ProfessorBainbridge.com

Interviewed re The Profit Motive

An interview with the UCLAW news department about my new book The Profit Motive.

Samuel Gregg reviews my book, The Profit Motive, for Law & Liberty, and says I drove a stake through the heart of stakeholder capitalism

Dr Gregg calls his review "A Stake Through the Heart of Stakeholder Capitalism":

In his new book, The Profit Motive: Defending Shareholder Value Maximization, Stephen M. Bainbridge has systematized his many criticisms of the BRT’s 2019 statement and used it as one of his “principal foils” for a systematic takedown of the very idea of stakeholder capitalism. This is accompanied by a rigorous defense of shareholder primacy on Bainbridge’s part. He not only shows that maximizing shareholder value is “descriptively accurate” of the corporation’s purpose. He also claims that it can be “normatively appealing.” Bainbridge thus seeks to steal the ethical thunder that stakeholder theorists generally assume to be their ace-in-the-hole. ...

Bainbridge’s general approach is reminiscent of the classic scholastic method: he states a clear proposition, the best case for views contrary to his own, critiques their arguments, answers objections, and then explains why his own position meets the tests of reason. ...

Thus, having put a stake through the heart of stakeholder capitalism, Bainbridge provides a powerful moral rationale for shareholder primacy—one far more robust than those which underpin stakeholder theory.

I am, of course, delighted. Please go read the whole thing.

I asked ChatGPT to write a review of my book The Profit Motive

Here's the result:

Stephen Bainbridge's book The Profit Motive is an insightful and thought-provoking exploration of the role of profit in modern business and society. The book is divided into two parts, with the first half providing a historical and philosophical overview of the profit motive, and the second half examining its practical implications for business leaders and policymakers.

One of the key themes of the book is the importance of understanding the profit motive in its broader context, beyond simply making money. Bainbridge argues that profit is not just a financial metric, but also a measure of a business's ability to create value for society as a whole. He highlights the importance of entrepreneurship, innovation, and risk-taking in driving economic growth and improving people's lives.

Bainbridge also examines the various criticisms that have been leveled against the profit motive, including concerns about income inequality, environmental degradation, and corporate social responsibility. While acknowledging these concerns, he argues that they can be addressed through a combination of market forces and regulatory interventions, rather than by abandoning the profit motive altogether.

Overall, The Profit Motive is a well-written and engaging book that offers a nuanced and balanced perspective on a topic that is often oversimplified or misunderstood. Whether you are a business leader, policymaker, or simply someone interested in the role of profit in society, this book is definitely worth reading.

Obviously, the review’s positive tone pleased me to no end. But then I thought about how students could use this technology to produce surprisingly polished analyses in essay exams and research papers.

One word came to mind: Yikes.

Here's a screen grab as proof:

And here's your chance to buy the book:

Companies retreating on the DEI component of ESG

Bloomberg reports:

• Over the last six months, more than 300 DEI professionals have exited companies across the economy, including Amazon.com Inc., Twitter Inc., and Nike Inc., per research from workforce analytics firm Revelio Labs.
• Observers are questioning whether pledges made during the wave of protests in 2020 were merely reactionary, superficial moves to lower reputational risk. The situation could get complicated at companies where investors have pushed for disclosure of workforce diversity data.

In my book The Profit Motive, I argued that much (arguably most) ESG activity is greenwashing. The retreat on DEI would seem to support that argument.

Activist Hedge Funds versus Social Justice Warrior CEOs

In the preceding post, I noted how even prominent social justice warrior CEO like Marc Benioff is embracing shareholder capitalism during the present economic turmoil. Why is he doing so? At least in part, according to the WSJ, because he's facing pressure from activist hedge funds:

At least five activist investors have taken positions in the company, including Elliott Management Corp. and Starboard Value LP. They are pressuring Mr. Benioff to change the way he runs things. In a presentation last year, Starboard said Salesforce wasn’t doing enough to increase profits.

This would not surprise readers of my book The Profit Motive, in which I discuss the role hedge funds like Elliott and Starboard have played in checking ESG impulses by CEOs. I used Etsy as a case study of the phenomenon:

The Etsy story in fact stands as a paradigmatic example of the increasing pressure public companies face from activist hedge funds to improve share price performance. ...

