Shareholder-Driven Stakeholderism by Cathy Hwang and Yaron Nili

For the last two decades, scholars, judges, and corporations have embraced the idea that corporations should maximize benefit for shareholders. But on a lazy summer day in August of 2019, that changed. The CEOs of nearly 200 major U.S. companies released a statement embracing stakeholder theory—the idea that corporations should look after the needs of not only shareholders, but also those of employees, suppliers, community members, and others. Many applauded this as a progressive step: a way for corporations to take control back from the outsized, greedy influence of profit-driven shareholders. This Essay takes a different view, arguing that shareholders have long been advocates of the kind of progressive values that the public desires. Instead of being a step forward, stakeholder theory is another way to entrench management.

This Essay draws on hand-collected data from companies in the S&P 1500 that shows that shareholders, not management, have been the driving force behind the environmental, social, and governance principles that often align with stakeholder governance. In particular, institutional investors and proxy advisory firms have taken the lead on pushing these policies through to management. This Essay contributes to both a long-standing literature on managerial and shareholder power, and to the timeliest debate in corporate law today. On the practical side, its novel argument—one that has yet to be explored by commentators in media or scholarly circles—gives public companies a roadmap to engage in policies that better promote diversity, sustainability, and community stewardship.



I. Who Controls the Corporation?

II. Who Champions for ESG?

III. The Future of Stakeholder Theory and Other Implications



For the last two decades, shareholder primacy—the idea that corporations should, first and foremost, make decisions that benefit shareholders—has been the dominant theory of corporate governance. But in August 2019, that changed. Nearly 200 CEOs of major American companies released a statement embracing a stakeholder theory of corporate governance. In the statement, these CEOs committed not just to shareholders, but also to employees, customers, suppliers, and the community.

The Business Roundtable statement sparked a flurry of commentary. The New York Times called the announcement “an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs.” Commentary in Forbes highlighted the practical issues that the statement implicated. On one hand, the statement “serve[d] as a strong endorsement of the principles of corporate social responsibility and the important role that corporations can play in improving society.” On the other, it “mark[ed] a further departure from traditional precepts of shareholder primacy,” which would cause “boardroom confusion as to whom—or what—directors owe their attention and responsibility.”

The statement also had enormous implications for corporate governance theory. Perhaps the most important and most long-standing question in corporate governance law, theory, and policy has been the question of who should control the corporation. The classic debate has been between management and shareholders: While the former has argued that management ought to have leeway to make decisions, shareholders have argued that their views—often cast as synonymous with a corporation’s responsibility to maximize shareholder wealth—should take center stage.

In recent years, a third camp has entered the fray. This camp is comprised of those who argue that stakeholders, such as community members and corporate employees, should also have a say in corporate actions. The CEOs spoke most directly to this third camp, embracing the idea that corporations can and should cater to the needs of stakeholders, not just shareholders in their statement.

Against this backdrop, it is no surprise that shareholder advocacy groups were wary of the CEOs’ announcement. The Council of Institutional Investors, a powerful group of shareholders representing more than $4 trillion in assets, criticized the statement for “undercut[ting] the notions of managerial accountability to shareholders” and argued that “accountability to everyone means accountability to no one.” The Editorial Board of The Wall Street Journal agreed, arguing that “[a]n ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters.”

Surprising praise, however, came from management advocates. Among the most effusive praise came from Marty Lipton, the outspoken named partner of storied Wall Street law firm Wachtell, Lipton, Rosen & Katz. Lipton, best known for inventing corporate takeover defenses and advising corporate management, penned a memo on the day of the Business Roundtable’s announcement, noting that “[a]s a long-time proponent of stakeholder corporate governance . . . , I applaud the [Business Roundtable’s] commitment to stakeholder corporate governance. . . . I hope it is emulated by all participants in our markets.” The day after, he distributed another memo, criticizing the Council of Institutional Investors for failing to embrace the stakeholder model, and noting, rather ominously, that “[i]nequality and climate change will not be mitigated without adherence to the [Business Roundtable] governance principles . . . .” By Lipton’s account, managerial discretion has always been aligned with stakeholder theory.

