Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, Stakeholder Capitalism in the Time of COVID, 40 Yale J. Regul. (forthcoming 2023).
This Article investigates the time of COVID-19 to test the claims of supporters of stakeholder capitalism (“stakeholderism”). Such supporters advocate encouraging and relying on corporate leaders to use their discretion to serve stakeholders such as employees, customers, suppliers, local communities, and the environment. The pandemic followed and was accompanied by peak support for stakeholderism and broad expressions of commitment to it from corporate leaders. Nonetheless, and even though the pandemic heightened risks to stakeholders, we document that corporate leaders negotiating deal terms failed to look after stakeholder interests. Some supporters of stakeholder capitalism argue that corporate leaders should and do give weight to stakeholder interests because delivering value to stakeholders is a major element of corporate purpose. Other supporters maintain that corporate leaders considering a sale of the company should and do seek to benefit stakeholders, because fulfilling implicit promises to do so serves shareholders’ ex ante interest in inducing stakeholder cooperation, arguably essential to corporate success. We find that the evidence is inconsistent with the claims of both views. We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced during the COVID pandemic, totaling more than 100 acquisitions with an aggregate consideration exceeding $700 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders. After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives to benefit stakeholders only to the extent needed to serve shareholders’ interests. While we focus on decisions in the acquisition context, we explain why our findings also have implications for ongoing-concern decisions, and we discuss and respond to potential objections to our conclusions. Overall, our findings cast substantial doubt on the claims made by supporters of stakeholder capitalism. Those who seriously care about corporations’ external effects on shareholders should not harbor illusory hopes that corporate leaders would protect stakeholder interests on their own. Instead, they should concentrate their efforts on securing governmental interventions (such as carbon taxes and employee protection policies) that could truly protect stakeholders.
Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, For Whom Corporate Leaders Bargain, 94 S. Cal. L. Rev. 1467 (2021).
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At the center of a fundamental and heated debate about the purpose that corporations should serve, an increasingly influential “stakeholderism” view advocates giving corporate leaders the discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that its application would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism object that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article presents novel empirical evidence that can contribute to resolving this key debate. During the hostile takeover era of the 1980s, stakeholderist arguments contributed to the adoption of constituency statutes by more than thirty states. These statutes authorize corporate leaders to give weight to stakeholder interests when considering a sale of their company. We study how corporate leaders in fact used the power awarded to them by these statutes in the past two decades. In particular, using hand-collected data, we analyze in detail more than a hundred cases governed by constituency statutes in which corporate leaders negotiated a sale of their company to a private equity buyer. We find that corporate leaders have used their bargaining power to obtain gains for shareholders, executives, and directors. However, despite the risks that private equity acquisitions posed for stakeholders, corporate leaders made very little use of their power to negotiate for stakeholder protections. Furthermore, in cases in which some protections were included, they were practically inconsequential or cosmetic. We conclude that constituency statutes failed to deliver the benefits to stakeholders that they were supposed to produce. Beyond their implications for the long-standing debate on constituency statutes, our findings also provide important lessons for the ongoing debate on stakeholderism. At a minimum, stakeholderists should identify the causes for the failure of constituency statutes and examine whether the adoption of their proposals would not suffer a similar fate. After examining several possible explanations for the failure of constituency statutes, we conclude that the most plausible explanation is that corporate leaders have incentives not to protect stakeholders beyond what would serve shareholder value. The evidence we present indicates that stakeholderism should be expected to fail to deliver, as have constituency statutes. Stakeholderism therefore should not be supported, even by those who deeply care about stakeholders. This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Another part of this research project is The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita.