The Case Against Stakeholder Capitalism December 2022

Almost no one outside of business or academia talked about the concepts of Stakeholder Capitalism or its practical implementation process through stakeholder management and engagement practices until August 2019. This is when the Business Roundtable issued its pronouncement to “redefine the corporation to promote an economy that serves all Americans,” with almost no further definition or indication of an action plan other than the press release. This pronouncement still has not caught on with the general public (almost no one has ever heard of Stakeholder Capitalism) but did lead to wide-ranging attacks from the right and the left based on vague references to definitions and assumptions that cannot be found in the academic or business literature on the topic prior to the 2019 pronouncement. One might ask, where do the opponents’ definitions come from? This article offers abridged views of the opposition to let readers decide.

By Bruce Bolger

Business Roundtable Statement on the Purpose of a Corporation
Critiques From the Right
Critiques From the Left

It would be fair to characterize the Business Roundtable redefinition of the purpose of a corporation as a good example of a poor public relations roll-out given the negative backlash created by what appears at face value to be such a reasonable, anodyne proposition: organizations do not have to sacrifice profits in the pursuit of purpose. By issuing a statement clearly based on someone’s knowledge of a 40-year-old business and academic field known as Stakeholder Management or Stakeholder Engagement, but without any clear definition or action plan to clearly establish its meaning, the Business Roundtable statement opened itself to fervent opposition from conservatives as well as progressives. As can be seen in this summary of their views, their reasons in many cases have nothing to do with the actual Business Roundtable statement published word-for-word below nor the actual use of the concepts in business since the 1960s, when the concept began to bubble up in business practice and academia.

Given that this statement was issued by an organization representing the world’s largest companies, it’s natural that it would not only attract a lot of attention but also skepticism.

For comparison purposes, what follows is the exact Business Roundtable redefinition of the purpose of corporation published in August 2019 along with the objections raised by both the right and the left. Not one of articles on either side include the equivalent of a dictionary definition against which one can clearly benchmark the basis for their critiques. It was in anticipation of this challenge that the Enterprise Engagement in 2020 created a formal definition based on 40 years of actual usage and practice in business and academia, which was published in an article co-authored with Alex Edmans, Professor of Finance at the London Business School, which appeared in Forbes in August 2020.

Stakeholder Capitalism is based on a simple premise: it is impossible to optimize returns for shareholders over time without engaging with and addressing the interests of those stakeholders upon which an organization depends for long-term success: customers, employees, supply chain and distribution partners, communities, and a healthy environment. How can an organization enhance returns for shareholders if all these key stakeholders are disengaged, ill-equipped, or unhealthy? It is based on practices long proven in manufacturing at organizations that sincerely follow the practices of Total Quality Management--a CEO-led, strategic and systematic approach to fostering the proactive involvement of all stakeholders necessary for success.

Upon reading the Business Roundtable statement below and the opposition from the right and left in their own words that follow, one can reasonably wonder if the critiques are more focused on the opponents’ undying commitment to shareholder primacy in governance or in a distaste and distrust for business elites, rather than on an understanding of the true nature of Stakeholder Capitalism. For other comparisons, click here for the text of the original Davos Manifesto of 1973, one of the first expressions of Stakeholder Capitalism principles; here for a link to the 1984 book, Strategic Management--A Stakeholder Approach by R. Edward Freeman, the University of Virgina professor who published the first formal framework for the theory; here for a meta-analysis of research on Stakeholder Engagement research since the turn of the 21st century conducted by academics in Europe; here for a similar review of Stakeholder literature conducted by a professor in the US; here for a primer on Stakeholder Capitalism created by the Enterprise Engagement Alliance in 2020 and periodically updated since then. It will be difficult to find any references in any these sources to the interpretations of Stakeholder Capitalism assumed by its opponents in the articles cited below.

Judge for yourself if the above extensive body of work has anything to do with accusations being made below that it's about addressing the needs of disinterested parties; heralding billionaire executives as the saviors of humanity; trying to balance the interests of all stakeholders, or diverting corporate profits to the pet interests or poltical social favorites, which is of course what many CEOs and companies do under shareholder capitalism.

Business Roundtable Statement on the Purpose of a Corporation

Here is the Business Roundtable statement that attracted general disapproval from both the right and left against which to weigh the criticisms below.

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all our stakeholders. We commit to:

Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

Generating long-term value for shareholders who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.

