Concerns about a lack of viewpoint diversity in stakeholder capitalism have been touched upon in commentary about the SEC’s recent climate change proposal. For those not caught up, the SEC has proposed a rule that would “require registrants to provide certain climate-related information in their registration statements and annual reports.”[1] The proposed rule has been widely discussed, and to some extent criticized, in corporate governance circles. Professor Sean Griffith, for example, argued in a recent paper that “the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation.” A 2021 survey reported that, while 82 percent of Democrats view climate change as a critical threat, only 16 percent of Republicans reported a similar level of concern.[2] Relatedly, a comment letter submitted by prominent law professors highlights the conflicts of interest between the institutional investors the SEC points to as supporting its proposal and the retail investors the SEC should arguably be more concerned with.[3]
Thus, there appear to be some legitimate concerns about what may be described as stakeholder capitalism’s political bias, and my recent paper contributes to that conversation. One relevant additional data point presented in the paper provides that, in a 2019 survey of Fortune 100 board members’ ideological makeup, the split was 100 percent Democrat and 0 percent Republican in the Fortune 1-10, and 83 percent Democrat and 17 percent Republican in financial sector companies in the Fortune 1-100.
To the extent a lack of viewpoint diversity plagues stakeholder capitalism, there are several possible explanations. One, offered by Stephen Bainbridge, is that it represents a “Revolt of the Elites,” manifested at least in part by “CEOs increasingly reflect[ing] the values of the Blue state coastal bubbles in which they are embedded, especially on environmental and social issues.” Potential problems created by a politically biased stakeholder capitalism include not only destroying the value-creating power of traditional capitalism or creating a false sense of confidence that regulatory solutions to ESG issues aren’t needed, but also contributing to the polarization currently tearing our country apart. As James Piereson noted in the The New Criterion, our “new corporate alliance with liberals and the Democratic Party is … dangerous…. As a strategy for dividing America, this one would be hard to beat.” Furthermore, all the foregoing may add fuel to an on-going populist backlash. As Samuel Gregg notes: “To expect the rest of the world simply to accept whatever stakeholder-corporatist insiders have decided to be the new global consensus on any given topic seems disconcertedly utopian. It also increases the possibility of more populist backlashes on an international level.” In response to the foregoing, my paper addresses some potential solutions to the problem of a politically biased stakeholder capitalism.
In my paper, I first examine a viewpoint diversity shareholder proposal advanced by the Free Enterprise Project. This proposal seeks to “force corporations to ask their shareholders whether employees should be protected from discrimination on the basis of viewpoint or political participation, and whether corporate boards should reveal information about the political affiliations and worldviews of their board-of-director candidates to shareholders and the investing public.” This proposal has the potential to reduce the echo-chamber problem that is perceived to plague institutions dominated by left-of-center as well as radically progressive voices.
Second, I examine a stakeholder capitalism proposal, also advanced by the Free Enterprise Project, which seek to determine how corporations have transitioned to stakeholder capitalism in accord with the proclamations of CEOs. (This proposal is targeted primarily at corporations whose CEOs signed on to the Business Roundtable’s 2019 redefinition of the purpose of corporations.) If the conclusion is that no substantive change requiring alteration of governing documents has occurred, then the proposal calls for an inquiry into whether either “corporate managers have been breaching their fiduciary duty to maximize shareholder value for years” or “stakeholder capitalism is merely a form of marketing, which then makes corporate statements touting a commitment to stakeholder capitalism materially misleading.” This stakeholder capitalism proposal has the potential to expose the greenwashing or woke-washing elements of stakeholder capitalism.
Third, I reference a prior paper I’ve written wherein I argue that corporate actions raising a specter of political bias should be subjected to enhanced scrutiny. Importantly, the proposal does not preclude corporate decision-makers from pursuing any particular course of action. Rather, it simply recognizes that corporate actions may be sufficiently political to call into question the disinterestedness of the relevant corporate fiduciaries, and therefore declines to grant them the benefits of the business judgment rule presumption that they acted on a fully informed basis and in the best interests of the corporation. In recognition of the increased litigation costs that may arise should the proposal be adopted, I further argue that a safe harbor from such enhanced scrutiny may be provided to corporations with demonstrably viewpoint-diverse boards. Relatedly, I’m currently finishing up a project that examines Senator Marco Rubio’s “Mind Your Own Business Act,” which proposes using listing standards to reach a similar “enhanced scrutiny” solution.
Concerns about the politically biased nature of stakeholder capitalism abound. Left unchecked, both the associated biases and backlash have the potential to seriously undermine the market-powered value-creation that likely holds the greatest hope for solving the very problems stakeholder capitalism claims to address. Improving the viewpoint diversity of corporate decision-makers, as well as properly accounting for the rise of political activism in the C-suite and boardrooms when litigation ensues, are two potential corrective measures worth considering.
ENDNOTES
[1] https://www.sec.gov/rules/proposed/2022/33-11042.pdf
[2] https://www.thechicagocouncil.org/research/public-opinion-survey/republicans-and-democrats-different-worlds-climate-change
[3] https://www.sec.gov/comments/s7-10-22/s71022-20126528-287180.pdf
This post comes to us from Professor Stefan Padfield at the University of Akron School of Law. It is based on his recent paper, “Does Stakeholder Capitalism Have a (Viewpoint) Diversity Problem?” available here.
re.