This Essay takes a different view. In particular, it argues that in public companies, shareholders, not management, have been the driving force behind the environmental, social, and governance principles that often align with stakeholder governance. As our previous research shows, corporations have, for some time, been adopting environmental, social, and governance (ESG) policies at the behest of shareholder activists, powerful institutional investors, and influential proxy advisory firms. In other words, shareholder primacy—rather than managerial discretion—could be best aligned with stakeholder primacy theory.

The remainder of this Essay proceeds as follows. Part I provides a brief overview of the relevant literature in corporate governance—in particular, the battle for power between managers and shareholders, and how stakeholder theory fits within it. Part II argues that in public companies, shareholders are the ones pushing for the values that underlie stakeholder theory. Specifically, shareholders have pushed for more diversity, better environmental and community stewardship, and a variety of other measures that broadly fall into the ESG category. Part III discusses implications. It considers the continued relevance of stakeholder theory in public and private companies, and argues that in private companies, stakeholder governance might require more direct input from management.

I.    Who Controls the Corporation?

As any business or law student will remember, the defining feature of a corporation is the separation of ownership and control. Unlike other business entities, where the owners are also managers who control business decisions large and small, a corporation’s owners—its shareholders—largely cede control of day-to-day decision-making to hired managers. These managers—directors, officers, executives, and the like—make all but the biggest decisions without shareholder input. And if shareholders are unhappy with those decisions, their recourse is to fire those managers, to sue those managers, or to sell their shares.

In theory, this division of labor works well. From the shareholders’ perspective, nearly any regular person with a bit of spare cash can invest in a corporation without having to shoulder the managerial burdens of, say, deciding whether to install new vending machines in the employee break room, move production abroad, or engage in corporate restructuring to take advantage of tax breaks. Instead, those decisions are delegated to professional managers, who are paid handsomely not only to take on those day-to-day headaches, but also to make strategic decisions that will grow the company and, in turn, the investor’s investment.

But in practice, the separation of ownership and control is rife with problems. It is a paradigmatic principal-agent relationship, where the shareholder is the principal and the manager is the agent. And, like other such relationships, the incentives of the shareholder and the manager can be misaligned. Suppose there is a bit of cash left over after the year’s expenses are paid. Shareholders will likely want to receive that cash in the form of dividends or see that cash re-invested in the business so that the business can grow. But managers might want to see that cash paid out to themselves in the form of a bonus; after all, it was their hard work that resulted in the extra cash.

And that is only the beginning—the agency problems inherent in corporations are numerous and complex. In mergers and acquisitions, for example, the tug-of-war between management and shareholder power led to a rich line of cases in the 1980s—Unocal Corp. v. Mesa Petroleum Co., Revlon, Inc. v. MacAndrews Forbes Holdings, Paramount Communications, Inc. v. Time, Inc., and others—that have rendered the corporate sales process a minefield for companies.

At times, these cases have vindicated the idea that management knows best. In the famous Airgas case, for example, Airgas’s management, advised by Lipton, repeatedly rebuked hostile takeover attempts by its rival, Air Products. After successfully fending off Air Products, Airgas sold itself four years later for more than double Air Products’ earlier offer.

But on the other hand, there are also instances where courts have found that management breached its duties to shareholders when taking actions to fend off acquirers. In this vein, perhaps no case is more famous than Revlon. In the early 1980s, businessman Ron Perelman, who owned a rather unfortunately named chain of supermarkets—Pantry Pride—made an offer to purchase storied French cosmetics company Revlon. Revlon’s management refused the offer and, as the offers increased in value, continued to turn them down and took actions to ensure that Revlon’s shareholders could not accept the offers. The landmark case that ensued led the Delaware Supreme Court to establish a new rule: when the breakup of the company becomes inevitable, management’s primary duty switches from protecting shareholders’ long-term interest to that of an “auctioneer,” seeking the highest sale price for shareholders. In essence, the Delaware courts found that Revlon’s management had strayed too far from doing what was in the best interest of its shareholders.