Critiques From the Right

None of the commentary below opposing Stakeholder Capitalism includes a one-sentence statement to understand what definition the critics are using to frame their opposition. All have a common thread that implies that Stakeholder Capitalism means taking the organization’s focus off the needs of investors to balance or appease the interests of other stakeholders, or, even worse, those of ‘disinterested’ outside interests. The alleged result is reduced returns for investors; actions that potentially run afoul of corporate governance laws, and, in the view of some, an inevitable slide to “corporatism” or even communism.

To reduce the risk of mischaracterizing any of these viewpoints, this article summarizes, while abridged, direct quotes from the authors. Note, ESM previously published an article opposing Stakeholder Capitalism from a conservative perspective. See ESM: Perspective From the Right—What’s Wrong With Stakeholder Capitalism. The sentences coming close to the definition of Stakeholder Capitalism used by the writer in each article are boldfaced.

The Illusory Promise of Stakeholder Governance
By Lucian Bebchuk and Roberto Tallarita (Harvard Law School) published in the Harvard Law School Forum for Corporate Governance in March 2020.

Editors’ note: The authors of this article regularly use a term “stakeholderism” which is not known to be used either in academic study or the practical business application of this framework. The authors do not consider themselves as representing the views of the right. "As we repeatedly point out in our papers," Roberto Tallarita wrote to the EEA. "We’re motivated by a deep concern for stakeholders and by the concern for the effects of corporate externalities on society and the environment."

Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “Stakeholder Capitalism.” In a new study, The Illusory Promise of Stakeholder Governance, we critically examine the Roberto Tallarita

increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders.

Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.

Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.

In our new study we wish to warn against the rise and growing acceptance of stakeholderism. To this end, we conduct an economic, empirical, and conceptual analysis of stakeholderism and the claims made by its supporters.

Part II of our study describes the evolution of stakeholderism, and the broad support it has received among academics, practitioners, business leaders, and policymakers. We then discuss how stakeholderism provided the basis for anti-takeover legislation adopted in the 1980s and 1990s by a majority of US states. Finally, we discuss how and why support for stakeholderism has been rising substantially in recent years. The long-standing debate on corporate purpose is now at a critical juncture, and the growing embrace of stakeholderism might well in the coming years have considerable influence on companies, their stakeholders, and society.

Part III distinguishes between two different versions of stakeholderism and discusses their conceptual problems. According to the “enlightened shareholder value” version, corporate leaders—a term we use throughout to refer to the directors and top executives who make important corporate decisions—should take into account stakeholder interests as a means to maximize shareholder value. Such an instrumental version of stakeholderism, we show, is not conceptually different from shareholder primacy; it is merely a semantic change, and we show that there are no good reasons for adopting it.

According to the second version, by contrast, corporate leaders can and should regard stakeholder interests as ends in themselves. This view, which we call “pluralistic,” posits that the welfare of each stakeholder group has independent value, and consideration for stakeholders might entail providing them with some benefits at the expense of shareholders. This version is the one that in theory—though, as we shall show, not in practice—could lead to decisions that would benefit stakeholders beyond what would be useful for shareholder value maximization.

We also discuss in Part III some conceptual problems and difficulties with pluralistic stakeholderism and its implementation. In particular, stakeholderists have commonly avoided the difficult issue of determining which groups should be considered stakeholders, leaving this decision to the discretion of corporate leaders; have tended to overlook the ubiquity of situations that present trade-offs between the interests of some stakeholders and long-term shareholder value; and have generally not provided a method to aggregate or balance the interests of different constituencies in the face of such trade-offs, leaving this matter again to the discretion of corporate leaders. Thus, the effects of pluralistic stakeholderism would critically depend on how corporate leaders choose to exercise discretion.

Before examining the effects of stakeholderism in general, Part IV considers the expected effects of the widely-celebrated Business Roundtable statement. We show that the statement is largely a rhetorical public relations move rather than the harbinger of meaningful change. In particular, we discuss the statement’s ambiguity regarding the intention to provide stakeholders with any benefits beyond what would be useful for shareholder value; the failure to reflect the commitment to stakeholders in corporate governance guidelines; and the lack of concern about legal constraints that preclude many companies from approaching stakeholder interests as an independent end. We conclude that the BRT statement should not be expected, and was largely not intended by its signatories, to bring about major changes in the treatment of stakeholders.

The Well-Deserved Death of ‘Stakeholder Capitalism’
By David L. Bahnsen, writing in the National Review in November 2022.

Hope is not a strategy, and world consciousness is not a viable business model. It is adorable, but it is not for grown-ups.