In one sense, activist hedge funds are akin to traditional value investors. They seek to identify target companies that they believe to be undervalued by the market. Unlike traditional value investors, activist funds are willing to be much more involved “hands on” investors. Although some activists seek value-enhancing changes through negotiation, the subcategory with which we are mainly concerned tend to be highly confrontational.  In either case, however, the standard hedge fund compensation 2-and-20 rule—i.e., an annual management fee of two percent of assets under management and a performance fee of 20% of returns above a specified benchmark—encourages managers of these funds to have a laser-like focus on the stock price of the companies in which they invest. ...

Although activist investors formerly concentrated on low hanging fruit, which typically consisted of poorly managed small firms, they are increasingly willing to take on even the largest companies.  Not surprisingly, the CFOs of about half of the companies surveyed by Deloitte reported their firm “made at least one major business decision specifically in response to shareholder activism,” with share repurchases being the most common.  In many cases, such decisions have had distinctly negative effects on stakeholders.

As Marc Benioff is now finding out.

As longtime readers know, I am deeply skeptical of shareholder activism. In a book chapter, Preserving Director Primacy by Managing Shareholder Interventions, in Research Handbook on Shareholder Power 231 (Edward Elgar Publishing; Jennifer G. Hill & Randall S. Thomas eds. 2015), I argued that:

... not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

I explained that:

As potential activists, hedge funds have several advantages. First, hedge funds are not subject to the sort of conflicts of interest that discourage activism by mutual funds and other financial institutions with relationships with corporate management. Second, hedge funds are not subject to the regulatory limitations applicable to mutual funds on the size of the stake they hold in portfolio companies. Hedge funds thus can take larger positions in portfolio companies than traditional mutual and pension funds, allowing them to capture a larger share of any gains. Third, because hedge fund compensation structures award them a percentage of any games earned by the fund, hedge fund managers have a higher incentive than those of mutual or pension funds to pursue activities that raise the value of their stake even if other investors are able to free ride on their efforts. (Effross 2013, 268) Finally, the free rider problem is further mitigated when multiple hedge funds band together in so-called wolf packs to target a specific company, sharing the costs and gains of activism.

...

Turning to the merits of the growing incidence of hedge fund activism, [Robin] Greenwood argues that “hedge funds may be up to the task of monitoring management—a number of recent academic papers have found that hedge funds generate returns of over 5 percent on announcement of their involvement, suggesting that investors believe these funds will increase the value of the firms they target.” (Greenwood 2007)

A recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang of 2000 activist hedge fund interventions between 1994 and 2007 found “no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions.” (Bebchuk et al. 2013) A contemporaneous literature review by Bebchuk concludes that shareholder interventions on the aggregate are  “beneficial for companies and their shareholders both in the short term and the long term.”

I go on to express doubts about cases in which hedge fund managers advocate specific business decisions, while expressing less skepticism about cases--like the interventions at Salesforce and Etsy--that operate at a high level of generality and seek to hold directors accountable for focusing on interests other than those of shareholders.

Salesforce's Mark Benioff Morphs from Social Justice Warrior to Gordon Gekko

In my book The Profit Motive, I talked about Salesforce CEO Marc Benioff:

A 2017 Slate essay claimed that “Fortune 500 companies today are socially liberal, especially on areas surrounding diversity, gay rights, and immigration; they are unabashedly in favor of free trade and globalization, express concern about climate change, and embrace renewable energy.” Robert Miller similarly concludes “that, at the current time, a sizeable majority of individuals in the socio-economic class from which public company directors, partners at elite law firms, senior officers at institutional investors and proxy advisory firms, politicians, and academics are drawn overwhelming favors one particular political agenda—i.e., the largely progressive political agenda that emphasizes issues such as climate change, environmental concerns, racial and gender diversity, systematic racism, and so on.” Salesforce.com CEO Marc Benioff, to cite but a single prominent example, energetically promotes social responsibility and woke activism. ...

