Lucian Bebchuk

The COVID-19 crisis has intensified discussions about corporate purpose and corporate duties to stakeholders. Against this backdrop, the European Corporate Governance Institute and the London Business School Centre for Corporate Governance hosted a virtual debate on stakeholder capitalism between Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84 and London Business School Professor Alex Edmans. Held earlier this month, the debate, titled “Stakeholder Capitalism: The Case For and Against,” was moderated by Gillian Tett, chair of the editorial board and editor-at-large of the Financial Times. Stakeholder capitalism is the idea that companies should look to serve all stakeholders, not just shareholders but also customers, employees, suppliers, and local communities. Shareholder capitalism, on the other hand, is the view that companies should focus exclusively on serving in the interest of shareholders, the owners of the stock of the company...Bebchuk, the James Barr Ames Professor of Law, Economics, and finance and director of the Program on Corporate Governance at Harvard Law School, argued that relying on corporate leaders to serve goals other than shareholder value should not be expected to provide material benefits to stakeholders and should be rejected, including by those who deeply care about stakeholder interests, as a way to ensure that capitalism works for stakeholders.

It’s been a little over a year since the Business Roundtable (BRT) issued its much-ballyhooed statement on corporate purpose. Many of the commentators who welcomed it rapturously predicted the statement would usher in a new era of corporate social responsibility (CSR), with corporations tackling a range of social problems such as climate change and racism. After a year in which society and business have faced unprecedented problems, it seems fair to ask whether corporations have really embraced the BRT’s vision of corporate purpose...Further evidence that the BRT statement was mostly greenwashing comes from surveys by legal scholars Lucian Bebchuk and Roberto Tallarita. They found that most CEOs who signed the statement had not gotten approval to do so from their companies’ board of directors, which one would expect in the event of a major shift in corporate policy and purpose. They also found that the corporate governance guidelines of a sample of signatory firms had not been modified to reflect the statement’s emphasis on social responsibility and stakeholders. To the contrary, as they pointed out, “explicit endorsements of shareholder primacy can be found in the corporate governance guidelines of the two companies whose CEOs played a key leadership role in the BRT’s adoption of its statement.” ... In an open letter to the CEOs of the signatory firms, management academic Bob Eccles pointed out that the logical next step would have been for their boards to “publish a statement explaining the specific purpose of your company,” but “not a single one of your boards has published such a statement.” Bebchukand Tallarita’s argument that boards are not even talking the talk, let alone walking the walk, remains valid.

More than 90% of CEOs give high priority to being agile, according to surveys by Deloitte and McKinsey and most large firms are exploring business agility, at least in their IT departments. Yet these efforts are often limited in scope, and most of the potential gains are unrealized, owing to the lack of agility elsewhere in the firm...Some ask what would it take to put the life back into it? What would it take to make the whole firm Agile? To use a baseball analogy, what would it take to get from being “stranded at first or second base” to “reach home plate”? This three-part article will explore seven central questions...To enable ideas to come from anywhere, the dynamic of the firm has to take the form a horizontal network of competence, rather than a vertical hierarchy of authority. These three elements—customer, teams and network—constitute the core principles—the three laws—of 21st century management. These principles reflect what the management does, not just what it says. Often what management declares for public consumption is merely window dressing. For instance, in August 2019, more than 200 chief executives of major corporations signed a statement of the Business Round Table (BRT) on the purpose of a corporation and publicly renounced the goal of maximizing shareholder value. However, analysts have found little change in corporate behavior in the year since. Harvard law professor Lucian Bebchuk concludes that the BRT statement was signed “mostly for show.” Despite the highly publicized BRT announcement, 20thCentury management principles in these firms remain unchanged and continue to drive corporate behavior.

Every corporation is unique. It follows that governance arrangements should be tailored to suit. Yet many shareholders, especially indexers, roundly condemn certain governance practices as if one size fits all. Three corporate practices illustrate this: combining the roles of chairman and chief executive; staggered director terms, and classes of stock with different voting rights. Each is derided for valid abstract reasons, but all persist because they can be suitable at particular companies...Why might indexers and other critics universally condemn corporate practices that quality shareholders accept and that may enhance a company’s performance? Different business models may explain: indexers address the market as a whole while quality shareholders focus on specific companies. Indexers prescribe policies expected to benefit the overall market, on average, not particular businesses. The size and reach of indexers — commanding around one-third of public equity — give them outsized influence, and a wide critical following. But they have small stewardship staffs and minuscule budgets to address particular companies, according to research led by Harvard Law School’s Lucian Bebchuk — no more than 45 people covering  well more than 3,000 U.S. companies.

