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Stavros Gadinis and Amelia Miazad, A Test of Stakeholder Capitalism, __ J. Corp. L. __ (forthcoming, 2021), available at SSRN.

Stavros Gadinis and Amelia Miazad’s thought-provoking paper, A Test of Stakeholder Capitalism, reveals certain shortcomings of the current academic debate on stakeholder governance.

Somewhat buried in a polarized corporate-purpose debate between shareholder primacy and stakeholder-centric perspectives is a novel narrative of evolution within companies. The authors note that the pandemic’s far-reaching and diverse effects on all types of companies and stakeholders offer a unique glimpse into corporate engagement with stakeholders. However, they caution that we cannot attribute the recent emphasis on stakeholders to the pandemic alone.

Instead, they argue, the pandemic has hastened an ongoing evolution: companies adapt to the complex business environment by developing mechanisms to proactively address stakeholder concerns as a risk management tool. Their collection and evaluation of stakeholder information is a process that ultimately enhances director oversight. Gadinis and Miazad capture this trend and illustrate how companies are becoming more sensitive to business risks, particularly those that are hard to predict; for example, various types of social and political risks.

Key Takeaways

The paper relies heavily on interviews with senior executives at companies that have relatively advanced stakeholder governance features. The authors recognize that all firms are not at the same point in their trajectory. The paper’s qualitative insights build upon the legal literature, offering nuanced illustrations of how companies use stakeholder information to weigh competing concerns in their decision-making processes. Stakeholder governance is viewed as a bottom-up process relying on private ordering and proactive information exchange, not top-down managerial or prescriptive regulatory efforts. Key takeaways from the paper are, first, that the primary benefit of stakeholder governance is an exchange between stakeholders and corporate managers that gives managers key information about stakeholder concerns and adds to the overall mix of information management evaluates. Second, stakeholder governance is in essence a risk management tool that improves boards and managers’ oversight of the corporate enterprise.

The authors propose that directors rely on private self-regulation to enhance both the amount and quality of information flow. They recognize an issue other scholars have observed: directors, particularly independent directors, must receive information from a broader range of sources than internal executives. Stakeholder governance addresses this informational disadvantage, placing boards in a better position to evaluate management strategies and navigate a range of other issues. After describing the information advantages associated with stakeholder governance, the paper sketches what stakeholder governance looks like in large, publicly traded firms or what it should look like. Its key features might include: (I) stakeholder engagement and disclosures; (II) board oversight and monitoring by executive teams; (III) collecting and evaluating stakeholder information; and (IV) leveraging outside professionals and third parties.

The authors caution against an overemphasis on the substantive outcomes of management decisions; that is, whether or not a particular decision favors stakeholders or shareholders. They observe that simply looking at outcomes may distort and discount the impact that stakeholder governance has on companies. Recognizing the importance of inputs and outputs, they focus on process, context, and mechanisms through which directors and managers balance a range of concerns.

Relationship to Regulatory Framework

Concerning corporate law and regulation, the authors advocate for a light touch, which, they believe is consistent with the corporate law framework and requires no significant change to state corporate law. The authors also contemplate disclosures that emphasize stakeholder governance processes instead of outcomes. This measured approach raises an interesting question: whether stakeholder governance obviates the need for the proliferation of social enterprise entities (e.g., Delaware public benefit corporations) because companies can balance various interests without changing the corporate form and still maintain the broad protection provided by the business judgment rule. Directors are unlikely to be liable for nonstakeholder-related decisions or lapses in stakeholder governance oversight, especially in the absence of regulatory or legal requirements. Nonetheless, the Marchand decision and its progeny signal a greater emphasis on risk management in the oversight context.

Some critics will wonder whether the authors’ definition of stakeholder governance goes far enough. They may question: (I) its reliance on processes, private ordering, light regulatory flourishes, and limited director liability; and (II) whether, by itself, it is sufficient to generate a stronger commitment from companies to balance and consider stakeholder interests. In response, some proponents may argue that the private-ordering response recognizes that stakeholder governance is not a one-size-fits-all approach to balancing and integrating stakeholder concerns. Different companies will have a range of stakeholders, affected in sometimes unique ways. Even if two firms have the same stakeholder considerations, they may not reach the same decision outcome.

Although stakeholder governance largely relies on internal mechanisms, the authors contemplate board and management reliance on third-party experts in addition to enhanced communication and engagement with stakeholders to ensure more timely information flow. They also anticipate that institutional investors, assisted by improved disclosures, will pressure directors to consider stakeholder issues. However, institutional investors are not uniform. They may support stakeholder considerations that differ from those of other members of a company’s investor base.

Legitimacy concerns may arise because stakeholder governance relies on self-regulation and affords directors broad discretion in balancing sometimes competing concerns. Sound processes provide a degree of procedural legitimacy to company actions, making them appear less ad hoc and more disciplined, but ignoring outcomes could also undermine another type of legitimacy based upon a putative “right” outcome. Companies, regulators, and academics wrestle with this issue: Is good governance simply a process or outcomes or both? Who should decide?

Connection to Risk Management

The paper does not dive deeply into all of the mechanisms that could be used to operationalize stakeholder governance. It does, however, discuss executive teams, board oversight, information collection, investor disclosures and engagement. A company’s risk management apparatus seems a fitting place for stakeholder governance to reside. Enterprise risk management has become the mechanism through which many large companies address financial and seemingly nonfinancial risks that may affect bottom lines and operations in myriad ways.

Evolving Expectations of Corporate Directors

The authors propose a measured approach to stakeholder governance, consistent with the way companies have adapted to a complex business and regulatory environment. A by-product of this evolution has been the enhancement of director duties. As companies develop more elaborate compliance systems in response to regulatory and legal complexity, stakeholder governance may prompt the creation of a separate corporate function and/or the rearrangement of corporate functions, board committees, and managerial teams responsible for incorporating it into company processes. This approach is consistent with a better-informed board engaging in objective decision making.

Does the paper propose anything new? Yes and no. Admittedly, companies have historically considered stakeholder-related issues in managing their business but largely in a reactive manner. As conceived in this paper, the value of stakeholder governance is in calling for a more proactive, structured, and routinized approach that can be evaluated and continuously improved. This is an important contribution.

Parting Thoughts

The pandemic experience illustrates how companies might better incorporate stakeholder governance into their corporate frameworks and how the resulting information could be extremely important in sustaining profitability and navigating crises. From the authors’ perspective, stakeholder governance has at some companies enhanced “the ability of managers and directors to navigate a global pandemic” in a complex risk environment. They make a very compelling argument.

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Cite as: Omari Simmons, The Pandemic’s Testing of Stakeholder Governance, JOTWELL (May 23, 2022) (reviewing Stavros Gadinis and Amelia Miazad, A Test of Stakeholder Capitalism, __ J. Corp. L. __ (forthcoming, 2021), available at SSRN),