Late one night during the financial crisis of 2008–2009, when working around the clock was the order of the day in the AIG war room, a team member left the building to grab takeout for dinner. Having forgotten to remove his AIG badge, he was punched by an irate passerby, a man incensed by the unfairness of it all. That financial gulf has only gotten bigger and more lethal in the past decade.
From that day on the two of us, as longtime corporate counselors, wondered, “Did the financial crisis last long enough to teach corporations its critical lessons?” Companies no longer serve just customers and shareholders, but a much broader audience that is as much impacted by the doings of large companies as those that they serve directly. When they sneeze, we all get colds.
A forthcoming article by Harvard Law Professors Lucian Bebchuk and Roberto Tallarita, both experts in corporate governance, spotlights how this country’s contentious debate over social justice and inclusion has cascaded into C-suites and boardrooms. Their essay explores whether publicly held companies should continue basing decisions on the interests of shareholders, or whether there’s been a paradigm shift, meaning that corporate executives should take into greater account the views and aspirations of such stakeholders as customers, employees, and community leaders.
As we can attest, the shareholder vs. stakeholder dynamic is not new and long predates the AIG and Wall Street experience. What is new is the urgency of the debate and an abiding belief in many quarters that now — more than ever — corporations must practice what we call “mercantile activism” to address societal ills and enhance their brand while they do it. If all companies are doing is maximizing profits for this quarter, what are the liabilities they are creating for the next? Even if the perfect storm of the pandemic and its financial devastation could not have been precisely predicted, down markets and their associated unrest could be. Historically, when the federal government becomes inactive in addressing societal problems, Wall Street steps into the void — at least to a degree. J.P. Morgan, Andrew Carnegie and even John D. Rockefeller eventually understood that.
After breaking down the arguments and volunteering some positive perceptions of shareholder capitalism, Professors Bebchuk and Tallarita conclude that the conventional model — shaping corporate actions around the (generally) short-term pecuniary desires of shareholders — is still the smartest path for publicly traded companies to pursue.
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