Jack Bogle championed index funds as a way to democratize investments. Now the three biggest index fund managers pose a new threat, a former Federal Reserve staffer argues...According to the paper, the stock holdings of BlackRock, Vanguard, and State Street give them “outsized influence” in corporate elections and reward anti-competitive behavior among companies in a given sector...Even though BlackRock and the other firms don’t own the underlying assets that they manage, they still control many activities, including voting shares, Steele said. According to the paper, BlackRock, Vanguard, and State Street manage over $15 trillion in global assets, which is equal to approximately three-quarters of the U.S. gross domestic product. The asset management industry has also grown more concentrated over the last decade, with these three firms attracting 82 percent of all investor money over the time period. BlackRock, State Street, and Vanguard also control between 73 percent and 80 percent of the exchange-traded fund market, according to Steele. That dominance means that when combined, the “Big Three” are the largest shareholder of 88 percent of firms in the S&P 500. This concentrated ownership has several potential consequences, according to Steele. One example is the rise in stock buybacks. Research from Lucian A. Bebchuk and Scott Hirst has found that companies with a high amount of index fund ownership have increased stock buybacks more rapidly than peers with more diverse ownership.

Every corporation is unique. It follows that governance arrangements should be tailored to suit. Yet many shareholders, especially indexers, roundly condemn certain governance practices as if one size fits all. Three corporate practices illustrate this: combining the roles of chairman and chief executive; staggered director terms, and classes of stock with different voting rights. Each is derided for valid abstract reasons, but all persist because they can be suitable at particular companies...Why might indexers and other critics universally condemn corporate practices that quality shareholders accept and that may enhance a company’s performance? Different business models may explain: indexers address the market as a whole while quality shareholders focus on specific companies. Indexers prescribe policies expected to benefit the overall market, on average, not particular businesses. The size and reach of indexers — commanding around one-third of public equity — give them outsized influence, and a wide critical following. But they have small stewardship staffs and minuscule budgets to address particular companies, according to research led by Harvard Law School’s Lucian Bebchuk — no more than 45 people covering  well more than 3,000 U.S. companies.

Robert Fleming has a claim to be a pioneer of active asset management. His First Scottish investment trust pledged to invest mostly in American securities, with choices informed by on-the-ground research. Fleming saw that shareholders needed to act as stewards in the governance of the businesses that they part-owned. So once the fund was launched, in 1873, he sailed directly to America. It was the first of many fact-finding trips across the Atlantic over the next 50 years, according to Nigel Edward Morecroft’s book, “The Origins of Asset Management”. The art of asset management is capital allocation. It is easy to miss this amid confusing talk of alpha and beta, active and passive, private and public markets...A paper in 2017 by Lucian Bebchuk, Alma Cohen and Scott Hirst, a trio of law professors, found that asset managers mostly avoid making shareholder proposals, nominating directors or conducting proxy contests to vote out managers. Index funds are especially at fault. Their business model is to avoid the costs of company research and deep engagement. The law professors reckoned that the big three asset managers devoted less than one person-workday a year to stewardship.

The US debate over the future of capitalism continues to flare with a proposal for new legislation that would shift companies away from “shareholder primacy” and into the realm of “stakeholder governance”. A newly published white paper, from non-profit organisations B Lab and The Shareholder Commons, proposes the US push through a Stakeholder Capitalism Act containing measures to give both company directors and investors revised fiduciary duties. In an article for the Harvard Law School governance blog, the paper’s authors argue that there is a need for urgent reform while insisting the best elements of capitalism must be retained. They say their policy measures are “designed to maintain the market mechanism inherent in profit-seeking but correct market failures that allow for profits derived by extracting value from common resources and communities, including workers.” Their legal reforms, they say, consist of “revised fiduciary considerations that extend beyond responsibility for financial return…” Among the key changes, the writers call for reforms that give investors a requirement to consider the “economic, social and environmental” implications of their decisions. The white paper also calls on investors to report on how they have met these new responsibilities...In the US, the debate around stakeholderism, or “purposeful” business, has been ongoing for some time. But in August last year the discussion was jet-fuelled when the Business Roundtable—a club for corporate leaders at some of the largest US corporates—declared its members would become “purpose-driven” corporates. A year on and a blizzard of articles have poured cold water on the idea that anything is different. Perhaps the most notable comes from academics Lucian Bebchuk and Roberto Tallarita, who say they found little evidence of change in Roundtable members. “Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value. They can be expected to protect other stakeholders only to the extent that doing so would not hurt share value,” they write in the Wall Street Journal.

Despite the urgent pressure of COVID-19 and other crises brought to us by 2020, stakeholder capitalism — the idea that corporations should take into account the interests of their stakeholders, not just shareholders — has remained at the top of the corporate news cycle. On the recent 50th anniversary of economist Milton Friedman's essay "The Social Responsibility of Business Is to Increase Its Profits" — which established shareholder primacy as the prime corporate directive — many legal, business and economic leaders challenged Friedman's legacy, favoring stakeholder capitalism over shareholder primacy. We think that it isn't an either/or situation. 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. In fact, a review of recent history shows us that collaboration between business and government is the optimal way to determine what is in the best interests of the stakeholders...How can we restore confidence? Stakeholder capitalism can help, by increasing the accountability of institutions for the constituencies they affect. However, in order for stakeholder capitalism to work, the government needs to take a central role, because corporations are not legally accountable to any parties other than their shareholders and the government. Moreover, corporate leaders are not incented to prioritize the interests of stakeholders, as concluded in a recent study by Harvard professors Lucian Bebchuk and Roberto Tallarita. And under corporate law in Delaware, where most large corporations are incorporated, directors have fiduciary duties to make decisions in the best interests of shareholders — not stakeholders. Delaware public benefit corporations allow directors to weigh a public benefit alongside shareholder interests, but do not provide for broader accountability.

In August last year, the US-based Business Roundtable created waves when it announced its “Statement on the Purpose of a Corporation” that formally pushed for stakeholder capitalism. Led by Jamie Dimon of JPMorgan Chase, 187 chief executive officers (CEOs) of the top American companies turned away from its decades-long belief that the main goal of a business corporation is to service its shareholders. In its statement, the Roundtable declared that “each of our stakeholders is essential [and] we commit to deliver value to all of them, for the future success of our companies, our communities and our country.” More than a year since this declaration was made, the global pandemic has caused massive job losses in the US amid the highest number of coronavirus disease 2019 (Covid-19) cases and deaths in the world. The Washington Post reported that “the economic collapse sparked by the pandemic is triggering the most unequal recession in modern US history, delivering a mild setback for those at or near the top and a Depression-like blow for those at the bottom.” Ironically, the state of stakeholder capitalism in the US is much worse today than it was before the Roundtable released its statement. Tremendous profits have been made in the stock market while millions have suffered the worst economic setback since the Global Financial Crisis. This led Professor Lucian Bebchuk of Harvard Law School to remark that “stakeholder capitalism seems mostly for show.” He contacted the companies whose CEOs signed the statement and asked who was the highest-level decision maker to approve the decision. Only one of the 48 companies who responded had board approval to sign the statement. Bebchuk further observed that the corporate governance guidelines of JPMorgan Chase stated that “the board as a whole is responsible for the oversight of management on behalf of the firm’s shareholders.”

