Robert T. Miller (George Mason University – Antonin Scalia Law School; European Corporate Governance Institute; Classical Liberal Institute, New York University Law School; Manhattan Institute) has posted Shareholders and Stakeholders in Corporate Law on SSRN. Here is the abstract:
There are two main theories of corporate governance: the shareholder theory and the stakeholder theory. The former, which originated in the earliest corporate law decisions of courts of equity in the nineteenth century, requires directors to manage the corporation for the long-term benefit of its shareholders. The latter, which is largely the creation of academics, holds that directors should balance the interests of all corporate stakeholders, including employees, customers, suppliers, creditors, and the communities in which the corporation operates. In an age of climate change, the class of stakeholders may expand to include all human beings now living or to born in the future.
Delaware law adheres to the traditional shareholder theory, and Delaware’s continuing dominance of the market for corporate charters, especially for public companies, has made the practical influence of stakeholder theory practically negligible. Nevertheless, the theory retains an academic following and enjoys episodic popularity in wider corporate governance circles, as happens in the recent, short-lived ESG movement. This paper traces some of this history, as well as the enactment in many states in the 1980s of so-called corporate constituency statutes that, on their face, allowed managers to consider the interests of non-shareholder constituencies in making business decisions, but were really intended to help managers thwart takeover offers that would pay shareholders large premiums but likely cost managers their jobs.
The paper then argues that stakeholder theory is essentially vacuous. While the theory requires directors to balance the competing interests of various stakeholders, it utterly fails to explain which interests of which stakeholders are cognizable, much less how benefits to some stakeholders are to be traded off against harms to others. Unlike shareholder theory, which employs the concepts of financial economics to determine which of various alternatives available to directors maximizes value for shareholders, stakeholder theory has never integrated any concepts from economic theory (including welfare economics, which would seem to be the natural choice) and so offers no way to determine whether one distribution of value among stakeholders is any better or any worse than any other. Most tellingly, this point has been conceded even by leading stakeholder theorists, who expressly admit that stakeholder theory must be supplemented with any of various additional normative premises, which might range from utilitarianism to a Rawlsian theory of justice to Thomistic natural law to radical feminism to critical race theory. Stakeholder theory is thus best viewed as an empty placeholder, an unfulfilled promise of an alternative to the traditional shareholder theory. In any event, stakeholder theory cannot be regarded as a serious theory of corporate governance.
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