Stakeholder Capitalism or Shareholder Value Maximization
Presuming that shareholders own a corporation is one of the fundamental points of Shareholder Value Maximization (SVM). Since the 1980s, corporate governance has used Shareholder Value Maximization as the dominant organizing framework. In 2008 with the global financial crisis, criticism of Shareholder Value Maximization started to increase. In recent years externalities of corporations have continued skepticism of Shareholder Value Maximization.
Stakeholder Capitalism is the main alternative to Shareholder Value Maximization. Stakeholder Capitalism asserts that executives and directors should treat stakeholder interests as ends in themselves rather than subordinate them to shareholder interests, with broad definitions of stakeholders, including supplies, local communities, employees, and customers. When the interests of shareholders and stakeholders are not perfectly aligned prioritizing stakeholder interest is the cornerstone of Stakeholder Capitalism. Unlike Shareholder Value Maximization, where redistribution of wealth to shareholders, the redistribution of wealth will affect other constituencies.
The most challenging part of Stakeholder Capitalism is that it advocates granting additional discretion to executives and directors with the hope that they will use the power to benefit stakeholders rather than presenting new contractual protections to stakeholders. Unfortunately, this does not seem to be happening, and signatures constantly oppose shareholder resolutions to grant new protections to stakeholders. Some Business Round Table signatories have disliked including non-management employees on the board of directors. Other signatories have apposed resolutions to convert from a for-profit corporation to a public-benefit corporation. A public-benefit corporation is a hybrid corporation that directors must consider the interest of all who are materially affected by the corporation’s conduct. CEO’s have failed to use their discretion to negotiate protections for stakeholders in private acquisitions of public firms. Business Round Table signatories are more likely to commit labor-related compliance violations relative to their industry peers.
Stakeholder Capitalism is another issue that can directly affect investors. Corporate offices can prioritize the interest of one stakeholder group over another at their discretion. The ambiguity of Stakeholder Capitalism gives corporate leaders the ability to justify almost any action by invoking the interest of one of the stakeholder groups. When a firm is experiencing negative financial results, a CEO is more likely to invoke stakeholder-friendly rhetoric. This type of stakeholder rhetoric threatens to weaken the accountability of corporate leaders—a development with the potential to harm both shareholders and other stakeholders.
External interventions, such as regulation and legislation are more likely to protect stakeholders than voluntary commitments. In the case of climate change, enacting a carbon tax and letting firms maximize shareholder value subject to this new tax could be more effective than expecting corporate leaders to cut firms’ emissions. Stakeholder Capitalism explicitly positions itself as a way to deflect external interventions. When viewed through this lens regulation by elected governments is replaced by the CEP discretion. This shift may undermine rules that would potentially help stakeholders.
A popular position is that a corporation should still maximize shareholder value since individual shareholders can choose to redistribute their share of the wealth to other stakeholders. On the other hand, it is believed that when corporate externalities are hard to revise, giving collectedly though the corporation may be more efficient than giving individually outside of the corporation. Shareholder welfarism does not reject the premise that the corporation is run for the benefit of shareholders. They are making it a middle ground between Stakeholder Capitalism and Shareholder Value Maximization.
Shareholder Welfarism has many difficulties to overcome. Most notably, the Environmental, Social, and Governance are multidimensional, and shareholders have problems agreeing on the tradeoffs among the complex Environmental, Social, and Governance issues. Shareholder Welfarism could make prospective shareholders hesitant to invest. Suppose investors value good Environmental, Social, and Governance characteristics. In that case, market prices should already reflect these changes giving corporations an incentive to address Environmental, Social, and Governance preferences even when using Shareholder Value Maximization.
Corporate Governance and Shareholder Value
There are many reasons for a corporation to be run in the interests of shareholders. Two key provisions should be central composition and antitakeover devices. There is a large amount of consensus in investment communities, which drives stewardship decisions on trillions of dollars in assets. Most institutional investors support the appointment of unconflicted and qualified board members. These same groups oppose staggered boards and poison pills. Proving that unconflicted and talented board members have a positive, casual effect on shareholder value is not a small task. No two corporations are the same, but they will find that the same practices can improve their board. Weak boards and antitakeover devices will cause a lower firm value.
Keeping a board independent is less likely to run into issues like a firm value decreasing because of the death of a board member. It is more plausible that independent directors are valuable and that their death deprives the corporation of their contribution. Consistent with the agency view, it finds a positive effect of director independence on the firm’s value. Independent of the executives they monitor, directors are more likely to feel like guardrails against opportunistic behavior. The actions of the independent directors will benefit shareholders.
The director’s expertise matters for the firm’s value; an independent director with investment banking expertise is on a board for at least three years before an acquisition results in more favorable terms for the acquirer. Other areas of expertise necessary for independent board members are experience with past acquisitions, corporate social responsibility, and international trade. Directors with specific expertise are positioned better to deter possible opportunistic behavior and prevent being well-intentioned by misguided initiatives.
Using devices such as staggered boards and dual-class shares on shave holder values can have a significant impact when used as antitakeover devices. While small shareholders have weak incentives to monitor and discipline corporate agents because they bare the entire font of doing so while receiving a fraction of the benefit, outside acquirers stand to recipes substantial use from improving the firm’s governance if they acquire a sufficiently large stake. Sometimes antitakeover provisions can negatively affect a firm’s value, and other times, these tactics have a positive effect.
The effects of antitakeover devices and dual-class shares are different for firms of different ages. The positive impact that a young firm has could affect a mature firm negatively. The notion is that antitakeover devices in mature firms can harm shareholder value. Antitakeover provisions tend to be complicated. Enacting antitakeover provisions without sunsetting clauses will likely harm shareholder value in the long run.
Governance practices that increase the oversight and accountability of management, like appointing strong boards and letting takeover markets operate freely, benefit the firm’s value. An emphasis on incentives and the proper balance of power between corporate agents remains relevant today as a framework to think about the means and purposes of corporate governance. If you are unsure that you have all the proper checks and balances for your board and shareholders, contact one of our lawyers today to discuss your firm’s goals.