A Test of Stakeholder Capitalism.

• Author: Gadinis, Stavros

1. INTRODUCTION 50 II. STAKEHOLDER CAPITALISM DOMINATES CORPORATE LAW DEBATES. 59 A. The Polarizing Debate on Stakeholder Capitalism 59 B. Information and Independence: Foundations of Board's Role 62 C. The Informational Value of Stakeholder Governance 67 III. PARTICIPANTS AND METHODOLOGY 68 A. Why Study Companies During COVID-19? Our Hypotheses 68 B. Participants and Methodology 70 IV. INTERVIEWS: HOW STAKEHOLDER FEEDBACK HELPED COMPANIES DURING COVID-19. 71 A. Consumers and Product Development: Fighting Financial Distress and Health Anxiety 72 1. Dealing with Consumers in Financial Distress: Millicom 73 2. Supplying Healthcare Facilities and Losing Consumer Market Share: Clorox 74 3. Reorienting Credit Card Services Toward Financial Inclusion: Mastercard 75 B. Employee Needs: Renegotiating the Socially Distanced Workplace 76 1. Reopening the Office after COVID-19 and Employees' Choices: Salesforce and Levi's 77 C. Supply Chain Vulnerabilities: Supporting Collaborators Faced with Financial Ruin and Illness 78 1. Helping Supply Chain Vendors Overcome Financial Difficulties: Levi's 78 2. Supporting Vulnerable Supply Chain Workers: PepsiCo 79 D. Governments and Communities: Companies Help Governments Address Urgent Needs and Shortfalls 80 1. Helping Tourist Communities Limit Travel: Airbnb 81 V. LIMITATIONS OF STAKEHOLDER GOVERNANCE 82 A. Health, Safety and Workers in the Gig Economy: Uber 83 B. Pandemic Layoffs 87 VI. ISN'T THIS JUST SHAREHOLDER PRIMACY? FROM AD HOC INCENTIVES TO A SYSTEMATIC FRAMEWORK 90 A. Shareholder Primacy: Explanations and Gaps 91 B. Stakeholder Governance as A Systematic Framework for Obtaining Information 93 1. Substantive Scope: Obtaining Stakeholder Information in a Comprehensive, Standardized, and Regimented Manner 94 2. Institutional Features: Executive Teams, Board Oversight and Investor Disclosures and Engagement 95 C. Why a Systematic Framework for Stakeholder Governance Helps Mitigate Concerns Over Accountability 97 VII. CONCLUSION 98 I. INTRODUCTION

   Surrounded by morning traffic in early March 2020, Amy Weaver was headed toward Salesforce's headquarters in downtown San Francisco. (1) As city life was bustling around her, she knew that the decision she and the leaders at Salesforce would make that day could soon bring everything to a standstill. Customers and contacts at partner and peer companies provided Salesforce with updates, giving them first-hand accounts of what they were seeing with respect to the COVID-19 virus. Based on this information, the company had already been canceling travel and tours. But as it became clear that the pandemic was spreading in the U.S., management was wondering: was it time to shut down the headquarters? As head of the company's legal, ethics, integrity and compliance team, Weaver's input would be decisive. (2) She opted for a coordinated approach, connecting with employees as well as other businesses and governments. Salesforce moved early into remote working. (3) "We started getting emails from other CEOs and business leaders asking what we knew... they were looking to us to lead." (4) Some inquiries were from their customers, but others were from peer companies, or companies located nearby. They were looking to obtain the superior information that Salesforce apparently had. Soon after, local authorities in the Bay Area, and then the state government, got in touch. (5)

   A few weeks later, the fear of COVID-19 increased the demand for cleaning and sanitization products. (6) Benno Dorer, the CEO of Clorox, strove to increase the supply of their widely popular antibacterial wipes by boosting production capacity, but his efforts were quickly eclipsed by consumer demand. (7) Forced to prorate available products among its distributors, Clorox had to evaluate its priorities. Besides households, Clorox also supplies care facilities like hospitals and nursing homes, which became common epicenters of COVID-19 outbreaks. If the company continued to supply these facilities, it would be unable to satisfy demand by large retailers like Walmart or Target. (8) As a result, Clorox would have to back down from valuable distribution deals and cede expansive shelf space to alternative suppliers, with no assurance about when or whether it could claim it back. Moreover, the damaged relationship with retailers could hurt Clorox's other household products, whose sales depended more heavily on this distribution channel. Finally, Clorox's retreat from the retail market would provide an opportunity for competitors, many of whom had been trying to enter the market unsuccessfully for years. However, care providers told Clorox that it would be hard to source alternative sanitization supplies and might take weeks until new deliveries--endangering the lives of many people. "I chose to send our products to frontline workers," Dorer said. (9) For a little while, Clorox products all but disappeared from the shelves. (10) Consumers were desperate, and the media covered the shortfall fueling further anxiety. (11) Retailers and investors expressed concerns but were ultimately assuaged.