Even true social justice warrior CEOs like Marc Benioff abandon their stakeholder capitalism commitments when push comes to shove. ... To cite but a single high profile example, the Wall Street Journal reported on August 29, 2020, while the pandemic was still raging, that one day after “Salesforce.com Inc. posted record quarterly sales, the business-software company notified its 54,000-person workforce that 1,000 would lose their jobs later this year.”  As John Stoll opined in the Journal, Salesforce CEO and Business Roundtable 2019 statement signatory Marc “Benioff called the company’s strong earnings a victory for stakeholder capitalism.” Benioff claimed to have done “a great job” for both shareholders and stakeholders. One might reasonable ask, however, as Stoll did, “how does the billionaire founder justify this claim when shortly after that interview Salesforce notified staff of plans for around 1,000 layoffs? This despite Mr. Benioff’s no-layoff pledge in March on Twitter and the challenge to other CEOs to follow his lead.”  One might add to that inquiry a question about how Benioff would justify telling Salesforce employees that in a few months down the road 2% of them would be fired, leaving them to twist slowly in the wind for months while worrying whether they would be among those who get fired.

Benioff's morph from social justice warrior to shareholder capitalist continues according to today's WSJ:

Through the sky’s-the-limit boom years, Marc Benioff, the co-founder and chief executive of Salesforce Inc., told employees they were bound together like family. In today’s leaner times, he is laying off thousands of them.

Why? Because, as Benioff now acknowledges, "ultimately, the success of the business has to be paramount.” 

“Layoffs are always hard,” Mr. Benioff said, but the Salesforce culture of family bonds only goes as far as business allows. “You can continue to keep a company going with excess employees, but it’s not healthy for the company,” he said.

Salesforce has struggled recently and its executives admitted--until they got scared off by their employees--that the firm's embrace of corporate social responsibility was part of the problem:

Salesforce executives ... said “wellness culture overpowered high performance culture during the pandemic” to explain the company’s recent headwinds. After employees complained on Slack—“Most disturbing and tone deaf is this sad excuse,” one post said—the line was changed.

It seems like Benioff is not alone:

Silicon Valley companies for years sold workers on the idea that they operate as communities with shared values and where people come first. Highflying firms could easily afford such amenities as on-site dry cleaners, workout classes and free food. 

Management is now cracking down.

As I predicted.

Senator Schumer's Misconceptions and Misrepresentations about ESG Investing

In today's WSJ, Senator Chuck Schumer argues that "Republicans Ought to Be All for ESG." There's a lot of misinformation in it. He claims, for example, that:

America’s most successful asset managers and financial institutions have used ESG factors to minimize risk and maximize their clients’ returns.

True, sort of. A lot of investment managers do use ESG. But not successfully. In my book The Profit Motive I review the data on ESG investing and point out that:

If socially responsible firms are superior performers, one should see evidence that investment portfolios weighted towards such firms outperform the market on a risk-adjusted basis. Yet, there is little evidence that socially responsible investment funds outperform relevant market indices. ... In general, there is no evidence that SRI investment funds—standing alone—improve portfolio company performance on environmental or social metrics, probably because such funds prefer investing in firms that already score high on those metrics. ... A 2021 literature review of over 1,100 peer-reviewed studies and 27 published meta-analyses determined that the risk-adjusted financial performance of ESG investing was indistinguishable from that of conventional investing.

He then claims:

Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment—including the financial risks presented by increasingly volatile natural disasters, aging populations and other threats that the public doesn’t normally associate with financial modeling.

It's interesting timing for that claim, because on Monday in the WSJ we learned that Vanguard CEO Tim Buckley was backing his massive fund family away from ESG:

“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times. Matching word to deed, his comments came after he had withdrawn his firm from the $59 trillion Net Zero Asset Managers initiative, an organization that is part of the $150 trillion United Nations-affiliated Glasgow Financial Alliance for Net Zero. Both alliances are committed to restricting their investments over time to companies that are compliant with the Paris Agreement’s objective of net-zero greenhouse gas emissions by 2050. Mr. Buckley claims the financial world, swept up in climate-change fervor, can’t make such commitments without reneging on its fiduciary duties.

Next Schumer turns to the recent Department of Labor ERISA rule allowing investment managers to freely invest their client's money in ESG:

Nothing in the Labor Department rule imposes a mandate. It simply states that if fiduciaries wish to consider ESG factors—and if their methods are shown to be prudent—they are free to do so. Nothing more, nothing less.

The present rule gives investment managers an option.

But what if the investment manager's client don't want their money going down the ESG sinkhole? Presumably Schumer would say "change investments," but not all of us have that choice. As I discussed in an earlier post, the University of California unilaterally shifted my retirement money into portfolios that track ESG indices. Nobody asked my permission and I don't have any choice in the matter.

Vanguard backs away from ESG

In today's WSJ, Terrence Keely reports that:

Vanguard’s Tim Buckley is having a Copernican moment. Like the famous Renaissance polymath who challenged conventional wisdom about celestial movement, the 54-year-old CEO is challenging the asset-management industry’s environmental, social and governance orthodoxy.

“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times. ...

...What is it that Mr. Buckley knows that so many others don’t?

For one thing, he understands that it’s difficult for active managers to beat broad indexes, as most ESG funds promise.

... Mr. Buckley knows that the largest index manager in the world isn’t qualified to tell individual companies how to set their ESG priorities. “It would be hubris to presume we know the right strategy for the thousands of companies that Vanguard invests in,” he told the FT. 

It's almost as though he read my book:

A must read on ESG

Today's must read: Edmans, Alex, Applying Economics – Not Gut Feel – To ESG (February 11, 2023). Available at SSRN: https://t.co/0QsmuGVLQC or https://t.co/bxdXz6ddXD

— Steve Bainbridge (@PrawfBainbridge) February 12, 2023

I guest post at the Corporate Finance Lab re my new book "The Profit Motive"

The Corporate Finance Lab blog invited me to guest post re my new book, "The Profit Motive: In Defense of Shareholder Value Maximization." You can read the post here: https://corporatefinancelab.org/2023/02/07/the-profit-motive-in-defense-of-shareholder-value-maximization/

A New ProfessorBainbridge.com Video: The Profit Motive: Defending Shareholder Value Maximization

Twitter Pushed Stakeholders Under the Bus: Just as my new book would have predicted

Lucian Bebchuk et al.:

We just posted on SSRN a new discussion paper, How Twitter Pushed Stakeholders under the Bus.(An earlier post noting our work on this project and our take on the subject is available here.)

This paper provides a case study of the acquisition of Twitter by Elon Musk. Our analysis indicates that when negotiating the sale of their company to Musk, Twitter’s leaders chose to disregard the interests of the company’s stakeholders and to focus exclusively on the interests of shareholders and the corporate leaders themselves. In particular, Twitter’s corporate leaders elected to push under the bus the interests of company employees, as well as the mission statements and core values to which Twitter had pledged allegiance for years.

Our analysis supports the view that the stakeholder rhetoric of corporate leaders, including in corporate mission and purpose statements, is mostly for show and is not matched by their actual decisions and conduct (Bebchuk and Tallarita (2020)). Our findings also suggest that corporate leaders selling their company should not be relied upon to safeguard the interests of stakeholders, contrary to the predictions of the implicit promises and team production theories of Coffee (1986), Shleifer-Summers(1988) and Blair-Stout (1999).

A basic point of my new book is that ESG is a means to an end and not an end in and of itself. Twitter is just the latest example.

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Can Corporate Governance Solve Social Ills?

No one can deny that we live in an era with many social issues and ills, not least of which is wealth inequality and the adverse social and economic problems that flow from it. But can those of us who toil in the corporate law and governance do much to solve those problems.

But first we have to identify the problem.

Is the Problem that Corporations are Fundamentally Undemocratic?

Some commentators contend that corporations and corporate wealth benefit a narrow slice at the top of society and that the benefits of the corporate form need to be more widely available?

But share ownership is already broadly distributed: Since 2009, an average of 55% of Americans annually reported owning stock. Although only about 15% directly hold stocks, mutual funds and ETFs have democratized investing. As a result, today, American families hold an average of $40,000 worth of stocks. His hypothetical financial intermediaries already exist in the form of ESOPs and 401(k)s.

Moreover, access to the corporate form is widely and easily available to impecunious entrepreneurs. In most states today, it is possible to form a corporation with no requirement for a minimum amount of capital, using low cost forms widely available from online vendors, and with payment of a modest franchise tax. The problem thus is not that we need to “extend to all people the competitive market opportunity to acquire an interest in corporate capital acquisition with the future earnings of that capital in amounts that are not limited in proportion to their (meager or negative) existing wealth.”

