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Debating stakeholder capitalism

November 3, 2020, 10:20 AM UTC

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Good morning.

In honor of election day, Ellen McGirt and I hosted a debate on our podcast Leadership Next. The topic: Stakeholder capitalism, pro or con?

Taking the con was Lucian Bebchuk, professor at Harvard Law School, who published a major academic paper earlier this year called The Illusory Promise of Stakeholder Governance. It’s long, but in a nutshell, he thinks the Business Roundtable’s statement last year that companies have responsibilities to society equal to their responsibilities to shareholders is “largely cosmetic.”

“First, corporate leaders do not have significant incentives to protect stakeholders beyond what would serve shareholder value. They simply don’t. And secondly, we have to look at the evidence, and the evidence colleagues and I have put forward is that in fact when CEOs and other corporate leaders face choices, they do not give independent weight to the interests of stakeholders.”

On the pro side, we went (virtually) across the Charles River and found Harvard Business School’s Rebecca Henderson, author of Reimagining Capitalism in a World on Fire:

“I respectfully disagree. I think the BRT statement is quite important. I believe what we might call rhetoric or culture or our understanding of what the goals of the corporation are, is super important. For the last 40 years, we said the goal of the corporation is to maximize shareholder value. Shifting the goals makes a lot of difference.”

I don’t want to give it all away here, but their disagreement—which they had never debated together before—comes down to this:  Bebchuk said CEOs still have incentives and rules that require them to deliver primarily to shareholders. Henderson acknowledges that, but goes on:

“I think the debate is more interesting than this. I believe there are an important class of actions that benefit both the shareholder and the stakeholders that many firms have not focused on (in the past) because they have been so focused on shareholder value that they have not taken a longer-term perspective.”

This, of course, is what we heard from many of the corporate leaders on our podcast this year—that stakeholder capitalism is about “win-win” solutions, which deliver benefits to society and to shareholders. Bebchuk responded that there is “something puzzling” about the idea “that corporate leaders have not noticed this is important for maximizing value” before now. To which Henderson emphatically responded:

“Leaders of major corporations are bad at seeing discontinuous changes in their environment…I spent the first 20 years of my career working with firms like Kodak trying to persuade them the world was changing. I spent six months with Nokia in Finland in saunas in the middle of February trying to convince them that Apple was really a threat to their business…There are real cognitive barriers to doing things differently.”

Readers of this newsletter know where I fall in this debate.  But these two professors animate it with an eloquence I never could.  Take the time to listen, on Apple or Spotify (but not on Nokia.)

More news below.

Alan Murray
@alansmurray

alan.murray@fortune.com

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This edition of CEO Daily was edited by David Meyer.