In a world with too many disengaged, dissatisfied, and disaffected employees, as well as bumbling governments unable to deal with destabilizing change, and too many people putting misplaced trust in populist leaders, it’s sad to note that even leadership experts concede that the multi-billion-dollar leadership industry has been of little help. The never-ending array of conferences, books, workshops, and training programs on the theme of leadership has not only failed to generate appropriate leadership behavior, or even agreement on the concept of leadership: they have often made things worse. A different, more pragmatic, and more agile concept of leadership is needed to cope with the complex, rapidly changing world of the 21st century...Meanwhile, the goal of maximizing shareholder value—which even Jack Welch called “the world’s dumbest idea”—eventually came under such heavy fire that, in August 2019, more than 200 chief executives of major corporations signed a statement of the Business Round Table (BRT) publicly renouncing it. The BRT declaration stated, “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.” Yet since the declaration was issued, researchers have found no indication of significant change in corporate behavior. Harvard Law Professor Lucian Bebchuk and colleagues found that few of the signatories obtained the approval of their boards to sign the announcement. Nor has there been any apparent effort to change the many processes and practices that reinforce the goal of maximizing shareholder value. And in cases where the firm has had to make a clear choice between shareholders and other stakeholders, these firms have invariably chosen shareholders ahead of other stakeholders. Massive share buybacks that benefit shareholders, particularly executives, continue to flourish, even where there has been a collapse in profits. Bebchuk concludes that the BRT statement was signed “mostly for show.”

We can bring ethics back to Professor Friedman’s call to corporate purpose by returning to the more inclusive purposes that historically bound us together to form corporations. Corporations have the capacity to tap humanity’s greatest potential to accomplish projects spanning, in scope and time, beyond what any individual could provide to the world. Think of the earliest forms of group associations that combined our efforts, from the Roman origin of our word for corporation, corpora (founded “around a common tie such as a common profession or trade, a common worship, or the widespread common desire to receive a decent burial”), through the intergenerational building of cathedrals erected to the glory of powers beyond ourselves...In theory, the 2019 Business Roundtable Statement demoting shareholder primacy, and describing corporate purpose as “a fundamental commitment to all of our stakeholders,” is a good start to rethink the direction in which we are headed. Recent work by Professor Lucian Bebchuk and Mr. Roberto Tallarita asks why, however, if corporations were serious about these changes, they did not bring them more often to their governing boards. Professor Tyler Wry’s work further suggests that Covid-19 is testing the resolve of the companies that signed the Statement. Since the economic impacts of Covid-19 began, its signatories have paid out 20 percent more capital to shareholders than similar companies, and signatory companies have been almost 20 percent more likely to announce layoffs or worker furloughs. Given management incentive systems in place, the Statement’s aspirations do not seem to be penetrating into the behavior of signatory corporations. As another essay by Bebchuk, Tallarita, and Mr. Kobi Kastiel examining the efficacy of stakeholder constituency statutes in this ProMarket series concludes, there should be “substantial doubt [about]… relying on the discretion of corporate leaders, as stakeholderism advocates, to address concerns about the adverse effects of corporations on their stakeholders.”

When the Business Roundtable last August issued a statement on corporate purpose shifting from focusing on returns to shareholder to satisfying the needs of a broader range of stakeholders, it was treated as momentous news. But were the U.S. CEOs signing the statement serious? Would anything really change? Two academics decided to follow up, contacting the 184 companies where CEOs pledged their support, asking who was the highest level decision-maker that approved the decision – was it the board of directors, the CEO, or an executive below the CEO? Only 48 companies responded, and 47 said it was approved by the CEO, not the board. There’s no reason to believe the picture would be much different in the non-respondents, suggest the researchers, Harvard Law School professors Lucian Bebchuk and Roberto Tallarita. And they argue the fact the boards weren’t involved indicates the CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. “In the absence of a major change, they thought that there was no need for a formal board approval,” they report in a law school publication. Another explanation, of course, is that the CEOs believe the statement is what their corporations are already committed to. In his just-released book The New Corporation, UBC law school professor Joel Bakan writes about how companies have been trying to present a different face in recent years, more compassionate and committed to social ends. “Visit the website of any major corporation and you’ll wonder whether you’ve accidentally clicked on that of an NGO or activist group. These days all corporate communications lead with social and environmental commitments and achievements,” he notes. Whether this is driven by noble impulses, or an attempt to do well financially by doing good societally, or just blarney is up for debate. You, however, may be happier working for a company that is more socially and environmentally conscious, perhaps with a high-sounding purpose and even giving you time off for volunteer activity, as some companies do.

“When did Walmart grow a conscience?” The question, asked approvingly in a Boston Globe headline last year, would have made Milton Friedman turn in his grave. In a landmark New York Times Magazineessay, whose 50th anniversary fell on September 13th, the Nobel-prizewinning economist sought from the first paragraph to tear to shreds any notion that businesses should have social responsibilities. Employment? Discrimination? Pollution? Mere “catchwords”, he declared. Only businessmen could have responsibilities. And their sole one as managers, as he saw it, was to a firm’s owners, whose desires “generally will be to make as much money as possible while conforming to the basic rules of the society”. It is hard to find a punchier opening set of paragraphs anywhere in the annals of business...Some bosses claim they can do this, keen to win public praise and placate politicians. But they are insincere stewards, according to Lucian Bebchuk, Kobi Kastiel and Roberto Tallarita, of Harvard Law School. Their analysis of so-called constituency statutes in more than 30 states, which give bosses the right to consider stakeholder interests when considering the sale of their company, is sobering. It found that between 2000 and 2019 bosses did not negotiate for any restrictions on the freedom of the buyer to fire employees in 95% of sales of public firms to private-equity groups. Executives feathered the nests of shareholders—and themselves. Such hypocrisy is rife. Aneesh Raghunandan of the London School of Economics and Shiva Rajgopal of Columbia Business School argued earlier this year that many of the 183 firms that signed the Business Roundtable statement on corporate purpose had failed to “walk the talk” in the preceding four years. They had higher environmental and labour compliance violations than peers and spent more on lobbying, for instance. Mr Bebchuk and others argue that the “illusory hope” of stakeholderism could make things worse for stakeholders by impeding policies, such as tax reform, antitrust regulation and carbon taxes, if it encourages the government blithely to give executives freedom to regulate their own activities.

In a famous article written 50 years ago this week, Milton Friedman argued ‘the social responsibility of business is to increase its profits’. The statement remains a lightning rod for the debate on ‘corporate purpose’ – whether public corporations should be managed just for the benefit of shareholders or for a broader set of stakeholders, including employees, suppliers and the community.  We continue to go back and forth. In 2019, to much fanfare, 181 CEOs of the US Business Roundtable publicly committed to manage corporations for stakeholders – reversing their 1997 statement that upheld shareholder primacy! Not so fast, countered Harvard Law Professors Lucian Bebchuk and Roberto Tallarita, who argued that stakeholderism can backfire in insulating corporate leaders from external accountability and compromising economic performance… to the detriment of broader stakeholders! Friedman’s essay was necessarily of its time. In 1970, Friedman was one of the leading economists of his day. However, and not really his fault, he presided over a discipline profoundly shaped by a reductionism that was then the deep guiding force of social sciences, but which has since revealed limitations. Economics was not alone in being so waylaid, but was arguably most affected. The extraordinary explanatory power of reductionism in the hard sciences over the preceding centuries had drawn all fields with scientific pretensions in the direction of physics and its methods. Social scientists were eager for their own simple, universalizable laws and for the prestige which might follow such discoveries.  But, fifty years on, general laws in the social sciences remain elusive, and another development from the 1970s clarifies why. Even as Friedman was penning his op-ed, a new science – ‘complexity science’ – was emerging. It – and its associated ‘systems thinking’ – announced itself with the formation of the Santa Fe Institute in 1984.

An article by Lucian Bebchuk and Roberto Tallarita: In The Illusory Promise of Stakeholder Governnace, which we will present at the Stigler Center’s Political Economy of Finance conference later this week, we critically examine “stakeholderism,” the increasingly influential view that corporate leaders should give weight to the interests of non-shareholder constituencies (stakeholders).  Acceptance of stakeholderism, we demonstrate, would not benefit stakeholders as supporters of this view claim. Corporate leaders have incentives, and should therefore be expected, not to use their discretion to benefit stakeholders beyond what would serve shareholder value. Furthermore, over the past two decades, corporate leaders have in fact failed to use this kind of discretion to protect stakeholders. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. Embracing stakeholderism, we find, 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.

