Does Enlightened Shareholder Value Add
Posted by Lucian Bebchuk (Harvard Law
School), Kobi Kastiel (Tel Aviv University), and Roberto Tallarita
(Harvard Law School), on Monday, May 9, 2022
Unlike shareholder value maximization (SV), which calls on corporate leaders to
maximize shareholder value, enlightened shareholder value (ESV) combines this
prescription with guidance to consider stakeholder interests in the pursuit of
long-term shareholder value maximization. In a forthcoming article we recently
placed on SSRN, Does
Enlightened Shareholder Value Add Value?, we show that replacing SV with ESV
should not be expected to benefit stakeholders or society.
We begin by explaining that the appeal of ESV and the enthusiasm for it among
supporters seems to be grounded in a misperception about how frequent “win-win
situations” are. In the real world, corporate leaders often face significant
trade-offs between shareholder and stakeholder interests, and such situations
are exactly those for which the specification of corporate purpose is important.
Furthermore, we explain that, under certain standard assumptions, SV and ESV are
always operationally equivalent and prescribe exactly the same corporate
choices. We then relax these assumptions and consider arguments that using ESV
is beneficial in order to:
counter the tendency of corporate leaders to be
excessively focused on short-term effects;
educate corporate leaders to give appropriate
weight to stakeholder effects;
provide cover to corporate leaders who wish to
serve stakeholders; and/or
protect capitalism from a backlash and deflect
pressures to adopt stakeholder-protecting regulation. We show that each of
these arguments is flawed.
We conclude that replacing SV with ESV would fail to deliver any material
benefits to stakeholders or society. At best, such replacement would be neutral,
creating neither value nor harm. However, to the extent that the switch to ESV
would introduce the illusory perception that corporate leaders can be relied
upon to protect stakeholders, such a switch would be detrimental for
stakeholders and society.
Below is a more detailed account of our analysis:
There are growing concerns about the effects that corporations have on
“stakeholders,” including employees, suppliers, customers, local communities,
and the environment. In the words of one
prominent economist, “[t]he world is on fire” and “if we don’t reimagine
capitalism, we will all be significantly poorer.” There is therefore a great
deal of support, which we share, for developing rules and arrangements that
would produce a capitalism that works for all stakeholders.
Even those who agree on the importance of this goal, however, differ
substantially in their views on how to advance it. We focus in our article on
one influential and widely supported approach—the view that corporations should
replace their traditional SV approach with an ESV approach.
Part II discusses the ESV approach and the increasing support it has been
receiving from academics, corporate leaders, and institutional investors. Unlike
the “pluralistic” version of stakeholderism, which considers stakeholder welfare
as an end in itself, ESV directs corporate leaders to take into account
stakeholder concerns only as a means to the maximization of shareholder value.
Part III discusses the common misperception that seems to lie at the core of the
support for ESV. This misperception, which we call the “win-win” illusion,
misconceives the scope and frequency of win-win situations in which the same
corporate actions benefit both shareholders and stakeholders.
We show that the win-win illusion is explicitly embraced by some prominent ESV
manifestos, such as the 2019 Business Roundtable Statement
on the Purpose of a Corporation, but it is unsubstantiated. Contrary to the
perceptions of many ESV supporters, trade-offs between shareholder interests and
stakeholder interests are ubiquitous, and corporate leaders routinely face
difficult choices among options with very different effects for shareholders and
stakeholders. This recognition, we argue, shows that even if ESV were successful
in increasing the focus of corporate leaders on the relevance of stakeholder
issues for shareholder value, trade-offs would remain pervasive and would
severely limit the potential effects of ESV on societal problems.
Part IV examines the question whether SV and ESV are operationally equivalent,
that is, whether corporate leaders operating under an ESV standard would make
different decisions than corporate leaders operating under the traditional SV
standard. The question is critical because supporters of SV, including Milton
Friedman in a famous essay, acknowledge that treating stakeholders well may be
good for shareholder value. Therefore, since SV already requires corporate
leaders to make stakeholder-friendly decisions if these decisions are indeed
shareholder value-maximizing, it is important to understand what a switch from
SV to ESV is expected to add to the traditional framework. To this end, Part IV
shows that SV and ESV direct corporate leaders to choose the same corporate
action among several options (operational equivalence) and identifies four
assumptions under which ESV and SV are operationally equivalent.
Part V relaxes in turn each of the four assumptions discussed in Part IV and
examines whether doing so justifies the case for switching from SV to ESV.
First, we discuss whether ESV is an effective strategy to address the problem of
short-termism, which allegedly affects today’s capitalism. We show that, even if
concerns about short-termism were valid, ESV would not address them. To begin
with, short-termism concerns arise from corporate leaders’ having short-term
incentives. Addressing short-termism concerns therefore requires reforms, such
as redesign of executive pay, that address the distorting effects of short-term
incentives. Reminding corporate leaders about the importance of long-term
effects is not an effective remedy for short-termism concerns.
Second, we discuss whether an ESV standard might be an effective way to inform
or educate corporate leaders about the relevance of stakeholder factors for
long-term shareholder value. But the approach of corporate rules is to provide
corporate leaders with adequate incentives and rely on them to obtain the
necessary information. There is little reason to expect that using an ESV
language would practically affect the decisions of corporate leaders, or for
reminding corporate leaders about stakeholder factors but not about other
factors that are relevant for long-term value maximization.
Third, we discuss whether ESV could provide legal cover or moral support for
corporate leaders to make stakeholder-friendly decisions. We show, however, that
under SV, thanks to the business judgment rule, corporate leaders already have
sufficient legal cover to make stakeholder-friendly decisions and justify them
on the grounds that they would contribute to long-term value maximization.
Fourth and finally, we discuss whether ESV could be a way for corporate leaders
to improve the image of their companies, and of capitalism in general, and to
deflect pressures for regulatory interventions on business. To those interested
in stakeholder protection, however, this should be a reason for opposing ESV,
not for supporting it. Indeed, if ESV provided rhetorical and political cover to
corporate leaders without producing any benefits for stakeholders, stakeholders
could well be better off under SV.
We conclude in Part VI that replacing SV with ESV should not be expected to
produce benefits for either shareholders or society, and thus should not be
appealing to anyone who is concerned about corporate effects on stakeholders.
Adopting ESV could at best be just inconsequential, but it could also be
counterproductive by introducing illusory expectations that would impede
Our paper is available here.
Harvard Law School Forum
on Corporate Governance
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