National Review’s Capital Matters has been a leader in critiquing the so-called “Stakeholder Capitalism” movement. I have lectured on the topic extensively myself. My agenda here is less to reaffirm the self-defeating folly of this movement and more to demonstrate how the failures of these companies illustrate the fact that everyone agrees the movement has failed. There are varying degrees of self-awareness and consistency, but the societal response to each of these three debacles indicates the same thing: Stakeholder Capitalism is a fraud. And a significant part of current market challenges comes down to the need to relearn the lessons that basically were forgotten in the insanity that these three drama series capture.

The premise behind a market economy is human action: the reason, rationality, and self-interest of created beings acting with the dignity God imbued them to practice self-preservation, self-advancement, and ultimately, the cultivation of things they care about (their families, their dreams, their passions, their aspirations, etc.).

Those critiquing Stakeholder Capitalism do not argue that business actors should be agnostic about the well-being of employees, vendors, suppliers, and the community in which the business exists. Rather, they argue that, in honoring their fiduciary loyalty to the equity owners of the business, they will inevitably serve well the needs of the aforementioned actors. And yet, when the primary function of the business is lost — that is, the profitable delivery of goods and services toward the aim of a better enterprise — not only do equity shareholders suffer, but so also do bondholders, employees, vendors, et al.

The preservation of a business’s core mission is the sine qua non to all the other peripheral advantages one hopes will come out of the enterprise (e.g., higher wages, charitable contributions, friendly treatment of vendors, improved environmental conditions, etc.). The modern movement of the Business Roundtable and ESG zealots to confuse fiduciary duty and primary loyalty is not merely misguided; it is self-defeating. Any company more focused on “world consciousness” than “growing revenues” is dead on arrival.

ESG: Financial Discrimination
By Jack McPherrin, writing for the Heartland Institute in November 2022.

Environmental, social, and governance (ESG) scores are an insidious mechanism by which a cabal of ideologically aligned influential interests working through unelected supranational organizations are attempting to “reset” the global financial system to their advantage. At its core, this emerging design circumvents national sovereignty, free markets, and individual rights by altering traditional financial methods of assessing risk and allocating capital and credit. This attempted shift from “shareholder capitalism” to a “stakeholder collectivism” model hinges upon assigning companies, and soon individuals, arbitrarily determined ESG social credit scores. These scores mandate subjective and politically motivated commitments to “climate” and “social justice” objectives, which draw heavily from the United Nations-sponsored Sustainable Development Goals.

Essentially, ESG operates by punishing poorly scored companies with reduced or altogether eliminated access to capital and credit, while highly scored companies receive substantial capital in-flows, in addition to tax breaks, grants, access to “special financial vehicles,” preferential contracting, and potentially other yet-to-be-defined advantages. Ultimately, these measures are designed to centralize power and wealth in the hands of unelected technocrats, central bankers, regulators, and globalist institutions. The full institutionalization of ESG—internationally and domestically—would represent a major step towards consolidating a unitary global governance model, ultimately causing the dissolution of free markets, national sovereignty, due process under the law, and individual liberty.

ESG Is a Woke Scam Infecting Our Corporations and Changing Our Nation
By Kathy Barnette, Republican candidate for US Senate for PA in 2022, in an opinion piece for Newsweek in November 2002. (She lost to Mehmet Oz in the primary.)

Have you heard of ESG investing? If not, you soon will. ESG is the latest trendy acronym designed to empower the elites at the expense of us non-elites. The letters ESG stand for environmental, social, and governance. Together they represent a standard for investors to monitor how "socially conscious" a company is. In other words, it's a wokeness scorecard for investors.

Think of the E in ESG as code for climate change activism. Think of the S in ESG as code for social justice—how open a company is to critical race theory, diversity mandates, and drag queen story hour in public libraries. And the G is all about how much power employees have to shake things up at a company.

Now, if you're like most Americans, you probably think of climate change as one issue, social justice as a completely separate issue, and the relationship between workers and their bosses a third entirely. But ESG brings the cultural and political dominance of the climate change and social justice narratives into one, mighty fist that is beating its way through one boardroom after another. In turn, what's decided in those boardrooms become the values we advocate for in the public square.

So it's fitting that the backlash has arrived. Politicians, investors, and everyday citizens are attacking ESG, insisting that it hurts local industries, delivers subpar returns, and fundamentally changes the vital fiduciary relationship between the investor and the asset manager. Altogether, ESG investing insidiously changes traditional American values, all while never having to stand before the American people and ask for their permission.

But the real danger is to society. ESG is a win-win for climate change activists and social justice warriors who can bypass the ballot box—and thus the will of the people—to implement policy that would have a very hard time getting passed in Congress.

