How an Anti-Stakeholder Capitalism Study Proves the Dangers of Shareholder Capitalism
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A recent study by three respected professors uses a 2017 Nevada statute specifically intended to attract corporations to the state by offering greater freedom from shareholder oversight to conclude that stakeholder capitalism is a failure. In fact, the study offers proof of the dangers of unfettered shareholder capitalism as well as the flagrant use of biased research to make a false point.How the Study Backfired: The Researchers Studied a Law Intended to Attract Shareholder Capitalists
Offering Objective Proof That Unfettered Shareholder Capitalism Is Bad for Business
Nevada Bill 103 Has Nothing to Do With Stakeholder Capitalism
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In his book, May Contain Lies, Professor Alex Edmans of the London Business School warns readers of the many ways research can be deliberately biased to prove one’s point. This research designed to debunk stakeholder capitalism, recently shared in a prestigious law journal, contains an egregious example. In this instance, the research proves precisely the opposite of the case it is trying to make: some shareholder capitalists will be attracted to states whose corporate statutes give them broader leeway to conduct their business with less risk of shareholder lawsuits.
The study, The Costs of Weakening Shareholder Primary: Evidence from a US Quasi-Natural Experiment, was published in the Harvard University newsletter on corporate governance. It immediately drew the attention of conservatives as proof of the failure of stakeholder capitalism. This recent Washington Post editorial by Jason Willick, Why This Fashionable Corporate Concept Doesn’t Work and Dominic Pino in a National Review article cited the study as proof of the failure of stakeholder capitalism.
How the Study Backfired: The Researchers Studied a Law Intended to Attract Shareholder Capitalists
The study authors are Benjamin Bennett, an Assistant Professor of Finance at the A.B. Freeman School of Business, Tulane University; René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business, Ohio State University, and Zexi Wang, an Associate Professor of Finance at the Lancaster University Management School.
The problem with their study is that the bill had nothing to do with stakeholder capitalism. Three recognized professors analyzed a 2017 Nevada bill specifically designed by conservative lawmakers to make the state more attractive to corporations. Since the state already offers the option for Nevada companies to register as public benefits corporations, it is obvious the lawmakers had no intention of implementing stakeholder capitalism but rather a law to make the state friendlier to shareholder capitalists.
Were the researchers interested in understanding the impact of stakeholder capitalism in Nevada, or anywhere for that matter, they would do better by analyzing companies registered under the states' public benefits statutes. These are more aligned with stakeholder capitalism principles that put purpose before profit only because without a purpose there are no sustainable sources of profit.
If anything, the research proves that giving CEOs more unfettered power through protection from lawsuits unleashes more harmful forms of shareholder capitalism.
Offering Objective Proof That Unfettered Shareholder Capitalism Is Bad for Business
Since the intent of the researchers was to prove the importance of shareholder primacy, they cannot be accused of bias by accidentally proving the opposite.
In their article in the Harvard Law School Forum for Corporate Governance, they write: “Empirically, it is difficult to assess whether weakening shareholder primacy to give boards and officers more leeway to take into account the interests of stakeholders does actually worsen agency problems. In our paper, we use the adoption of a law in Nevada that weakens shareholder primacy to examine this issue and find strong evidence that increasing the discretion of officers and directors to pursue stakeholder interests has an adverse impact on agency problems within firms.”
They report that “Our analysis reveals that the enactment of the law has a pronounced negative impact on corporate governance. For example, we find that the entrenchment index worsens, board independence falls, and director attendance drops. While the law frees insiders to pursue policies that are stakeholder friendly, we find no evidence that such discretion is used to advance stakeholder interests. If insiders pursued actions favorable to stakeholders, we would expect the ESG performance of firms to increase. Instead, we find a deterioration in ESG performance, suggesting that the increased discretion is not used to promote stakeholder welfare.”
Nevada Bill 103 Has Nothing to Do With Stakeholder Capitalism
Of course this would be the case. The law has nothing to do with stakeholder capitalism—enhancing returns for investors only by creating value for customers, employees, distribution and supply chain partners, and communities, nor was it intended to. The bill was part of a broader legislative effort by conservative lawmakers to reinforce Nevada’s reputation as a business-friendly state, especially for companies seeking incorporation with minimal regulatory friction and reduced threat of lawsuits.
The bill was designed to clarify Nevada’s corporate statutes, particularly those governing private corporations. It’s goals included streamlining corporate governance procedures, enhancing, flexibility for boards and shareholders, and aligning Nevada law more closely with Delaware’s corporate code.
These researchers seeking to disprove the benefits of stakeholder capitalism in fact have helped underline the dangers to investors and society of shareholder capitalism, and also of biased research.
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