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Bringing Corporate Governance Down to Earth: from Culmination Outcomes to Comprehensive Outcomes in Shareholder and Stakeholder Capitalism

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Bringing Corporate Governance Down to Earth: from Culmination Outcomes to Comprehensive Outcomes in Shareholder and Stakeholder Capitalism Bringing Corporate Governance Down to Earth: From Culmination Outcomes to Comprehensive Outcomes in Shareholder and Stakeholder Capitalism Malcolm Rogge Corporate Responsibility Initiative, Harvard Kennedy School April 2020 Working Paper No. 72 A Working Paper of the Corporate Responsibility Initiative Malcolm Rogge – Currently Under Review, April, 2020. BRINGING CORPORATE GOVERNANCE DOWN TO EARTH: FROM CULMINATION OUTCOMES TO COMPREHENSIVE OUTCOMES IN SHAREHOLDER AND STAKEHOLDER CAPITALISM Dr. Malcolm Rogge* ABSTRACT A battle rages between the partisans of shareholder and stakeholder capitalism; the very heart and soul of corporate governance is at stake. This paper advances the scholarly debate by mapping Amartya Sen’s distinction between culmination outcomes and comprehensive outcomes onto shareholder primacy and stakeholder theory. It provides foundational reasons to move away from the untenable idealism of value maximization, characterized here as a culmination outcome-oriented approach, towards a stakeholder- oriented approach that is concerned with broader comprehensive outcomes. It argues that the stakeholder approach more accurately reflects how business decision makers actually make choices; as compared to the shareholder primacy approach, which proposes that decision makers are able to seek (and should seek) to maximize a single-valued culmination score. It is argued that the value maximization approach is flawed because no decision-making space exists where a “maximal” allocation is available in its merely technical sense, free of the taint of politics or constraints of ethics. The stakeholder approach is a more realistic account of what decision-makers are actually able to do in discharging their managerial responsibilities; and thus, it provides a richer account of what they ought to do and how. While imperfect in its own way, the stakeholder approach is a more down-to-earth theory of reasoned and purposive business decision- making for addressing today’s critical problems of people and planet. * Dr. Malcolm Rogge, S.J.D. (Harvard), J.D. (Osgoode), M.E.S. (York), B.A. First Class Honours (Manitoba). Research Fellow - Corporate Responsibility Initiative, Mossavar- Rahmani Center for Business and Government, Harvard Kennedy School; Member, Global Business & Human Rights Scholars Association. The author is grateful for helpful comments on earlier versions of this paper by Robert C. Clark, John Coates, I. Glenn Cohen, Tamar Groswald Ozery, John G. Ruggie, Amartya K. Sen, Henry Smith, as well as helpful comments from the attendees of Harvard Law School’s Corporate Fellows luncheons and my anonymous reviewers. Earlier versions of this paper were presented at the 2019 Global Business & Human Rights Scholars Association conference at the University of Essex and at the 2018 Annual Law & Society conference in Toronto. 1 Malcolm Rogge – Currently Under Review, April, 2020. Table of Contents Introduction ........................................................................................................................................................ 2 Part I – What is Value Maximization’s Purpose? ....................................................................................... 9 A. Just What is to be ‘Maximized’? ........................................................................................................................................... 9 B. Conviction and Ambivalence about Value-Maximization ................................................................................... 12 C. What is “Good” about Shareholder Value Maximization? ................................................................................... 17 D. Compensating “All Those Who Suffer”? ........................................................................................................................ 21 E. Keeping Externalities Outside............................................................................................................................................ 25 F. Shareholder Value Travels the Globe / Tax and Transfer Stays Home......................................................... 29 Part II - From Culmination Outcomes to Comprehensive Outcomes ................................................. 36 A. Kaldor-Hicks Efficiency and Value Maximization are Concerned with Culmination Outcomes ..... 42 B. Stakeholder Theory is Concerned with Comprehensive Outcomes ................................................................. 