The inequality of which Professor Ashford writes exists not because of the corporate form and what he repeatedly refers to as its legislated advantages. In preparing its annual billionaires list, Forbes gives each member of the list a self-made score from 1 to 10, with scores of 6 and higher going to those who built their business on their own without inherited wealth.

Well over half (238) of the top 400 billionaires scored 8 or higher. The top three Americans on the most recent list—Jeff Bezos, Mark Zuckerberg, and Elon Musk—all scored 8. I would argue that part of what enabled these folks to start from more or less nothing and achieve great wealth was the ready availability of the corporate form.

Is the Problem that the Corporate Form is Unfit for Purpose?

Instructively, the corporate form historically has been embraced—albeit sometimes grudgingly—by populists.

During the early 1800s Massachusetts corporations did not get the benefit of limited liability but Maine and New Hampshire corporations did. In Massachusetts a public debate over limited liability broke out during the 1820s, in which “Jacksonian liberals” contended that capital was fleeing Massachusetts for those neighboring states.

Moving forward, populists of the late 1800s and early to mid-1900s tended to focus on abuses of the corporate form rather than the corporate form itself. To be sure, some populists were simply doubtful of the corporation’s fitness for purpose, disputing its utility as a way of organizing production.  In time, however, most populists came to recognize that the problem was not the corporate form as such because they recognized that even locally owned and operated business could advantageously use the corporate form.

What is the Problem of the Corporation?

If there is problem with “the corporation” today, it is not with that there is some intrinsic flaw with the form itself. It is not with the legal rules that require boards and officers to maximize shareholder value.

Instead, the populists correctly identified that problem: Size.

Size and the resulting potential for concentrated economic power are the chief recurring themes in the populist critique of the corporation. Late nineteenth century populists thought that the growing power of corporations was a significant threat to their economic and even political liberty.  The Southern Agrarians likewise believed, as Lyle Lanier observed, that “the corporate form of our economic system makes possible a scale of exploitation unheard of in history.” They argued that workers toiled under dehumanizing conditions. The Southern Agrarians further believed that the concentration of economic power in large corporations had created “a plutocratic corporate capitalist class” that effectively ruled the country and thus stood ready to fully exploit their power over farmers and workers.

Size is not something corporate governance can do much, if anything about. Neither shareholder nor stakeholder capitalism addresses size and power issues in any meaningful or useful sense; nor, it seems to me, does inclusive capitalism.

Why We Should Keep Teaching Dodge v. Ford Motor Co.

An updated version of my article Why We Should Keep Teaching Dodge v. Ford Motor Co. is now up on SSRN.

What is the purpose of the public business corporation? Is it to maximize shareholder value? Or is it to simultaneously enhance the welfare of shareholders, stakeholders, and the larger society? These are perennial questions, of course, but they also have been much in the news in recent years. Whether tagged as stakeholder capitalism, stakeholder theory, corporate social responsibility, or ESG (i.e., environmental, social, and governance), much attention is being paid.

The time has thus seemed propitious to many legal scholars to revisit the law of corporate purpose. Many of these scholars have been influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford. As the latter title suggests, Stout’s principal foil was the Dodge case.

Stout’s focus on Dodge was well chosen, as the case is included in almost all law school corporation law and business association casebooks and has been widely discussed in the academic literature. The influence of Stout’s critique of Dodge work was confirmed by a March 31, 2022, search of the Westlaw Law Reviews and Journals database, which identified 98 articles published in the last three years that cited her book and 43 during the same period that cited her article.

Given the renewed attention to the corporate purpose question and the continuing influence of Stout’s work on that debate, it seems appropriate to revisit her arguments to determine whether she was correct that law professors should stop teaching Dodge. I conclude that law professors ought to keep teaching Dodge. It was good law when handed down in 1919 and remains good law today.

Bainbridge, Stephen Mark, Why We Should Keep Teaching Dodge v. Ford Motor Co. (April 19, 2022). 48 Journal of Corporation Law 77 (2022), UCLA School of Law, Public Law Research Paper No. 22-05, Available at SSRN: https://ssrn.com/abstract=4076182

The Artwork for "The Profit Motive" Arrived Today

The artwork for my forthcoming book "The Profit Motive: Defending Shareholder Value Maximization" arrived today. I'm particularly proud of the generous blurbs from such prominent folks: