The greenwashing of stakeholder capitalism

On the anniversary of the Business Roundtable's famous statement on corporate purpose, a new study sees more harm than good

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Grand corporate pronouncements about protecting the environment are hurting more than helping.

That’s because they lull us into thinking that genuine change is taking place, when in fact corporate behavior is remaining largely the same and the environment is getting worse.

That’s the conclusion I draw from a recent study from two Harvard Law School professors: Lucian Bebchuk and Roberto Tallarita. It’s titled, “The Illusory Promise of Stakeholder Governance,” and is scheduled to appear in the December issue of the Cornell Law Review.

Particularly telling was a survey they conducted of the nearly 200 companies whose CEOs signed the now-famous Business Roundtable statement on corporate purpose, which this month celebrates its one-year anniversary. Signatories declared that “companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”

Protecting the environment was explicitly mentioned as one of the ways in which signatories would live up to their grander purpose; they committed to “embracing sustainable practices across our businesses.”

This declaration was presented as a major change, with some declaring that 2019 represented a watershed year in corporate governance. And yet, of the 48 companies that responded to the Harvard professors’ survey, only one said that signing the statement had been approved by its board of directors. In the other 47 cases, it was approved by the CEO without board approval. As the professors point out, “if the commitment expressed by joining the Business Roundtable statement had been expected to bring about major changes in a company’s choices and practices, it would have been expected to be approved by the board of directors.”

It’s hard not to conclude that the Business Roundtable statement was yet another instance of greenwashing and not the occasion for genuine change. Indeed, the Harvard professors report that some companies justified not having their boards approve the statement by claiming that they were already living up to its principles, and therefore no major changes were necessary.

That seems particularly hard to swallow as California suffers under a record heat wave, rolling electrical blackouts for millions, a recent rare firenado, and dozens of wildfires. Globally, 2020 is already on track to go down in the history books as one of the hottest years on record, and possibly the hottest. No major changes in corporate behavior are needed?

How much do you trust corporate leaders?

It would be bad enough if statements of new corporate purpose were simply PR stunts that lulled the gullible among us into a false complacency. In fact, the professors show, the proposed changes to corporate purpose — which they classify as “stakeholderism” — very likely will make things worse by reducing corporate leaders’ accountability and increasing their managerial discretion. Do you really trust that those leaders will use their reduced accountability and greater discretion to make climate-friendly changes to their corporations’ practices?

Asking the question this way brings up a big irony: Most environmental activists do not trust corporate leaders to do the right thing. They will be shocked to learn that the stakeholderism that they otherwise support in effect boils down to a faith in corporate self-regulation. And we can see every day how well that’s working out.

Consider: There are already numerous tradeoffs that must be taken into account in any corporate decision. Adding in environmental sustainability and other societal goals only makes the situation even more complex. It therefore will become even harder to hold corporate leaders accountable than it already is. How is one to determine that a decision that is detrimental to shareholders, to workers, or to the community wasn’t justified by protecting the environment — or vice versa?

One perverse consequence of stakeholderism therefore will be that corporate leaders become freer to do what they want. The professors even wonder if that is why some corporate leaders supported the Business Roundtable statement. Their support may have been “strategic: an attempt to advance a managerialist agenda dressed in stakeholder clothing to make it more appealing to the general public.”

This isn’t just hypothetical speculation, by the way. The professors remind us that, in the 1980s and 1990s, several states adopted statutes that explicitly allowed corporate leaders to take into account the interests of other constituencies besides shareholders. One of the big reasons why those statutes were adopted were “the lobbying efforts by management interests seeking to insulate managers from the threat of hostile takeovers.”

Keep that in mind the next time you’re tempted to be a cheerleader for stakeholderism. Wouldn’t it be ironic if you in fact were doing corporate managers’ bidding?

What, then, is the solution?

If stakeholderism is “not an effective tool for addressing the catastrophic threat of climate change,” as Bebchuk and Tallarita put it, then where should climate activists devote their energies? The professors believe that “the only plausible route” to genuine protection of the environment and other stakeholder interests “is through politics, regulations, and public policies.”

By diverting our energies away from the political arena, the focus on at-best ineffectual corporate governance reforms therefore could be downright harmful. As Bebchuk put it to me in an email:

“We urge those concerned about the environment in general, and climate change risks in particular, to recognize that stakeholderism should not be expected to contribute meaningfully to saving the planet… To the contrary, acceptance of stakeholderism might deflect pressure for meaningful regulatory reforms that could make a difference.”

Above, San Francisco Youth Climate Strike, 2019. Photo: Intothewoods7/Wikipedia.