Two academics argue that the current push for corporations to focus on nebulous stakeholder value rather than traditional shareholder value only provides cover for underperforming managers.
In 2019, 181 CEOs signed a Business Roundtable Statement on the Purpose of a Corporation. The statement reflected a growing sentiment in corporate governance attitudes that the purpose of a corporation extends beyond maximizing shareholder value to maximizing the value for the benefit of all stakeholders—which according to the Statement include “customers, employees, suppliers, communities and shareholders.”
The 2019 Statement replaced the Business Roundtable’s 1997 Statement declaring that the primary objective of a corporation was to serve shareholders.
Critics of the shift from shareholder to stakeholder value argue that the concept of stakeholder interests is filled with ambiguity, including the challenge of measuring the value received by each stakeholder group, as well as the challenge of balancing the interests of each group. In contrast, traditional shareholder objectives are unambiguous: corporations know, by name, exactly whose interests they must serve, and the stock price metric of shareholder value could not be more precise.
A study by Ryan Flugum of the University of Northern Iowa and Matthew Souther of the University of South Carolina, based on corporate quarterly earnings announcements, highlights the issues related to the ambiguity of stakeholder value.
Quarterly earning announcements provide an objective metric of corporate performance based on whether companies met or failed to meet analysts’ earning expectations. The study, based on an analysis of corporate communications in the two weeks following quarterly earnings announcements, including analysts’ calls, quotes in news coverage, and discussions in analyst and investor conferences, showed the following:
The study also compared corporate earnings communications before and after the Business Roundtable statement, and found references to stakeholder value became 50 percent more prevalent after the Statement, notably in communications related to earnings that failed to meet expectations.
Finally, the study’s analysis of CEO turnover figures following poor earnings performances found that executives who cited stakeholder value in earnings announcements were less likely to lose their jobs following announcements of underperforming earnings.
The study confirms the concerns of critics who believe the ambiguous metrics of stakeholder value maximization enables poorly performing managers to be evaluated more favourably.
The 2019 Business Roundtable Statement reflected a growing sentiment in the business and academic community that—in their own long-term interests as well as in the interests of their communities—corporations have a responsibility to create value for a wider group of stakeholders. These stakeholders include but are not limited to shareholders.
As Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable, said in the announcement of the new Statement: “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.”
The Statement described stakeholder value creation, as “delivering value to our customers,” “investing in our employees,” “dealing fairly and ethically with our suppliers,” “supporting the communities in which we work,” as well as “generating long-term value for shareholders.”
Critics, however, push back on the social pressure to replace shareholder value with stakeholder value in the objectives of a corporation, arguing that without clear, objective measures, stakeholder value objectives provide cover to underperforming managers and corporate executives. The end result, they argue, is management entrenchment.
This academically rigorous study highlights a sometimes-neglected truism: While attitudes and perspectives may evolve—gender diversity and sustainability are two examples of issues with which companies struggle today—management theories and prescriptions for success are never unanimous. Instead, they offer a pool of resources and information for study and consideration. In the end, leaders themselves must make the final decisions they think are best for the long-term success of their businesses.
Stakeholder Value: A Convenient Excuse for Underperforming Managers? Ryan Flugum & Matthew Souther. SSRN Working Paper (November 2020)
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