For whom should the corporation be run?  The Business Roundtable proclaims the answer to be “for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”  Asset managers, both private and public, use their voting power to pressure companies to do more for all those they affect but who do not own shares.  Complicated scoring systems purport to rate companies along environmental and social metrics, assigning letter grades or numerical rankings according to companies’ impacts on non-shareholder constituencies.

Fearing that the emphasis on non-shareholders will harm the pension funds investing the hard-earned money of public employees, some states have enacted laws restricting the use of factors other than shareholder return in deciding how to invest state-level retirement assets.  Other states have laws requiring public pension funds to take non-shareholder considerations into account.

Six fundamentals should guide whether corporations should seek to maximize shareholder wealth or pursue the aggregate well-being of all constituencies.

First, both purposes – shareholder wealth maximization and stakeholder well-being – recognize that statutes, regulations, and caselaw limit the choices that managers can make. Since the early 1930s – when theorists in the United States began arguing over the corporate objective – legal restrictions and requirements have dramatically limited those choices, largely for the benefit of stakeholders who are not shareholders.

This suggests that society has chosen to use law and regulation to protect non-shareholder stakeholders by reducing the spectrum within which corporations can act.  Accordingly, the need to protect such constituencies by applying stakeholder theory has diminished.  And the efficacy of doing so has declined with the diminution of the corporate action in which stakeholder theory could make a difference.  Any serious consideration of moving from shareholder wealth maximization to operation of the corporation for the greater good must take this reality into account and consider whether the move is needed at all.

Second, shareholder wealth maximization, which is the dominant of the two theories, provides conceptual and empirical benefits to other stakeholders, whether advertently or not.  Conceptually, it posits that a corporation increasing shareholder wealth produces jobs and innovative goods and services for consumers, lowers prices consumers will pay, and brings prosperity to communities in which the shareholders and workers live, with all kinds of derivative benefits such as increased tax revenue.  Increased shareholder wealth leads to more capital investments. A virtuous cycle results.

Empirically, in July 2023, the companies listed on the NYSE and Nasdaq employed an estimated 47.226 million people (about 41.317 million if the count is limited to listed companies with U.S. headquarters). Those companies paid an estimated $495 billion in income taxes in 2022 (more than $461.2 billion from companies with U.S. headquarters). Their employees paid taxes on the money that the companies paid to them.  Companies listed on the two exchanges took in more than $22.477 trillion in revenue in 2022 (more than $20.925 trillion for those headquartered in this country).  Since customers would not have bought the goods and services that these publicly traded companies produced unless the customers valued the purchases at more than they paid for them, these numbers show that the companies provided products and services that had a total value, when including customer surplus, in excess of the amounts set out above.

This suggests that, as we tinker with company goals, we should be careful lest we reduce the substantial benefits already accruing to non-shareholders from the pursuit of shareholder return.

Third, while the champions of stakeholder theory market it as a win/win because the long-term market value of a company will increase as it takes actions deliberately to help non-shareholder stakeholders, this cannot be universally true.  If it were, companies solely pursuing shareholder wealth maximization would take exactly the same actions that stakeholder advocates encourage.  In that case there would be no reason any company would have to choose between the two purposes – hence no practical importance to stakeholder theory at all.

The entire debate is only important if the two theories produce different results and, in particular, if shareholders will lose – maybe only in the short term, but perhaps in the long term as well.  Moreover, this conflict between the shareholders and other stakeholders is mirrored by conflicts between different sets of non-stakeholder shareholders. To take a simple example, if a company shuts down a plant in a small town because it produces too much particulate pollution that blows to a nearby city, the residents of the city benefit, but at the expense of the workers in the town who lose their jobs.

These conflicts, which are the necessary result of serious stakeholder application, demand that any company embracing the theory employ a disciplined approach to tradeoffs between stakeholders.  Without such an organized approach, the company will simply lurch from one intuitively driven decision to another, sometimes favoring one set of stakeholders and sometimes another.  Such a result violates the normative justification for stakeholder theory – that the corporation has a moral obligation to all the different constituencies that it affects. 

Fourth, to provide discipline, those making these essentially moral choices for the corporation must define and consistently apply a multi-variable utility function.  This will require selection of the interests the corporation will seek to serve and metrics to measure the company’s effect on each – a scoring system that, for example, would evaluate corporate alternatives by their effects on employees (wages, control over work hours, permitted initiative), customers (price, product selection), shareholders (total shareholder return (“TSR”)), and communities in which the company operates (number of jobs provided, taxes paid, air pollution, noise level, traffic impact, etc.).  And the utility function must include criteria to weight tradeoffs between different sets of stakeholders.

All of this will be complicated by the dynamic nature of comparisons. Consider a company employing stakeholder theory in deciding whether to increase wages by $3 an hour, recognizing that this may decrease TSR by 2 percent.  The company may regard a per-year TSR decline from 12 percent to 10 percent lightly but accord serious weight to a per-year TSR decline from 3 percent to 1 percent – even though in each case the loss is 2 percentage points. In the same way, the company may accord only modest value to workers of a $3 an hour raise when the raise is from $47 to $50 an hour but consider the raise of greater value to employees when it increases pay from $12 to $15 an hour.

Creation of a stakeholder-based utility function thus presents technical challenges.  Even more difficult, the tradeoffs between different sets of stakeholders may be frustrated because society lacks a generally accepted moral algorithm that provides guidance and because even company-specific formulas can change as percentage impacts change with the same absolute marginal adjustment.

Fifth – and deriving directly from these difficulties in creating a utility function – wholehearted embrace of stakeholder theory must recognize that decision-makers may make choices based upon their own personal preferences, such as which sets of stakeholders are more deserving or important than others.

Corporate law has long recognized a duty of loyalty.  It forbids officers or directors from benefiting themselves at the expense of their company.  To date, that duty has been used principally to limit economic gain from self-interested transactions.

But if the company is reconceptualized – not as an instrument to enhance shareholder wealth but as an engine to advance the aggregate benefit to a raft of stakeholders – then the duty of loyalty might well be redefined as a duty to forgo, in making corporate decisions, favoring any particular set of stakeholders who the director or officer personally favors instead of making decisions that, in fact, are most likely to increase the aggregate well-being of all sets of stakeholders.

Sixth, investors and society are entitled to know the shape of the world that stakeholder-focused corporations wish to produce and how the companies will make choices as they seek to take society to that better place.

This suggests that asset managers, directors, and officers implementing a stakeholder vision must disclose their multi-variable utility functions through SEC filings.  Those disclosures must address such issues as (i) whether they believe there are instances in which a corporation should take actions it is not legally required to take or refrain from taking actions it is legally permitted to take for the purpose of advancing the interests of non-shareholder stakeholders; (ii) if so, which other stakeholders the decision-makers will consider and how the corporation’s effect on each of them will be measured; (iii) whether they believe there are instances in which the company should make such decisions even though doing so will reduce shareholder return; (iv) if so, how they would calculate the sacrificed return, how they would weight that sacrifice against benefits to other stakeholders, and what limit they would place on shareholder sacrifice; (v) whether they believe there are corporate decisions about which the interests of different non-shareholder stakeholders may conflict; (vi) if so, how they would trade off the effects on one set of such stakeholders against the effects on other sets; and (vii) how they would determine the total net effect of a corporate action (on shareholders and all other stakeholders) to decide whether a particular corporate action would, on balance, advance the greater good.

Any serious discussion of stakeholder theory must progress beyond bumper-sticker aspirations and address these issues squarely.  If corporations are to move beyond self-congratulatory press releases and chest-thumping “sustainability reports,” those who run them must disclose the utility functions they will use to advance their vision of a more worthwhile world.

This post comes to us from Professor William O. Fisher, retired after visiting at the University of Nebraska College of Law and holding a tenured position at the University of Richmond School of Law. It is based on his recent article, “Getting Serious About Stakeholders,” available here.