Can A Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera.

• Author: Gatti, Matteo

1. INTRODUCTION 2 II. THE STAKEHOLDER APPROACH 12 A. Background: The Corporate Purpose Debate 12 B. Corporatist Advocates for a Stakeholder Approach 17 C. Critiques to the Stakeholder Approach 18 D. A Preliminary Assessment of the Stakeholder Approach and of the Critiques to It 23 III. IS SHAREHOLDER PRIMACY RESPONSIBLE FOR INEQUALITY AND ECONOMIC STAGNATION? CAN A STAKEHOLDER APPROACH BE THE FIX? 26 A. Inequality and Economic Stagnation 26 B. What Is Behind Inequality and Economic Stagnation? 31 1. Trade and Globalization 31 2. Technology 32 3. Education 34 4. Concentration and Market Power 36 5. Excessive Compensation:. CEOs, Super Managers, and Other Elite Workers 44 6. Weak and Declining Protection from Labor Market Institutions 46 7. Deregulation and the Vanishing Safety Net 52 8. Tax 54 9. Discrimination 57 C. A Stakeholder Approach Would Hardly Address Inequality and Economic Stagnation 60 IV. THE RISKS OF A STAKEHOLDER APPROACH AND A PROPOSED ALTERNATIVE 63 A. A Stakeholder Approach Is Likely Detrimental to Redressing Inequality 63 1. The Offensive Feature of a Stakeholder Approach: The Weaker Constituencies Card Increases Lobbying Power 64 2. The Defensive Feature of a Stakeholder Approach: Stakeholderism Would Occupy Significant Legislative and Regulatory Space 67 B. Redressing Inequality: An Alternative Approach 70 V. CONCLUSION 73 We share a fundamental commitment to all of our stakeholders. Business Roundtable, August 2019. Timeo danaos et dona ferentes. (***) Virgil, 29-19 B.C. I. INTRODUCTION

   Economic stagnation and increasing income and wealth inequality are staples of our time. Even though the GDP has gone up 23% since the 1990s, median income has only increased by 2.2%. (1) In the last three decades, the so-called labor share, the share of income that accrues to all labor in the aggregate, fell by 10%; as a result, the U.S. appears closer to a developing country than a developed one as far as labor is being remunerated. (2) Wealth inequality, as measured by the Gini index, is the highest it has been since 1967, when the Census Bureau first began studying inequality. (3) Income inequality has returned to levels not seen since the Gilded Age. (4)

   Economic anxiety runs very high--seldom has the capitalist credo been as feeble as in current times, even well before the COVID-19 pandemic. To get a sense, in an August 2019 poll by the New York Times, three out of five respondents worried about the economy, regardless of whether they were financially well off or struggling. (5) Eight of fifteen economics books recommended by the Financial Times chief economist commentator, Martin Wolf, for the second half of 2019 were books describing or denouncing various aspects of the unsustainability of present day's economic system, inequality first and foremost. (6) Some fear social peace is at risk, (7) and many attribute the rise of populist movements around the globe to this economic malaise. (8) The end of history that was optimistically forecasted when the Cold War folded (9) has never felt so distant. Of course, things worsened dramatically with COVID-19. (10)

   Predictably, corporations, the archetypical legal structures for large businesses, (11) are not wildly popular these days: a 2014 poll found that only 36% of Americans consider corporations a source of hope. (12) There are several features of modern-day corporations that are subject to criticism, including the excessive salaries of high-level executives, the lucrative stock buy-backs that tend to systematically favor insiders, and the short-termism that some believe has been killing long-term planning and sustainability.

   But there is one criticism that stands out and revolves around the very purpose of the corporation itself: according to this view, corporations have created all sorts of negative externalities by adhering too closely to the so-called shareholder primacy norm, which requires directors to run the corporation in the exclusive interest of shareholders. (13)

   Further, some spheres of public opinion, (14) academics, (15) and politicians (16) seem to be in consensus that shareholder primacy is also a key contributor to inequality and that corporations, instead of focusing exclusively on profits, should rather embrace stakeholderism: a more holistic approach aimed at catering to a broader set of interests including those of workers, consumers, and the environment. Interestingly, even leading asset managers such as BlackRock's CEO, Larry Fink, (17) prominent corporate lawyers such as Martin Lipton (18) and conservative politicians such as Senator Marco Rubio (19) have come to argue that an exclusive focus on short-term shareholder gains is harmful to the broader economy.