On the eve of Labor Day, as we pay tribute to workers’ contributions to the strength and well-being of America, and grieve for the millions who have lost their jobs in the pandemic, can we also shed a tear at the sad news of the unexpected death of David Graeber, author of the landmark book, Bullshit Jobs: A Theory (Simon + Schuster, 2018)? Graeber, a professor of anthropology at the London School of Economics, put his finger on an uncomfortable fact: our society is riddled with useless jobs that no one wants to talk about...Graeber put his finger on an even more worrying issue: the holders of these pointless positions, often know that their work is pointless. “Could there be anything more demoralizing than having to wake up in the morning five out of seven days of one’s adult life to perform a task that one secretly believed did not need to be performed — that was simply a waste of time or resources, or that even made the world worse ? Would this not be a terrible psychic wound running across our society?” ...Why didn't all the big old firms embrace Agile management? It was largely because they were hooked on the world's dumbest idea—maximizing shareholder value (MSV)...After the Business Round Table of August 2019, which condemned MSV, the executives had to pretend that they were actually helping all the stakeholders, even society as a whole, when the underlying reality remained the same: maximizing shareholder value. Thus, important research by Harvard Law professor Lucian Bebchuk and colleagues shows that firms that profess to be acting in the interests of all the stakeholders are mostly acting in the interest of the shareholders and the executives. Stakeholder capitalism is there “just for show.”

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line? This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million. And these pay structures carry over into other sectors...If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t. The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance...It compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.

Agile management began as a work of passion and as a desire to set things right. It continues excite passion in its advocates and its critics. My article “What Good Agile Looks Like” has generated many excellent questions and suggestions. Perhaps the most unintentionally illuminating came from my long-time colleague, Dave Snowden, who wrote: “Utopia on the left, dystopia on the right and little or no truth in either - why do people do this?” ...Agile management as presented here is not utopian in the sense of “an impractically ideal social and political scheme.” It is the reality in many organizations around the world, including the most financially valuable firms on the planet. It only sounds unrealistic if you have suffered under constraints of bureaucracy for your whole working life and never learned that other ways of working are possible. But for those who have experienced Agile management, or who have observed it first hand, Agile management often unfits you for working in any other way. When workers have a clear line of sight to those for whom the work is being done, work becomes meaningful in a way that isn’t possible in a bureaucracy...Principles reflect the underlying assumptions that drive decision-making throughout an organization. Principles reflect what the firm is actually doing, not necessarily with what the management says it is doing. For instance, important research by Harvard Law professor Lucian Bebchuk and colleagues shows that firms that profess to be acting in the interests of all the stakeholders are mostly acting in the interest of the shareholders and the executives. The professed support for stakeholder capitalism, says Bebchuk, “is mostly for show.” In effect, the principles that are really driving behavior in those firms are quite different from the professed goals. Understanding a firm’s principles means going “inside the engine room” and finding out what’s actually driving behavior.

The widely acclaimed pledge that 181 CEOs signed last year to redefine the purpose of corporations was “largely a public-relations move,” according to Lucian Bebchuk, one of the country’s best-known academics on corporate governance and founder of the influential blog the Harvard Law School Forum on Corporate Governance. More importantly, writes Bebchuk, most CEOs who joined the pledge never planned to shift from the current model of shareholder primacy. Board directors and governance experts run the gamut in reacting to Bebchuk’s appraisal. What they do agree upon, however, is that the topic requires every board to take a more nuanced approach than the academic chose to in his recent pronouncement. “I believe that boards and CEOs understand that stakeholder capitalism is really a ‘thing’ and they understandably want to figure out how it will work,” writes Howard Brod Brownstein, director at P&F Industries, in an e-mail. “[B]oard directors should rightfully require management to explain fully how interests of non-shareholder stakeholders are being taken into account, and at what cost, if any, to shareholders.” On the other hand, Henry D. Wolfe, the founder and chairman of private equity firm De La Vega Occidental & Oriental Holdings, responds that he doubts that many boards and CEOs are in favor of the stakeholder model of governance. “And, yes, I think it is terrible for shareholders if by stakeholder capitalism the intent is to treat all stakeholders ‘equal.’” Bebchuk is a professor of law, economics, and finance at Harvard Law School and directs its corporate governance program. He was also a director of mining and metals company Norilsk Nickel of Russia, which trades on the Moscow and London stock exchanges.