‘Stakeholder’ Capitalism Seems Mostly for Show

If CEOs really intended to amend their companies’ purpose, they’d at least consult their boards first.

By Lucian Bebchuk and Roberto Tallarita. Messrs. Bebchuk and Tallarita are director and associate director, respectively, of the Harvard Law School Program on Corporate Governance. Their co-written study that details their research, “The Illusory Promise of Stakeholder Governance,” is scheduled for publication in the autumn. Excerpts:

"To probe what corporate leaders have in mind, we sought to examine whether they treated joining the Business Roundtable statement as an important corporate decision. Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it.

We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors."

"Even “imperial” CEOs tend to push major decisions through the board rather than disregard it. Similarly, it is implausible that CEOs didn’t seek board approval because they viewed the statement as reflecting a personal belief rather than a commitment made in their “official” capacity. In fact, the Business Roundtable presented the statement as a commitment by CEOs “to lead their companies for the benefit of all stakeholders,” thus reflecting a pledge regarding the goals of the companies led by these CEOs. 

The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders."

"the board-approved corporate governance guidelines of the companies whose CEOs joined the statement. We found that these guidelines, including the many that have been updated since the issuance of the Business Roundtable statement, mostly reflect a clear “shareholder primacy” approach."

"70% of the U.S. companies that joined the statement are incorporated in Delaware, which is widely viewed as a state with shareholder-centric corporate laws. In a 2015 law-review article, Delaware Chief Justice Leo Strine stated that “a clear-eyed look” at Delaware law “reveals that . . . directors must make stockholder welfare their sole end.”"