Is the Debate on Shareholders and Stakeholders Obsolete? 

By | March 28, 2022

Shareholders are widely perceived as the best advocates of stakeholders’ interests. We can dub this phenomenon shareholders stakeholderism: the pursuit of stakeholders’ good by shareholders. This leads us to wonder whether the pursuit of stakeholders’ good by shareholders is just a perception; or has something changed? Industry and academics seem to suggest that the perception is not fallacious. Nevertheless, the subtlety of the issue requires some considerations. 

Institutional investor guru Larry Fink, the co-founder, Chairman, and CEO of Blackrock, in his recent letters to CEOs and shareholders, concentrated on the role of stakeholder capitalism in furthering a corporation’s profitability. In his 2022 Letter to CEOs, he stated, “a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.” In his recently published 2022 Chairman’s Letter to shareholders, Fink focused on the power corporations have when acting consistent with “core values” and “supported by their stakeholders.” 

Mr. Fink is not alone, and academic debates largely corroborate it. Even more remarkably, academic experts who used to fuel the debate on shareholders and stakeholders, often taking positions on the opposite ends of the spectrum, appear to have come to terms. At a symposium last week at the University of Chicago, Professor Lucian Bebchuk, a leading global expert and advocate of shareholder primacy, called himself a stakeholderist. While the late Professor Lynn Stout, an advocate of directors’ insulation from shareholders, ultimately emphasized the importance of shareholders in corporate governance. In her posthumous book, Citizen Capitalism: How a Universal Fund Can Provide Income and Influence to All, co-authored with Dr. Sergio Alberto Gramitto Ricci and Professor Tamara Belinfanti, she pointed out that many issues in the relationship among corporations, society, and the planet can be traced to how shares are held and voted. While Stout appeared to welcome the help of shareholders to steer the corporate sector toward an ESG-oriented world, Bebchuk appears to imply that shareholders are expected to advance the interests of stakeholders. Thus, we have a meeting of the minds between two giants of corporate law who formerly represented opposite ends of the shareholder versus stakeholder debate—or so it appears. 

With the shareholder versus stakeholder debate apparently over, the focus has shifted to other questions. The first question is whether it makes sense to rely on shareholders to steer corporations toward an ESG-oriented world. The second is whether shareholders can always provide effective solutions for stakeholders.

The answer to the first question lies in generational characteristics of new shareholders who are transforming several norms concerning investing. Since 2020, tens of millions of new brokerage accounts have been opened. Retail investors opened between 10 million and 17 million new brokerage accounts in 2020. That number appears to have been exceeded in 2021. Between January and August 2021 alone, individual retail investors opened as many as 20 million new brokerage accounts, leading some to deem 2021 the “year of the retail investor.” According to a Charles Schwab survey, Millennials and GenZ’ers own the vast majority of these new accounts with 51% being held by Millennials and 16% being opened by GenZ’ers. Millennials and GenZ’ers have generational affinities toward ESG values and incorporate those values into their investment and voting decisions. Gramitto Ricci and Sautter, in their article Corporate Governance Gaming: The Collective Power of Retail Investors, argue that Millennial and GenZ investors, who they call wireless investors, are leading the charge in bringing new values to investing and corporate governance. They further argue, in The Wireless Investors Movement, that wireless investors can cause lasting paradigm shifts in corporate governance.

The second question, regarding whether shareholders can always provide effective solutions for all stakeholders, requires us to consider the complex mechanics of economic production. Distinctively, Professors Margaret Blair and Lynn Stout, in their seminal article A Team Production Theory of Corporate Law, warned us that stakeholders who contribute firm-specific investments – for example certain employees who relocate and develop knowledge and skills that are only valuable in one firm – are not fully protected by their employment contracts. This, on the one hand, exposes those employees to the risk of under compensation for their contribution to production. But, on the other hand, it exposes the firm to risks concerning attracting and retaining employees and talent. Corporate governance makes a radical difference here. Under the “Team Production Theory,” directors, as “mediating hierarchs,” should be able to allocate corporate resources fairly and protect firm-specific investments. 

The need to protect employees and firm-specific investments is evident in tech companies, as Professor Anat Alon-Beck explains in her article Unicorn Stock Options. In Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information, Alon-Beck further describes how tech employees typically receive option grants and can become shareholders in the firm that they work for. However, while outside investors usually have diversified investments, these employees put all their eggs in one basket. They not only have stock in the company, but they also work for the company. Not surprisingly, in a “war for talent,” skilled tech workers strive to accumulate power by organizing, unionizing, and forming tech cooperatives, as Alon-Beck discusses in Times They are a Changin’: When Tech Employees RevoltThe insights of Blair and Stout’s A Team Production Theory of Corporate Law are, therefore, as relevant as ever.

Shareholders stakeholderism is certainly a prominent reality now. Wireless investors and enlightened institutional investors can steer the corporate sector toward a stakeholder-and-ESG-oriented direction. So, Bebchuk’s take appears to be on point. In fact, as Gramitto Ricci and Sautter argue in The Wireless Investors Movement, we can expect lasting changes in investing norms that point exactly in that direction. Nevertheless, with respect to the underlying rationales that should inform policy making, structural adjustments that nurture a more stakeholder-and-ESG-oriented corporate governance remain germane.

Anat Alon-Beck is an Assistant Professor of Law at Case Western Reserve University School of Law.

Sergio Alberto Gramitto Ricci is the Jacobson Fellow at NYU School of Law. 

Christina M. Sautter is the Cynthia Felder Fayard Professor of Law, the Byron R. Kantrow Professor of Law, and the Vinson & Elkins Professor of Law at the Louisiana State University Paul M. Hebert Law Center. 

The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.

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