In recent years, the push-and-pull between management and shareholders has intensified. Powerful institutional investors—public pension funds, activist hedge funds, and most recently the big mutual funds—have consolidated shareholder power and pressured management to make changes at shareholders’ behest. Activist hedge funds have launched a series of high-profile campaigns against some of the largest and most storied companies in America. Activist shareholders have also used a number of tactics—most often shareholder proposals made at annual shareholders’ meetings—to nudge management toward a variety of changes. In recent years, for example, a clinical program at Harvard Law School (with which Professor Yaron Nili was once affiliated) ran a project to de-stagger public company boards through shareholder proposals, and a group of Catholic nuns used their influence as both nuns and shareholders (through a retirement fund) to advance corporate social responsibility goals.

Stakeholders, too, have joined the battle for corporate power. Non-owners and non-managers, including employees, suppliers, customers, community members, and advocacy groups of various stripes, have argued that corporations ought to consider non-owner and non-management views and interests in corporate decision-making. For those who want to advance corporate social responsibility goals, stakeholder theory has looked more attractive than shareholder primacy theory. This is in part because shareholder primacy theory is often interpreted as shareholder wealth maximization. And when maximizing shareholder wealth is the primary goal, it becomes harder for corporate managers to consider other priorities without breaching their fiduciary duties.

Indeed, a non-trivial subset of companies have (re)incorporated as benefit corporations, allowing them to explicitly consider the interests of various stakeholders when running the corporation.

II.  Who Champions for ESG?

When the CEOs made their announcement last August, they made it against this complex backdrop: one where shareholders, management, and stakeholders are each vying for a voice in corporate decision-making.

At first glance, the announcement appeared to be an unequivocal win for stakeholder theory, and, by proxy, the environmental, social, and governance policies that stakeholder theory often champions. The CEOs’ announcement, in fact, was written in the language of stakeholder theory, noting explicitly that “[w]hile each of our individual companies serve its own purpose, we share a fundamental commitment to all our stakeholders.” And, indeed, many commentators lauded the statement as being a repudiation of shareholder primacy and for championing causes other than corporate and shareholder wealth maximization. The Washington Post advocated that “this is a moment to be seized,” while Bloomberg cautiously endorsed the announcement: “For the Roundtable commitment to be meaningful, the signatories are going to have to alter their behavior in ways large and small, and maybe even in ways that aren’t always optimal for maximizing short-term profits. Still, we should be encouraged.” Fortune advanced the discourse with a simple line: “times change,” adding, “given the immense power large companies exercise in society, the new social consciousness of business surely should be seen as a step in the right direction.”

Among the most effusive praise came from Lipton, the famed champion of managerial discretion. Lipton celebrated the announcement while criticizing major institutional shareholders’ groups for not getting on board. He noted, for instance, that the Council of Institutional Investors’ failure to embrace the CEOs’ announcement amounted to a “failure to recognize the existential threats of inequality and climate change,” and described stakeholder theory as one that “recognizes that the management and board of directors’ primary fiduciary duty is to promote the long-term value of the corporation and is not primarily to maximize shareholder wealth.”

Inherent in Lipton’s praise is the idea that shareholders—but not management—are aligned against the ESG values that underlie stakeholder theory. In other words, managers are friendly to stakeholder theory, and shareholders are not.

Our research of public companies, however, cuts against this idea. We collected non-charter, non-bylaw governance documents—which we termed “shadow governance” documents—from the websites of all 1,500 of the large American companies listed in the Standard & Poor’s Composite 1500 index. Many of these documents fall into the ESG category. Business ethics and human rights policies, for instance, are the most-often disclosed non-required shadow governance documents.

Our research showed that there are two reasons that companies adopt non-required ESG-related policies and disclosures. First, and most importantly, ESG-related policies and disclosures are shareholder driven. Shareholders’ impact can be direct or indirect. Most commonly, companies adopt these policies and disclosures in direct response to shareholder proposals, suggestions, or demands. For example, a shareholder who wants a company to adopt a particular policy might make a shareholder proposal to be voted on at the annual shareholders’ meetings, and the company and the shareholder might thereafter settle for the proposal’s adoption.

