Prominent corporate law experts Alex Edmans, Luca Enriques, Jesse Fried, Mark Roe, and Steen Thomsen have issued a short response to "the European Commission’s efforts to ensure that companies create long-term social value," which was signed by a slew of prominent scholars. I find myself in agreement with almost the whole thing and recommend reading it.
Some key takeaways:
- "Solving one problem may not require addressing the second. For example, lengthening a company’s horizon need not require overturning shareholder primacy;"
- "Solving one problem may exacerbate the second. For example, tying pay to stakeholder targets may lead to short-term behaviour to hit the targets;"
- "The policy debate has typically assumed a “fixed pie”, that shareholder value is at the expense of stakeholder value and so the former must be reduced for the latter to be increased. However, improvements to stakeholder value typically increase (long-term) shareholder value."
- This is true, of course, but the interesting (and difficult) cases are the ones where a firm is faced with a true zero-sum problem in which either shareholders or stakeholders must lose.
- I am proud to say that this point is now known as the "Bainbridge Hypothetical."
- "The bigger danger for stakeholder value is not shareholder capitalism but “managerial capitalism”, where unaccountable managers shrink the pie for both shareholders and stakeholders."