Critiques From the Left

Interesting, if there is anything the left and right agree on, it’s their opposition to Stakeholder Capitalism. Left-minded critiques focus on the hypocrisy, fig-leaf statements and greenwashing of multi-nationals; the desire of the ultra-wealthy to present themselves as saviors, and, on the extremes, the fundamental inability of capitalism to create a just society because of the concentration of ownership in the wrong hands.

In January 2022, ESM interviewed New York Times journalist Peter S. Goodman on his book “Davos Man”. See ESM: "Davos Man" Author on the Dangers of Stakeholder Capitalism, whose opposition focuses more on the aspects of greenwashing or savior-like pronouncements than any objective to the fundamental concept of Stakeholder Capitalism as defined y the EEA.

The Savior CEO and the Empty Promise of ‘Stakeholder Capitalism’
By Adam Lowenstein, writing for the Guardian in November 2022

No matter how earnestly they proclaim their support for “Stakeholder Capitalism”—the popular promise that companies now take care of employees, communities, the planet and other “stakeholders”, not just themselves – profits still come first.

Few chief executives have embraced the CEO-as-world-saver conceit as enthusiastically as Jamie Dimon, the head of the $2.6tn investment bank JP Morgan Chase. There’s Dimon lamenting in Time magazine that “policymakers, governments and business leaders have done a poor job of helping those who have been left behind.”

There’s Dimon concluding a shareholder letter with a rousing call to “acknowledge our problems and work together” to “lift up those who need help and society as a whole”. And there’s Dimon taking a knee at a Chase bank branch, ostensibly in solidarity with the global Black Lives Matter uprising. New York Times reporter Emily Flitter captures the insurmountable contradictions of Stakeholder Capitalism in her important and infuriating new book, The White Wall: How Big Finance Bankrupts Black America.

In 2014, Flitter recounts, JP Morgan started making philanthropic contributions and “for-profit capital allocations” to the city of Detroit, Michigan, to “address some of Detroit’s biggest economic hurdles”, as Dimon would later phrase it. Accompanying each investment was, Flitter writes, “a media blitz that made it seem like JP Morgan bankers had galloped into a completely deserted hellscape and brought it back to life”.

Over the next five years, the bank directed some $155 million to Detroit. That’s not an insignificant amount of money – unless you compare it to JP Morgan’s own earnings or its CEO’s compensation. As Flitter points out, that $155 million represented “0.03% of its profits over the same period”. A Guardian review of JP Morgan’s annual proxy statements calculates that between 2015 and 2019, roughly the same window as JP Morgan’s work in Detroit, the bank’s board (which Dimon chairs) awarded Dimon more than $135 million in compensation.

I Wouldn’t Bet on the Kind of Democracy Big Business Is Selling Us
By Kim Phillips-Fein, writing in the New York Times in February 2022

When Larry Fink, the chief executive of the asset management company BlackRock, wrote in his 2022 annual letter to corporate America that prioritizing environmental sustainability, racial justice and other social goals is not “woke” and “not about politics,” he articulated anew a longstanding hope that business can be a driver for social change.

Mr. Fink’s hymn to Stakeholder Capitalism—the idea that companies should engage the interests of workers, the environment, and local communities alongside shareholders—puts forward a vision in which there is no necessary tension between private profit and collective progress.

In recent years, with traditional engines of progress so often in a state of dysfunction and gridlock, this ideal has appealed to some liberals. After all, even with unified party control in Washington, Democratic senators like Joseph Manchin of West Virginia and Kyrsten Sinema of Arizona have been able to stymie legislation that would protect voting rights and take tentative steps toward addressing climate change. And despite the increasingly favorable perceptions of unions, only about 6% of private sector workers are members today — the lowest proportion in more than 100 years. Against such a backdrop, it’s tempting to see hedge funds as a better bet.

But, however seductive it may be, Stakeholder Capitalism does not offer a real alternative. The ideal of an easy symbiosis between public and private sectors would undermine the kinds of political mobilizations, however difficult to organize and enact, that are needed for reform that benefits most Americans.

Historically, some private companies have occasionally supported goals like health and safety legislation to protect workers or the expansion of the welfare state through unemployment insurance and Social Security. But it has very often followed from focused, tireless efforts by unions and other social movements to get them to take these positions — and only when the disruptions have become so powerful that there appears to be no real choice and adoption offers companies a measure of control.

