How Illusory is the Promise of Stakeholder Governance

Lucian A. Bebchuk & Roberto Tallarita's paper, "The Illusory Promise of Stakeholder Governance", was noticed in The Economist magazine (issue of 12 March 2020), with the stirring words, 'Farsighted bosses have always known that promoting long-term shareholder value requires delivering for customers, and treating workers and suppliers reasonably. It is unclear if the same can be said of championing fuzzy stakeholderism'. 

That sounds like QED, except that their paper itself illustrates the structural reasons why exclusively shareholder-driven approaches produce the global oligopolies evident today -which increasingly often deliver collateral damage to customers looking only for value, and treat workers as well as suppliers reasonably only in some cases.

However, The Economist did not mention one of the paper's key arguments, which, if true, would be convincing even by itself: "stakeholderism relies on directors to make the hard choices that are necessary to define the groups of stakeholders whose interests should be taken into account, and then to weigh and balance these interests, which are often difficult to measure, in the vast number of situations in which trade-offs arise. This task (is) immensely difficult" (parenthesis mine).

The task is indeed immensely difficult, but only if one is fixated, as Bebchuk and Tallarita seem to be, on the question who such stakeholders (individuals and groups) might be - and, finding a rather large universe of them, are then defeated by the concerns which they attempt to foist on us.

If, instead, they had considered the approach of the International Integrated Reporting Council (IIRC), they might have found their conundrums disappearing.

The IIRC doesn't start with asking who stakeholders might be.  

It starts by asking how value is created in any corporation.

That value, the IIRC asserts, is created in terms of inputs and outputs not only in relation to one kind of capital (i.e. financial) but in relation to *six* different kinds of capital: financial, manufactured, human, social and relationship, intellectual, and natural.

Once this is accepted as the framework for understanding and reporting the value that is created by a company, the criteria become clear by which to include individuals and groups in the process of setting strategy, implementing strategy, and reporting the results in each of the six capitals.

What remains to be said is that the Bebchuk and Tallarita paper essentially questioned whether the declaration signed in August 2019, by 181 bosses of big American companies belonging to the Business Roundtable (BRT), in fact represented a u-turn ("nothing short of a repudiation of America Inc’s shareholder-first orthodoxy").

Bebchuk and Tallarita are right to evaluate the actions of those signatories and find them wanting - by the standards to which the signatories have announced they wish to be held accountable.

We will indeed know, as Bebchuk and Tallarita suggest, when it is that signatories to the BRT Declaration have in fact started living by their Declaration - i.e. when they start moving their companies out of Delaware, or when they have lobbied successfully against Delaware’s out-of-date version of capitalism.

That might give them the opportunity to start measuring the multiple dimensions of corporate value and reporting it in a rational framework such as the IIRC’s.

Stakeholder capitalism isn’t actually as fuzzy as some people insist on believing.