, they suspected, was "mostly for show."
Given these findings, why do CEOs sign such documents in the first place? The UCLA law professor Stephen Bainbridge has suggested three reasons. The first is that business leaders are trying to attract wealthy investors who see themselves as socially responsible. The second is to fend off regulation from progressive politicians. The third is that some CEOs want to insulate themselves from pressures from investors dissatisfied with their performance by suggesting that profit sometimes has to be sacrificed to promote various causes. Bebchuk and Tallarita agree with much of Bainbridge's analysis. CEOs, they argue, often engage in these activities to insulate themselves from investor oversight and to deflect political pressures for regulations that would diminish their autonomy.
Some on the right such as Sen. Ted Cruz (R–Texas) have indicated that they are considering using legislation to push back on ESG, an idea which has received verbal support from GOP figures like former Vice President Mike Pence. Here, they are following the lead of states that have stopped doing business with companies like BlackRock who, they argue, are using their weight as institutional investors to advance woke causes or to put pressure on the fossil fuel industry. It is unclear how Republican legislators would reconcile, for example, constraining investors from exercising their shareholder votes with once-standard conservative support for property rights and free markets.
Whatever conservatives decide to do, it is unlikely the various progressive groups pushing companies and institutional investors to embrace ESG will ever express deep satisfaction with corporations' efforts in this area. They are more likely to swear that the failure of American businesses to embrace stakeholder capitalism properly, or to integrate progressive priorities sufficiently into their internal company operations, simply proves the need to use government regulation to corral businesses down these paths.
Meanwhile, these trends will undermine the most important way businesses really do contribute to the common good. By pursuing shareholder value and maximizing profit, publicly traded companies facilitate choice in goods and services for consumers, provide wages and benefits to their employees, repay their loans to banks, and pay their taxes. They increase the total material wealth in society, allowing people who have never owned a share in their lives to realize goods ranging from health care to education.
Just as protectionism and industrial policy significantly compromise the workings of market exchange by using state power to privilege connected groups of businesses and political leaders, so too would a capacious, government-enforced vision of stakeholder capitalism. By blending politics and business, it would further shift the economy's focus away from meeting the needs and wants of 330 million American consumers and toward promoting the interests of politically connected businesses.
This article originally appeared in print under the headline "The Rise of the Stake Holders".