43 C. From Ranked Scores to Judgment Between Distinct Concerns ......................................................................... 45 Part III - Value Maximization’s Missing Moral Floor ............................................................................. 48 A. Moral Ground Floors and the “Taint” of Politics ...................................................................................................... 49 B. Value-Maximization does not Avoid Trade-offs, it Occludes Them ................................................................ 54 C. Value Maximization’s Human Rights Problem ........................................................................................................ 58 PART IV - When Value Maximization ‘Runs Out’ .................................................................................... 65 Conclusion ........................................................................................................................................................ 75 Introduction As battle rages between the partisans of shareholder and stakeholder capitalism, the very heart and soul of corporate governance is at stake. This paper charts a way out of the quagmire by drawing on Amartya Sen’s foundational distinction between culmination outcomes and comprehensive outcomes in moral and economic reasoning. It provides foundational reasons to move away from the untenable idealism of value maximization, characterized herein as a culmination outcome-oriented approach, towards a stakeholder- 2 Malcolm Rogge – Currently Under Review, April, 2020. oriented approach that is concerned with broader comprehensive outcomes. Though imperfect in its own way, the stakeholder-oriented ‘family’ of corporate governance models more accurately reflects how business decision making actually occurs; it also reflects a more down-to-earth account of reasoned and purposive business decision- making in the world today. In 2019, during the hottest month ever recorded on the planet,1 the U.S. Business Roundtable released an earthshaking revisionary “Statement on the Purpose of the Corporation.”2 In its press release, the organization indicated that the revised statement “moves away from shareholder primacy” and includes a "fundamental a Commitment to All Stakeholders.”3 The 300-word statement, signed by 181 CEOs of many the largest firms in the United States, concluded with a pledge to, “deliver value to all [stakeholders], for the future success of our companies, our communities and our country.” Despite a deluge of criticism that followed instantly,4 the stakeholder approach gained even more ground months later in a ‘manifesto’ issued at Davos that called on companies to treat people “with dignity and respect.”5 In a letter issued to CEOs in 1 See National Oceanic and Atmospheric Administration (NOAA), July 2019 Was Hottest Month on Record for the Planet, August 15, 2019. 2 See Business Roundtable, Business Roundtable Redefines Purpose of a Corporation to Promote An Economy That Serves All Americans, August 19, 2019. 3 Ibid. 4 One business commentator suggested that, “CEOs have thought it over and decided that shareholders are annoying.” See Matt Levine, Maybe CEOs Are Fed Up With Shareholders, BLOOMBERG, August 19, 2019. For their part, the U.S. Council of Institutional Investors (CII) warned that, “[t]he statement undercuts notions of managerial accountability to shareholders...”. See Council of Institutional Investors Responds to Business Roundtable Statement on Corporate Purpose, August 19, 2019. 5 Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution, Dec. 2, 2019, https://www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal- purpose-of-a-company-in-the-fourth-industrial-revolution/ [last accessed March 19, 2020] 3 Malcolm Rogge – Currently Under Review, April, 2020. January 2020, BlackRock’s CEO Larry Fink declared that “the importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society.”6 Responding to this seismic shift in the landscape, shareholder primacy’s most venerable proponent, Lucian Bebchuk and his co- author Roberto Tallarita issued a blistering counter-attack, claiming that ‘stakeholderism’ hurts the people that it is trying to help. They too raised the specter of managerial slack and re-iterated arguments about the economic inefficiency that they believe will follow from adopting the stakeholder approach.7 Moreover, they cautioned that ‘stakeholderism’ will have the unintended and very detrimental consequence of chilling important regulatory reforms that would benefit stakeholders.8 To face down Bebchuk’s offensive, Martin Lipton, shareholder primacy’s most formidable opponent, brought out the big guns. Referring to a string of memos that he and others released online from April 2017 to January 2020, he pronounced that a wholesale paradigm shift towards the stakeholder approach is taking place.9 Calling on business leaders
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