Earlier this week, the American Business Roundtable released a “Statement on the Purpose of a Corporation”. The CEO’s of America’s largest corporations, committing to make decisions in the interests of all stakeholders. Pledging:
to deliver value to all of them, for the future success of our companies, our communities, and our country.
For more than 20 years the Roundtable thought that “the paramount duty of management and of boards of directors is to the corporation’s stockholders”. Now, the CEO’s of America’s largest companies, are signalling that they’ll be making decisions in the interests of stakeholders and not just shareholders. Jamie Dimon, Chairman of the group and the CEO of JPMorgan, saying that he hoped that this declaration “will help to set a new standard for corporate leadership.”
But this was not the only surprise I got that day.
UCLA Professor, Stephen Bainbridge, had “marked” my homework that co-incidentally was a statement on the purpose of a corporation in Australia.
Written in 2017, “Revisiting the Bainbridge Hypothetical : Corporate Purpose in Australia” was a response to a thought experiment devised by the Professor. In essence, his hypothetical is a device to examine the flaws of the stakeholder model in practice and under Delaware law. The same model now embraced by America’s most influential CEO’s.
The William D. Warren Distinguished Professor of Law at UCLA gave me an “excellent”. And whether this was a true expression of merit or the professor’s dry wit, I’ll take it.
Leaving aside that he found the paper in the first place, I find the Professor’s mark astounding:
The Professor is a contractarian and I’m not. I’m not remotely convinced by the nexus of contracts model of corporate law. We don’t even talk the same language. As the professor once put it “Those of us who adhere to the nexus of contracts model pass those who do not like two ships in the night, with only an occasional exchange of broadsides to enliven the proceedings.”;
As a non contractarian, my analysis under Australian law leads to a fundamentally different conclusion to that offered by the Professor under Delaware law. Not that this prevents him showing grace and temperance by sharing my response to his hypothetical on his blog; and
We both reject the stakeholder model of capitalism, at the core of the Roundtable statement as plausible model of the corporation or of corporate law. Notwithstanding it’s obvious and seductive appeal, this form of capitalism lacks a logically compelling theory in law, economics and even ethics.
Despite the professor considering corporations to be fictions and value subjective and I considering corporations to be real (albeit artificial) and value 0bjective, we find common ground in rejecting the idea of stakeholder capitalism.
Though, in a two horse race, I’d still back stakeholder primacy over shareholder primacy. Reading the label, activist capitalism will do much less harm than that done by so called “democractic” capitalism. But this is not a two horse race! And what those betting on the stakeholder model fail to see is that they are bred from the same mare. Both share in the same flawed model of duty ethics and fictionalising the corporation that ultimately corrupts capitalism as a force for life. My horse is a completely different animal and, though the odds are long, it is still in this longest of races.
These CEO’s and their enabling lawyers, accountants and advisors who previously thought turning everything with more value than money into money was a good idea, do not have a monopoly on the ideas that connect business to a more enlivened world. After all theirs is a statement, not a plan or a theoretical model that predicts or explains a more humane form of progress. More importantly, their champions have been far better at debunking shareholder primacy, than developing a coherent theory of the corporation that supports their vision of shared prosperity. Unwittingly or unavoidably legitimizing the shareholder primacy norm by promoting the exceptionalism of their preferred form of the firm - b-corps and benefit corporations.
No one has a monopoly on how to recapitalise the world’s social, intellectual, human, natural and other capitals after decades of decapitalisation under the maxim of maximising shareholder value. I argue that Australian corporate law already embodies the goal of social purpose. Company directors just don’t yet know it.
The Bainbridge Hypothetical reads as follows:
Suppose Acme's board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?
The Professor’s says, under US law and based on the nexus of contracts model the board closes the plant. I say the plant stays open under Australian law and based on an energetic model of the corporation and corporate law. Please read them both and make up your own mind.
How will Jamie Dimon reconcile the competing and indeterminate interests of stakeholders when this is not a hypothetical based on his pledge?
The minds behind this latest statement, have made their promise to America more in hope than in good reason. And for that reason alone we can expect the promise of a more just form of capitalism to be kept in fear. Better but not excellent.
In the short term, the beneficiaries of the Statement on the Purpose of a Corporation will be the newly minted experts, commentators and pundits eager to please these titans of American industry. 21st century sophists, who praise the virtue of stakeholder primacy in public, and count their consulting fees in private.
If you want to understand what the future of the corporation and corporate governance might look like under an inclusive form of capitalism these are some of the real experts to read and follow:
“THE BUSINESS ROUND TABLE TURNS ITS BACK TO SHAREHOLDER VALUE IDEOLOGY” - Jean-Philippe Robé
“If we want our corporate leaders held accountable, we must let other stakeholders in” - Miguel Padró
And look out for responses from: