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CEOs pay lip service to shareholder capitalism but don’t follow through, according to a new analysis

Posted by Neha De

August 23, 2021

Companies grow and produce food; manufacture equipment and vehicles; provide healthcare; make and sell consumer products; generate and deliver energy; support the national defense; and offer financial, communications and other services that support economic growth. Therefore, they play an essential role in an economy, as they create jobs, enable innovation and provide essential goods and services. Every American deserves an economy that allows them to succeed through creativity and hard work, and hence, to lead a life of dignity. The free-market system is a great way of generating meaningful jobs, a healthy environment, innovation, a strong and sustainable economy and economic opportunity for all. To achieve this, in August 2019, about 180 American chief executives signed Business Roundtable’s Statement on the Purpose of a Corporation, thereby committing to lead their organizations for the benefit of all stakeholders, namely, customers, suppliers, employees, communities as well as shareholders. Two years later, nothing has really changed. Research carried out by Harvard Law School’s Program on Corporate Governance (after examining corporate bylaws, corporate governance guidelines, director pay policies, proxy statements and responses to shareholder proposals to see how well they aligned with the new statement of corporate purpose) has shown that “BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders. These findings support the view that pledges by corporate leaders to serve stakeholders would not materially benefit stakeholders, and that their main effect could be to insulate corporate leaders from shareholder oversight and deflect pressures for stakeholder-protecting regulation.”

COVID-19 and the urgent need for stakeholder capitalism

The COVID-19 crisis has called attention to several existing problems related to the global economic system: slowing growth, rising inequality, deepening societal problems, diminishing productivity, accelerating climate change, unsustainable levels of debt, and the lack of global cooperation on some of today’s most pressing challenges. Several businesses stepped up to take care of their customers and employees during the pandemic. And in June this year, BRT companies took several steps to break down the barriers to economic opportunity in the U.S., as well as to promote racial equity and justice, specifically those who have been disproportionately impacted by the coronavirus pandemic. For instance, Amazon launched its Black Business Accelerator to help build sustainable equity and growth for Black-owned businesses, and pledged $150 million to the initiative. And Coca-Cola North America announced plans to nearly double its spending with minority-owned media companies over the next three years. While these initiatives have given a push to stakeholder capitalism, according to Harvard Law School’s Lucian A. Bebchuk and Roberto Tallarita, the BRT Statement was “mostly for show.” Now, the consumers and society at large are expecting even more from corporations, and this is where the demand for stakeholder capitalism has grown manifold. However, stakeholder governance that depends solely on the discretion of business leaders does not represent an effective way to address growing concerns about the effects corporations have on stakeholders. To that effect, Senator Christopher J. Dodd is of the opinion that, “Stakeholder capitalism can work to benefit shareholders as well, but there must be collaboration between business and government in order to achieve the desired goals.”

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CEOs pay lip service to shareholder capitalism but don’t follow through, according to a new analysis

COVID-19 and the urgent need for stakeholder capitalism

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