The State of Stakeholder Capitalism: What Is It? Why the Controversy? What's Next?

Judge Leo E. Strine Jr.: Politics and Stakeholder Capitalism Don’t Mix...
In this recent Enterprise Engagement Alliance UA-cam video on Stakeholder Capitalism, Leo E. Strine Jr., former Delaware Supreme Court justice, early advocate for the Public Benefits Corporation statutes, with Larry Beeferman, Fellow on Work Life and Labor for the Harvard Law School, refute the notion that Stakeholder Capitalism has anything to do with politics. In fact, Strine argues, most companies should stay out of politics and focus on the welfare of the stakeholders-employees, customers, supply chain and distribution partners, and communities that create wealth for shareholders.
In this wide-ranging interview with two experts in the areas of Stakeholder Capitalism and corporate governance, key insights include: The current debate about Stakeholder Capitalism and Environmental, Social, Governance (ESG) is more a reflection of well-established opposing views about the pros and cons of capitalism and free enterprise than it is an actual debate about the merits of Stakeholder Capitalism.
The subject became conflated with politics because of the confluence of the Business Roundtable update of the purpose of the corporate to address the interests of all stakeholders and the period of heightened social unrest resulting from the murder of George Floyd and the impact of the pandemic, which in turn heightened concerns about general inequality.
The ESG movement, in fact, they say, has not focused enough attention on the role of employees; that pension funds have every right to transparently weigh ESG factors in their investment decisions.
Here are additional highlights:
Strine. “Stakeholder Capitalism is about wanting to “make money but wishing to make sure that we're respectful to all our stakeholders. This is the kind of capitalism in which you make money the right way, without imposing costs on society. There has always been this push and pull because you're taking other investors money. During the Great Society, there were concerns about corporations forming foundations and using their money to influence society. And then there were people like Ralph Nader who didn’t trust business and who were concerned about corporate power influencing the political process in a way that was harmful to workers, the environment, and consumers.”
Strine. “A majority of American states have so-called constituency statutes that say that boards can actually pursue the best interests of their stakeholders along with their stockholders. Even in Delaware, it's been long understood that, as long as there’s a rational relationship to the best interest of your stockholders that you can otherwise be attentive to the interests of workers and the communities in which you operate, including making charitable contributions.”
Beeferman. “A lot of the debate about Stakeholder Capitalism is about power and pushback over power. And there is a big difference about the talk about looking after the interests of stakeholders and what happens in actual practice,” which has contributed to the pushback, he adds.
Strine. “Feudalism existed for a long time, and it was quite profitable for the overlords. We had slavery in this country for centuries, and it made many people wealthy. We’ve had industries in this country that have made money for generations that were not good companies to work for. So it is the case that there are many companies that have a model of shared success in which their workforce is treated well, and their stockholders benefit accordingly. But the rules of the game matter and part of what we overcame during the New Deal and through European social democracy was having fairly stable rules of the game. This is so you can have the dynamism of a market economy, but it's set up so it’s fair to the people who are most important to creating the wealth. We want to make sure that we actually align our market dynamics with the best interests of all of us.”
Strine. "Everyone wants organizations to generate profits, starting with the workers and pensioners and others who invest in them. So, what we really want is for companies to make money the right way; which is making money, net of externalities, that creates real value, and where wealth is created by improving the state of things.” Note: Externalities mean imposing costs on society, such as underpaying workers in a way that causes them to apply for social benefits or causing environmental or causing infrastructure damage that cost money and inconvenience for taxpayers.
Beeferman. The big question is: how to get organizations to change. “What do we do to spur companies to rethink how they do things…I'm not saying that a greater regulatory regime is not required, but what do we do to spur them to experiment, with what modalities? The Public Benefits Corporation is one such modality that would be worth exploring, and there must be others.”
An upcoming ESM article will include additional details.