A fantasy capitalism that magically balances the interests of workers, investors, communities and shareholders has a strong allure, but pursuing it is a self-defeating strategy — and rooted in political despair. Focusing political energy on securing the commitment of a group of business elites would undermine the engagement of a broad democratic base that must be the real basis of substantial reform. To address many of our deepest problems, nothing less than a redistribution of economic and political power will be needed, and it will be achieved only over the opposition of business and the wealthy.

The social responsibility trend in general undermines the idea of citizenship and of a public sphere as the place where decisions and arguments over economic and social policy play out. The commitment of business to democratic norms is pretty shallow, or at least it emphasizes a narrow understanding of what those are.

You can see this dynamic even at BlackRock. Environmental activists have protested BlackRock for years, calling on it to withdraw its investments in oil, gas and coal companies. But for all Mr. Fink’s talk about the long-term problem of climate change, his company has been unwilling to divest from these firms, despite his company’s 2020 pledge to halt investment in firms that earned more than 25% of their revenue from thermal coal. (Businesses, he wrote in defending his approach, “cannot be the climate police,” and he called on governments to increase their efforts.)

The reality is that there is no way to bypass the arduous, contentious work of building a politics that can sustain a more democratic culture. The only thing that brought elites to support such causes in the past — however tentative such support may be — is the pressure of political and social movements.

New Capitalism, Old Problems
By Dinah Foley, writing in the Jacobin magazine in October 2019.

Salesforce CEO Marc Benioff’s “fair, equal, and sustainable capitalism” is a charade that won’t convince.

Earlier this month, Benioff published an opinion piece in the New York Times proposing that businesses sign on to a vague and voluntary moral code to solve wealth inequality and climate catastrophe. He touted his experience at Salesforce as proof positive of “profit and purpose going hand in hand.”

What a time for Benioff to make that argument: his employees are currently organizing as part of a national campaign calling on Salesforce to drop their contract with US Customs and Border Protection (CBP). Benioff only mentions immigration in the op-ed in the context of reflecting on how bewildered his immigrant great-grandfather would have been by the enormous wealth he has accumulated. For Benioff, this great wealth is not a problem but rather a prerequisite for the solution: philanthropy to address social injustice.

Yet injustice is baked into Benioff’s business model. Since March 2018, Salesforce has been selling software to US Customs and Border Protection for the purposes of hiring and management of border activities. In June, 650 Salesforce employees signed a letter detailing their concerns about the use of Salesforce technology to aid “practices irreconcilable to our values,” calling on Salesforce to “re-examine its contractual relationship with CBP and speak out against its current practices.” While the letter touches on CBP’s involvement in carrying out the Trump administration’s particularly cruel child-separation policy, it also recognizes the everyday cruelties inflicted by CPB, such as the routinized detention of children with their parents at the border.

In his op-ed, Benioff calls upon his fellow CEOs and billionaires to “no longer wash our hands of our responsibility or what people do with our products,” while continuing to vehemently defend his company’s contract with CBP.”

He waxes compassionate about homeless families and public-school children who are “stakeholders” to be factored into Salesforce business decisions, while refusing to extend the most minimal consideration to the immigrants subjected to brutally racist and punitive immigration enforcement, enabled by his products.

For a corporate CEO like Benioff to address capitalism’s moral failings — including profit obsession, yawning inequality, and catastrophic climate change — may be somewhat unusual. But his specious virtue-signaling is not.

Confronting even a few of the problems Benioff identifies will require more than public relations window dressing. The efforts of Salesforce workers to align the company’s practices with their principles underscores our need for workplace structures that would democratize corporate governance. Benioff’s “new capitalism” would continue to allow capital owners to unilaterally make decisions detrimental not only to the workers who generate wealth for the company but to the communities that are harmed in the process. To confront the profits-above-all-else model of corporate decision-making, climate devastation, and wealth inequality that Benioff criticizes, we need Democratic Socialism.

Democratic Socialism would put control of businesses in the hands of workers, giving them the power to cut their company’s contract with the Border Patrol and end the profiteering from violence. A society imbued with solidarity-based values of socialism would put an end to an immigration system that criminalizes people on the basis of citizenship while continuing to exploit them for their labor. We would stop the resource extraction and foreign intervention that fuel climate change, political instability, and the global migration crisis. We would tax the rich to provide resources like housing and healthcare that all people deserve, and not depend on the whims of philanthropists.

Relying on the goodwill of businesses and executives won’t mend global inequality; Benioff’s refusal to cut ties with CBP proves that corporate ethics can’t prevail over the profit motive. Business practices will only change if we make them do it.

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