Shareholders v. Stakeholders

The opening session of the 2012 Responsible Investment Conference in Montreal was a humorous and informative discussion between Bob Walker, VP of ESG Services at NEI and Lynn Stout, Distinguished Professor of Corporate and Business Law, Clarke Business Law Institute at Cornell Law School.

Bob Walker set the tone of the presentation with a slide – ‘Dear Capitalism, it’s not you, it’s us. Just kidding. It’s you.’

Walker and Stout then discussed a few American legal cases, Dodge v. Ford and Revlon, Inc. v. MacAndrews & Forbes Holdings, to buttress Stout’s conclusion that there is no legal support for the widely held assumption that corporate law requires directors, executives and employees to maximize shareholder wealth. Furthermore, a corporate law doctrine called ‘the business judgment rule’ allows directors a wide range of autonomy in deciding what to do with a corporation’s earnings and assets.

Lynn Stout believes that the model we have been using to measure corporate success ‘Gee, did the share price go up?’ is flawed, perhaps fatally so. The idea that maximizing shareholder value is the only job of corporations, an idea popularized by Milton Friedman, has not benefited anyone over the past 30 years or so, including shareholders themselves. Prof. Stout described one of main problems with shareholder value thinking, ‘There is no such thing as a free floating platonic shareholder who cares only about the price of single firm.’ Au contraire, shareholders are human beings with a wide range of concerns. A significant conflict of interest occurs, for example, between short term shareholders and long term shareholders. We see this most prominently in the actions of activist hedge funds, which have made money for their unit holders in the short term, but often at the expense of the long term shareholder.

She also dispels the myth of ‘homo economicus’, the rational man who always chooses what’s best for him, regardless of the effect on others. The best news the SRI community has heard in a long time is that 97% of investors are, at least to some degree, ‘pro social’ - that is, investors will make a modest personal sacrifice to avoid doing harm. Prof. Stout assured us that our target market is a whole lot bigger than we thought it was!