Realizing Diversity, Sustainability, and Stakeholder Capitalism

• Publication year: 2022

Realizing Diversity, Sustainability, and Stakeholder Capitalism

Peter H. Huang

REALIZING DIVERSITY, SUSTAINABILITY, AND STAKEHOLDER CAPITALISM

Peter H. Huang^*

Abstract

Stakeholder capitalism conceives of capitalism with companies maximizing their long-term value, while considering in addition to the interests of their shareholders, also the interests of all their other stakeholders. Examples of such additional stakeholders include customers, employees, communities, creditors, competitors, society at large, and our planet. America today does not have stakeholder capitalism. Instead, America presently has shareholder capitalism, in which publicly held corporations only maximize their stock value to shareholders.

This Essay analyzes proposals for the United States Securities Exchange Commission to require that all reporting companies make periodic mandatory Environmental, Social, and Governance (ESG) disclosures of comparable, standardized, and quantifiable metrics. These required, ongoing ESG report cards would measure the diversity, sustainability, and ethical impacts of companies on other stakeholders besides shareholders. In effect, this one simple regulatory change means that reporting companies effectively will maximize shareholder value subject to ESG constraints regarding other stakeholders' interests, just as corporations now maximize profits subject to economic, legal, market, scientific, and technological constraints.

This Essay analyzes how mandatory periodic ESG disclosures can realize diversity, sustainability, and stakeholder capitalism. This Essay explains why corporate greed as currently practiced under the notion of shareholder capitalism is a championed and cherished part of American popular culture. Finally, this Essay examines possible causes of the belief that corporate greed and individual greed are socially desirable and even somehow virtuous.

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Table of Contents

Introduction................................................................................................29

I. Shareholder Capitalism versus Stakeholder Capitalism......30
II. Corporate Social Responsibility.................................................32
III. Mandatory ESG Disclosures ........................................................33
IV. Mandatory Diversity Disclosures..............................................34
V. Mandatory Carbon Footprint Report Cards............................36
VI. Stakeholder Capitalism as Constrained Optimization...........39
VII. How ESG Constraints Guide Director Decision-Making........41
VIII. Greed as Hooray for Me and Frack Everyone Else.................43
IX. Greed in American Popular Culture...........................................45
X. Adam Smith's Invisible Hand Metaphor.....................................47
XI. Arrow-Debreu General Competitive Analysis.........................49
XII. General Equilibrium of Incomplete (Security) Markets........51
XIII. Slowing Economic Growth and Guided Civic Revival.............54

Conclusion...................................................................................................55

Introduction

Stakeholder capitalism conceives of capitalism with companies maximizing their long-term value, while considering in addition to the interests of their shareholders, also the interests of all their other stakeholders.¹ Examples of such additional stakeholders include customers, employees, communities, creditors, competitors, society at large, and our planet. America currently does not have stakeholder capitalism, and instead, has shareholder capitalism, in which publicly held corporations only maximize their stock value to shareholders. A valid theoretical foundation for a stakeholder theory of the firm also remains unresolved when there are many firms and heterogeneous agents.²

Obligations to all other stakeholders are outside the purview of business law, and instead governed by other areas of law, such as anti-discrimination law, antitrust, civil rights law, consumer protection, employment and labor law, environmental regulations, human rights law, privacy law, products liability, and torts. This legal compartmentalization is what many business law professors

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teach law students (in the canonical Business Associations course) and believe to be the right division of legal resources and responsibilities.³

This Essay analyzes how to realize diversity, sustainability, and stakeholder capitalism through mandatory disclosures, and why stakeholder capitalism is preferable to shareholder capitalism. This Essay explains why corporate greed as currently practiced under the notion of shareholder capitalism is a championed and cherished part of American popular culture. Finally, this Essay examines possible causes of the belief that corporate greed and individual greed are socially desirable and even somehow virtuous.

I. Shareholder Capitalism versus Stakeholder Capitalism

Only twenty-one years ago, two prominent corporate law scholars praised "the recent dominance of a shareholder-centered ideology of corporate law among the business, government, and legal elites in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value."⁴ They declared that "triumph of the shareholder-oriented model of the corporation over its principal competitors is now assured."⁵

And yet, intense debates are alive and well in today's business, legal, and public discourse on the future and meaning of corporate purpose.⁶ For example, Timothy Wu, currently serving in President Biden's National Economic Council as Special Assistant to the President for Technology and Competition Policy,⁷ and the Julius Silver Professor of Law, Science, and Technology at Columbia University Law School,⁸ pointed out how shareholder capitalism "logically incentivizes corporations to prevent government from acting in ways that might be social welfare-maximizing. In retrospect, what was actually predictable in the

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year 2000 was that urging corporations to focus only on shareholder value would yield the backlash we see today."⁹ Wu noted that a fatal flaw of shareholder capitalism is that it overvalues "the ability and likelihood of government doing that which the corporation is being asked to ignore."¹⁰

Wu split his normative critique of shareholder capitalism into two parts. First, shareholder capitalism "ignores public choice theory and the obvious incentives of corporations who are told to maximize shareholder welfare to prevent the legal system from actually providing protections that might decrease corporate profit. . . . And the shareholder value model is not independent of governmental failure but one of its causes."¹¹ Wu cited this very timely example related to global climate change:

Take environmental protection. Say we recognize absolutely no duty in corporations to take into account harms caused to the environment and ask them only to maximize profit. If new environmental laws will reduce long-term shareholder value by some billions of dollars, it is in the interest of the corporation to spend millions, if not billions, of dollars to prevent the passage of such laws and try to weaken those already in existence. That's elementary public choice theory.¹²

Second, shareholder capitalism "grandly overestimates the legal system and what it can realistically do for people. Yes, the government is powerful, and laws are commands backed by a threat of force. But to expect the law to fill in all the gaps is to expect far too much."¹³ As another timely example, Wu considers employment conditions:

The law, of course, can curb abuses and outliers by barring sexual harassment or policing misconduct, like failures to pay overtime. But to say the corporation has no ethical duties, and we'll leave it to the law to create the working conditions we'd like to see, is a recipe for terrible work conditions once you accept the limits of the law.¹⁴

The #MeToo viral social movement demonstrates how mere laws against sexual harassment are not enough to prevent sexual harassment, partly because

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government enforcement of laws is contingent on adequate funding and motivation of government agencies.

Trees, oceans, and our precious environment do not, in general, have standing to sue to legally protect themselves.¹⁵ An additional reason that laws are not always enforced is they are often very personally and professionally costly for individuals to enforce. All legal rights that people have are real options, in the sense that to exercise those legal rights, people may have to pursue costly litigation.¹⁶ As former Harvard law school dean and university president Derek Bok said, "There is far too much law for those who can afford it, and far too little for those who cannot."¹⁷

Partnoy has also cleverly demonstrated that shareholder primacy is illogical by constructing "counterexamples that show how the notions that shareholders should be assigned first priority, and that managers should maximize shareholder wealth, are illogical."¹⁸ Specifically, Partnoy shows "that economically equivalent firms, which should by definition choose the same projects, will instead be led to engage in different behavior if they seek to maximize shareholder value."¹⁹ Partnoy presents three "counterexamples related to counterexamples related to capital structure, residual claimants, and temporal challenges."²⁰ Partnoy had raised some of his arguments in his earlier work about financial derivatives.²¹

II. Corporate Social Responsibility

Do corporations have social responsibilities? In an often-cited essay, 1976 economics Nobel Laureate Milton Freidman²² controversially argued that corporations only have the social responsibility of maximizing profits for their

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shareholders.²³ Corporations engage in often contested political speech and social activism. Corporations have great power...