   As the pandemic engulfed western economies, closing borders (12) and decimating many retail industries, (13) supply chains in developing nations saw a tidal wave of order cancellations (14) just as they were trying to keep COVID-19 at bay. Levi Strauss & Co. (LS&Co.), the clothing company, quickly contacted their offshore vendors to reduce their orders, only to realize that many other companies had done the same, potentially driving some vendors in their supply chain out of business. Seth Jaffe, LS&Co. Executive Vice President and General Counsel noted that the supply chain leaders had spent years building relationships with their vendors, monitoring humane working conditions, and ensuring sustainable production methods. "If we turned our backs on our suppliers during the pandemic, we would be creating significant hardship for them, and we would undo years of work," he said. (15) Thus, LS&Co. ensured that they would pay for orders already placed and would help vendors get international financing to stay afloat.

   In addition to suppliers, companies also focused on the health and safety of individual workers throughout their supply chain. PepsiCo was about to complete a human rights report to uncover weaknesses in working conditions throughout its supply chain, (16) slated to be made public in February 2020, when COVID-19 began spreading throughout the world. At first, the immediacy of the pandemic pushed other topics further down the company's agenda. But as the company sought to support supply chain workers and enhance worker safety from COVID-19, they needed to pin down vulnerable populations and high-risk groups. The company quickly came to realize these groups largely overlapped with those highlighted in their human rights report. PepsiCo then turned to the information collected for their human rights report. It utilized the monitoring structures it had put in place as a tool for assisting suppliers in managing worker safety during the pandemic.

   In the examples above, companies facing tough choices charted a way forward that took into account the perspective of those likely to be impacted by adverse events, collectively dubbed stakeholders. These included employees, peer companies, local economies, and governments in Salesforce's case, consumers and collaborators in the Clorox example, and supply chain vendors and workers in the examples of LS&Co. and PepsiCo. By incorporating stakeholders' viewpoints into their decision-making, these companies reflected a reorientation of corporate culture. Prominent CEOs, (17) investors, (18) academics, (19) and regulators (20) around the world have been urging companies to abandon an exclusive focus on shareholder profits and instead adopt a broader view of their companies' purpose and objectives. By highlighting issues important to stakeholders such as workplace diversity and climate change, this movement has gained ground in the public debate (21) and has come to dominate policymaking agendas. (22) But it has also elicited a passionate rebuttal from legal academics. Some argued that management paid lip service to stakeholders while remaining tied to improving profits above all else, (23) and others questioned whether lumping all stakeholder interests together provides any real guidance to management and boards. (24)

   COVID-19's swift and overpowering arrival put these competing approaches to the test. On the one hand, stakeholder needs were more urgent and critical than ever before, as the health and livelihood of many were in immediate threat. From individual employees to entire communities, local authorities to national governments, and retail consumers to raw material suppliers, COVID-19 brought many stakeholder concerns to the forefront. (25) On the other hand, companies' resources were under immense stress. Some sectors saw their turnover plunge practically overnight. (26) Even firms who saw a boost in demand due to COVID-19 had to make rapid and extensive readjustments to their production and distribution models to deal with remote working and social distancing. (27) Stakeholder initiatives, often attacked as luxuries even in the pre-COVID-19 era, were at risk of elimination. (28) With so much at stake, both for stakeholders and for the companies and their shareholders, management would have to resolve hard dilemmas when deciding how to best allocate company resources.

   In this Article, we explore whether the stakeholder approach helped companies to address the COVID-19 challenge, sketching out both its successes and its weaknesses. We interviewed high-level executives in 14 large publicly-traded companies: Salesforce, Clorox, American Airlines, Airbnb, Uber, Lyft, PepsiCo, Levi's, Nestle, Hershey, Mastercard, Millicom, Nokia, and MGM Resorts. Our sample includes companies from a variety of industries. Some were hit hard by COVID-19, such...