Shareholders also influence the adoption of these policies indirectly. As part of our study, we interviewed a number of directors and general counsels of large companies to determine how companies decided which policies to adopt. Several of the interview participants noted that proxy advisors such as ISS and Glass-Lewis strongly influence the shadow governance policies companies adopt. For example, one director in our study highlighted, “we’re increasingly in an environment where there’s a lot of criticism and scrutiny around the board process . . . ISS, Glass Lewis, and the public, those people are looking at [shadow governance documents] as evidence of rigor and scrutiny, and for clarification on issues like risk and compensation.”

Second, to the extent management is involved in companies’ adoption of ESG-related policies, that involvement tends to be relatively disorganized and ad hoc. Our interviewees, for example, reported that, rather than adopting new policies through some kind of survey of competitors or consideration of all potentially relevant new policies, companies often adopt new policies when a new director that is joining the board suggests that the company adopt new policies. Those new policies were often policies that had been adopted by other boards on which the director served. Sometimes, general counsels also played a role in dictating what new policies the company would adopt.

The decision-making process around what policies to disclose to the public is similarly haphazard. In particular, interview participants reported that companies adopt a lot of policies—ESG-related and not—and what they choose to disclose is largely due to two things: the demands of a particular shareholder group (and the terms of the subsequent settlement), and the general counsel’s discretion.

In short, it seems that shareholders play an enormous role in influencing companies to adopt the ESG-related policies that are often aligned with stakeholder theory. Managers, by contrast, seem to have a smaller role. This suggests that shareholders, rather than management, may be more aligned with stakeholder interests.

III. The Future of Stakeholder Theory and Other Implications

Why does it matter that shareholders, rather than managers, seem more aligned with stakeholder theory?

First, to stakeholder theory advocates, it should matter greatly who supports them: shareholders, managers, neither, or both. Our work suggests that pressure from shareholders has been the primary reason that public companies have choose to adopt ESG-related policies; companies and managers do not often seem self-motivated to do so. Against that backdrop, it makes sense to proceed with caution: just because American business leadership has embraced a stakeholder governance model does not mean that the work of stakeholder advocates, or, indeed, shareholders whose views align with those of stakeholder advocates, is done.

Second, and on the flip side, we think that managers have a large and important role to play in advancing ESG and other stakeholder-centric goals in private companies. Our research focused on public companies—many of which have been targeted by activist shareholders of various stripes, and in which influential institutional shareholders are invested. When public companies ignore their shareholders’ suggestions and proposals, a public relations fallout can ensue. So, it stands to reason that shareholders have been able to influence public-company governance. But, private-company governance is, as the name suggests, more private. Shareholders have less direct influence, in part because the potential public-relations fallout is less severe. As a result, if a private company wants to adopt ESG or other policies that align with stakeholder theory, those efforts must be management-driven. That is, to the extent that private managers are interested in embracing stakeholder theory, they must take the lead. It is worth noting, too, that private-company governance is more important now than ever. In the era of private investment, many more companies are choosing to remain private for longer.

Finally, we do not claim that shareholders are the only ones who should care about ESG-related policies. As Lipton rightly notes, problems of inequality and climate change are “existential threats,” and there is every reason for both shareholders and managers to take those policies seriously. Moreover, once a company adopts a shareholder-driven policy, it is up to management to ensure that the company adheres to the policy—which, according to interview participants, management does do. In other words, both shareholders and management have roles to play in stakeholder governance.


A recent announcement by a powerful group of CEOs has sparked new excitement about the stakeholder model of corporate governance. While some have argued in the immediate aftermath that corporate management is stakeholder theory’s greatest supporter, this Essay argues that, for public companies, shareholders have actually been the main advocates of stakeholder governance.

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Cathy Hwang an Associate Professor of Law at the University of Utah, S.J. Quinney College of Law. Professor Hwang focuses her research on corporate contracts and deals and her work can be found here.

Yaron Nili is an Assistant Professor of Law at the University of Wisconsin. Professor Nili focuses his research on corporate governance and his work can be found here.

For helpful comments and conversations, the authors are grateful to Sarah Haan and Dorothy Lund. Gabrielle Kiefer and Madison Roemer provided excellent research assistance.

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