Corporate law has been wracked by a decades-long debate. A majority of academics and practitioners support shareholder primacy, the view that corporations exist solely to generate financial returns for shareholders. But an increasingly vocal minority support stakeholder governance, the view that corporate leaders should consider the interests of a broader range of stakeholders, including workers, consumers, and members of surrounding communities. Shareholder primacy theorists have long claimed that stakeholder governance would be costly or ineffective in advancing the interests of stakeholders. But they have recently escalated their attacks by insisting that stakeholder governance rhetoric is potentially dangerous to stakeholders: Eminent commentators have suggested that adopting corporate governance measures to promote stakeholder interests could “derail,” “crowd out,” “impede,” “cannibalize,” or otherwise prevent governmental reforms and regulations that would do more to advance stakeholders’ interests.
Somewhat more subtly, former Delaware Chief Justice Leo E. Strine, Jr. has suggested that current corporate law does not allow meaningful consideration of stakeholder interests and that misunderstanding this aspect of current corporate law could impede the adoption of external and internal reforms. Leo E. Strine, Jr., Corporate Power Is Corporate Purpose I: Evidence From My Hometown, 33 Oxford Rev. Econ. Pol’y 176, 177 (2017) [hereinafter Strine, Corporate Power] (arguing that “scholars and commentators obscure the need for legal protections for . . . constituencies” other than shareholders by suggesting that corporate boards are empowered to treat the interests of these other stakeholders as equal to shareholder interests); see also Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 767 (2015) [hereinafter Strine, Dangers of Denial] (“It is not only hollow but also injurious to social welfare to declare that directors can and should do the right thing by promoting interests other than stockholder interests.”). Chief Justice Strine’s position suggests that certain pathways to internal reform—such as advocating for corporate consideration of stakeholder interests without pressing for legal changes—could endanger external reforms.
The hypothesis that reformers face a stark choice between internal corporate governance reforms and external regulations plays an important role in the case against stakeholder governance.
Workers and other stakeholder constituencies have plainly suffered in the past few decades.
Stakeholder governance is a movement born of desperation over the plight of these constituencies and pessimism about the likelihood of effective and helpful government intervention. The “stark choice” hypothesis seeks to play one concern against the other.
It is also one of the few arguments for shareholder primacy that would resonate with people focused on stakeholder interests. Critics of stakeholder-governance–based reforms sometimes claim that such initiatives may be destructive because they would create obstacles to corporate acquisitions and other transactions that could generate economic value.
But stakeholder governance theorists are likely to accept some loss of economic value to deliver benefits to stakeholders.
Only a threat to stakeholder interests is likely to be persuasive. Similarly, critics of stakeholder governance claim that it may not deliver the intended benefits.
But that concern alone is not a reason to preclude experimentation with these reforms, especially after decades of shareholders enjoying outsized gains and other corporate constituencies suffering deeply, while external regulators did little to help.
To explain why stakeholder governance should not be pursued, shareholder primacy theorists must argue that it would be risky to try. The stark choice hypothesis plays that necessary role in the rhetoric of shareholder primacy theorists.
Despite its enormous importance, the hypothesis that reformers face a stark choice between two exclusive strategies has not been subjected to serious critical analysis. A more careful look reveals that the hypothesis is undertheorized and difficult to square with experience. Like much of the traditional law and economics literature, the hypothesis ignores important realities about the costs of political action.
There is no reason to believe that the choices are mutually exclusive: No clear constraint forces a choice between the internal and external paths.
There is little reason to assume that reformers are biased or naive in their expectations: Reformers are often sophisticated to the point of cynicism and are unlikely to overestimate the value of an internal reform or to trade away an achievable external reform that would be more effective.
And there is no reason to believe that the choices carry fixed political costs: Internal reforms could reshape the way that corporations use their formidable political capital with respect to external reforms, making external reforms more likely.
Stakeholder governance theorists have not pressed this case, perhaps because many are not eager to encourage governmental action.
But once the stark choice hypothesis is identified and inverted to match reality, it becomes possible to evaluate opportunities to effect real change through internal corporate governance reforms.
In addition to filling a gap in the literature, this Article also illuminates the somewhat confusing corporate law discourse on political process. Supporters of shareholder primacy are sometimes profoundly optimistic about how effective government can be in addressing problems, suggesting that corporate leaders can focus on shareholder profits because government officials will tend to all other issues.
On other occasions, they are implicitly pessimistic, suggesting that corporations can actually harm stakeholders for long periods of time without the government interfering in any way that affects corporate profitability.
Supporters of stakeholder governance are similarly torn between deep pessimism about the government’s ability to address problems
and an apparently strong belief in its regulatory capacity.
A careful look at the processes for internal and external reform can throw some light on a debate that is normally characterized more by heat.
This Article proceeds as follows. Part I identifies and contextualizes the stark choice hypothesis, situating it in broader concepts from law and economics. Part II presents evidence from current debates and historical reforms suggesting that the stark choice hypothesis is not true. Part III applies the analysis to live areas of debate, including social justice and climate change, and considers potential counterexamples that suggest the scope and limits of the stark choice argument.