A series of recent papers (here, here, and here, for example) have argued that maximizing shareholder value remains the proper goal of the modern corporation – and in some cases that stakeholderism is in fact harmful to stakeholders. Yet giving up on stakeholderism for the sake of stakeholders cannot be the right answer or strategy, even though there are significant challenges to steering away from the currently prevailing framework.

Although the papers differ in the details of their arguments, they share some common themes:

• Corporate managers do not and will not use discretion to benefit non-shareholder constituents; delegating the protection of stakeholder interests to them is therefore futile. Worse still, providing managers with more such discretion may give them cover to act in a manner that benefits themselves, thereby reducing firm value and harming shareholders, stakeholders, and society.
• Managers have a serving-two-masters problem: Under stakeholderism, they would have to reconcile various conflicting interests, which is impossible to do; shareholder value maximization is therefore the only viable corporate purpose.
• Stakeholderism, if adopted, would raise illusory hopes and weaken pressures for policy reforms beneficial for stakeholders. Stakeholderism is therefore counterproductive.
• The issue of stakeholderism should be addressed by external regulation, including labor, antitrust, consumer protection, and environmental laws.
• Providing new, more stakeholder-oriented incentives to managers – such as via redesigned compensation packages and modifications to the system of director elections – would be challenging and costly.

Even though various parts of these statements are certainly true, these objections do not necessarily support the conclusion that stakeholderism is harmful for stakeholders. Rather, the statements only represent hurdles to arriving at a corporate pluralist purpose; hurdles that can, and should, be overcome with sufficient societal and political support. Indeed, one could rethink or counter the statements to arrive in favor of a more pluralist corporate purpose.

The following represents a first attempt at such a rethinking, based on some of my previous work on corporate purpose and corporate duties to the public.

1. Managers do not use discretion to benefit stakeholders, and may even abuse discretion: Most businesses have not shown much genuine interest in advancing non-shareholder interests, and approaches that ask boards to “consider” stakeholder interests have shown little to no impact. But instead of giving up on stakeholderism, the response should be to curtail managerial discretion. For example, the law could expressly put shareholder and stakeholder interests on an equal footing. This could be complemented with a requirement for corporations to balance the positive and negative impacts of their actions, affecting shareholders and stakeholders, against each other. One subvariant of this approach would be to specifically require boards to strive to pursue net beneficial (for the public as a whole) corporate activities, taking into account financial and non-financial interests of any stakeholder group, including shareholders. Although such calculations are difficult to make and not an exact science, legislative guidance along the lines of these considerations could lead to improved outcomes by forcing corporations to consider the overall effects of their decisions and activities as precisely as possible. Another, more radical option would be to allow boards to pursue harmful actions for certain non-shareholders only if the costs of doing so could be justified in the provision of sufficient benefits to other non-shareholders. This would effectively be an attempt for corporations to counterbalance negative externalities at their roots.
2. Managers cannot consider multiple interests at once: Concerns that the pursuit of multiple goals – beyond a sole focus on profits – would have negative effects on managerial performance and behavior appear increasingly unfounded. Good managers, supported by technology, can handle complexity. Modern corporations should be capable of pursuing a variety of goals at once, optimizing their performance along several benchmarks. Additionally, it may be overly simplistic to assume that shareholder wealth maximization is a singular, easily delineated goal. Shareholders are diverse, too, with varying investment timeframes and levels of risk tolerance.
3. Stakeholderism concerns should be addressed via external regulation, and adopting a broader corporate purpose would simply weaken the impetus for regulatory action: Without a doubt, external laws and regulations are necessary and important tools to protect stakeholders and societal interests. Corporate actions are no substitute for governmental action, and it is primarily the role of legislatures and policy-makers to ensure adequate protections of public health, the environment, employees, etc. However, these external protections should be complemented with actions and behavior on the corporate level. External regulations and stakeholderism are not exclusive alternatives; they should work in tandem. It is plausible that increased corporate commitment to stakeholderism would give politicians cover for reducing their own initiatives in this regard. But to argue that, because of this possible effect, business should continue in its old ways seems unjustified. Based on the growing impact that corporations have on society at large, and given that liability and enforcement after the fact are better complemented by ex-ante duties, the consideration of broader stakeholder interests should be a fundamental part of the corporate mission.
4. Redesigning managerial incentives is difficult and costly: While this is certainly true, it is also a cost-benefit issue, and not in itself a reason for rejecting stakeholderism. The prospective costs of the ongoing health crisis and the likely much larger impacts of the looming climate crisis – both of which have corporate governance implications – should serve as a reminder of the potential impacts of failing to adequately safeguard societal concerns and may well justify even the most difficult reform measures. Furthermore, with more mandatory changes to the corporate purpose, as proposed above, incentives that aim to elicit voluntary action would become far less important. In short, today’s costly and difficult measures might well look prudent and necessary in hindsight. Let us not wait for a Minsky moment before taking up reform measures.

Instead of continuing with business as usual, corporate law needs to be recalibrated, with the core of this change lying in provisions on the corporate purpose, related director and management duties, the business judgment rule, and enforcement or review mechanisms. These reform measures do not replace external, non-corporate regulation, but rather act as a necessary corollary and ex-ante strategy. Stakeholderism certainly poses many significant challenges, but it is only bad for stakeholders if it is not properly implemented.

This post comes to us from Professor Martin Petrin at University College London and Western University. It is based in part on his recent book, Corporate Duties to the Public.