   In fact, public opinion's irritation with how corporations operate has bubbled up to the sphere of national politics. In the summer of 2018, Senator (and at the time presidential hopeful) Elizabeth Warren presented a bill in Congress titled "Accountable Capitalism Act" aimed at reforming major areas of corporate law, including expanding the fiduciary duties of directors and officers (and more). (20) In late 2019, her main rival on the progressive side of the Democratic Party, Senator Bernie Sanders, followed suit by presenting a plan to overhaul major areas of corporate and business law, which includes a similar approach on fiduciary duties (and more). (21)

   Unsurprisingly, corporations themselves turned to voice their views on the issue via their powerful lobbying organization, the Business Roundtable ("BRT"). Indeed, the BRT disclaimed shareholder primacy and embraced a broader stakeholder approach. In August, the BRT--a group including the CEOs of Amazon, Apple, Bank of America, GM, IBM, and JP Morgan Chase--announced that the creation of shareholder value was no longer the principal purpose of their corporations. (22) Instead, in a new "Statement on the Purpose of a Corporation," they said, "[e]ach of our stakeholders is essential," including employees, suppliers, and customers, and they agreed to commit to "deliver value to all of them, for the future success of our companies, our communities and our country." (23) The position of the BRT, which in the days immediately following the Statement was somewhat qualified (if not backtracked from), (24) generated a wave of reactions. Some commentators welcomed it--some enthusiastically, (25) some with cautious optimism. (26) However, many others raised concerns (27) or denounced the BRT's Statement as empty (28) or old (29) rhetoric. (30)

   Why is a stakeholder approach potentially appealing to the policymaker? We believe that it is because it promotes a seemingly radical change in how high-level decisions should be taken by the board of directors, which happens to be appealing to both progressives and incumbent executives. Indeed, both groups appreciate how the approach fosters a shift in the interests the decision maker is supposed to cater to. Progressives, on the one hand, believe that focusing uniquely on value creation for shareholders has generated the unequal outcomes we deal with in the socio-economic reality of today. (31) Therefore, by switching to a more holistic view of the enterprise, the theory confides to secure more just results for the weaker constituencies involved, especially workers who, as wealth and income inequality data show, have received an increasingly shrinking portion of the pie. (32) Incumbent executives, on the other hand, welcome the opportunity of a break from shareholder pressures. (33)

   However, there is also a cynical read for the Business Roundtable's endorsement of stakeholder theories. (34) Under this view, the BRT proposal helps management teams and boards of directors go through these uncertain times of socio-economic malaise while retaining the driver seat and not giving in to other quests for changes in policies affecting business firms, such as the far-reaching corporate law reforms advocated by Warren and Sanders, (35) for instance, or changes in labor, antitrust, and tax policies, which are currently being discussed in academic and political circles. (36)

   We side with the cynical read. For those concerned about inequality, a shift to stakeholder theory, especially one focused on expanding fiduciary duties, is perilous in part precisely because it does seem to represent a sea change. However, allowing or even requiring managers and directors to consider the needs of all stakeholders does not guarantee any meaningful rebalancing of power and resources to weaker constituencies. Without specific mandates to corporations and without enforcement mechanisms, these measures do little more than increase managerial discretion. Indeed, all existing proposals to broaden the scope of fiduciary duties to cover weaker constituencies are absolutely vague on the actual measures or initiatives the board should undertake to benefit such constituencies.

   Further, although there may be a role for corporate governance to play--assuming rule changes result in enforceable obligations for businesses--direct regulation in other fields is more critical. We show that increasing inequality is attributable primarily to factors outside corporate governance--including lack of antitrust protections, weakened labor rights, tax cuts, and so focusing time and resources on corporate governance changes is unlikely to be the most effective means of targeting inequality.

   But there is more: we are concerned that the stakeholder approach would be at best innocuous, but more likely counter-productive. We believe that to invest in stakeholderism is to hand corporate executives and their advisors both a sword and a shield with which they can maintain their advantageous status quo. First, executives can play offense with stakeholderism by justifying more expansive lobbying efforts as part of their mission to consider all constituents. (37) That is, corporations could use a stakeholder mandate to justify expanding...