THE RISE OF THE STAKE HOLDERS IS THE ROAD TO STAGNATION PAVED WITH GOOD ENVIRONMENTAL, SOCIAL, AND GOVERNANCE INTENTIONS?

• Author: Gregg, Samuel

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...