Stakeholders and Stakeholder Activism
- Pressure to Incorporate Stakeholder Interests
- Legal and Economic Implications
- Director and CEO Views on Stakeholders
- ESG Metrics and Disclosure
- External Assessment of ESG
This chapter is from the book
This chapter is from the book
This chapter is from the book
The governance mechanisms discussed in this book so far have been considered from a shareholder-centric perspective. A fundamental premise throughout is that the primary purpose of a corporation is to create value for shareholders and the obligation of a board is to ensure this purpose is achieved. Chapter 3 outlines board operations and fiduciary duties from this standpoint. Chapter 6 evaluates strategy development and risk management with this objective in mind. Chapter 11 accepts the premise that an effective market for control facilitates the transfer of corporate assets to owners that will derive the highest value from them. Many of the empirical studies discussed in this book measure the effectiveness of governance mechanisms by their impact on shareholder value and corporate profitability. In addition, the central definition of corporate governance that we employ—that a separation between the ownership of a company and its management creates opportunity for self-interested managers to take actions that benefit themselves at the expense of shareholders—is rooted in the premise that preserving shareholder value is a primary objective.
An alternative viewpoint also exists—that a corporation should exist not just to increase value for shareholders, but also to address the needs of other (non-shareholder) stakeholders. These stakeholders include employees, trade unions, customers, suppliers, local communities, and society. In this chapter, we examine the stakeholder perspective in depth. We start with an overview of the pressures that corporate managers have faced to incorporate stakeholder objectives into their planning, including pressure from their own shareholder base. We discuss the legal and economic implications of a stakeholder-centric governance model, including its potential impact on strategy, risk, and value creation. Then we examine how corporate managers and directors view their obligations to stakeholders and discuss the trend of CEO activism on social issues. We end with a discussion of the metrics used to track a corporation’s progress toward achieving social goals—including those developed by third-party rating providers—and their effectiveness.
As we will see, managing a corporation from a stakeholder perspective is not a simple undertaking. Indeed, it highlights a fundamental tension that has long existed in corporate boardrooms: how to balance competing interests to ensure the success of the organization over the long term.
Pressure to Incorporate Stakeholder Interests
In 1970, economist Milton Friedman famously asserted that a company’s only social responsibility is to maximize shareholder value. He argued that corporate executives are employed by the owners of the firm (shareholders) and that their obligation is to manage the business in accordance with the wishes of their employer—that is, to increase its value under the constraints of the law and accepted ethical standards. When other purposes are added to the equation, they require trading off this objective by diverting resources to a purpose that the owners of those resources have not approved, with the costs being borne by shareholders (through lower profits), customers (through higher prices), and workers (through lower wages and employment). Given these trade-offs, Friedman argued that corporations should focus on value maximization (which they are good at), and society should allocate the value however it sees fit.1
Despite Friedman’s argument, pressure has grown on large, publicly traded firms to incorporate stakeholder interests into their long-term planning. Although not an exhaustive list, the roster of stakeholders includes employees of the firm, customers, suppliers, creditors, trade unions, local communities, and society at large. The interests of these groups are broad, including environmental sustainability, reduction of waste or pollution, higher wages, workplace equality, diversity, providing access to groups that cannot afford products or services, and being a responsible counterparty or local citizen. Because companies operate in different industries, stakeholders and stakeholder interests differ across corporations. When we talk about stakeholder interests, we generally refer to the most directly relevant issues—such as climate change for energy producers, product waste for goods manufacturers, or affordability for healthcare providers. In some cases, the social interest is assumed to be common across companies, with one example being diversity.
Various labels have been applied over time to describe corporate and investor efforts to address stakeholder needs. Some of these terms include socially responsible investing (SRI), corporate social responsibility (CSR), and environmental, social, and governance (ESG).
The pressure on corporations to address stakeholders’ interests has come from multiple fronts and has shown to both wax and wane in recent years:
Money flowing into sustainable investment funds: In 1995, less than $1 trillion was invested with money managers and institutional investors dedicated to sustainable, responsible, and impact investing in the United States. In 2020, this amount peaked at $15 trillion; by 2024, it had declined to $6.5 trillion.2
ESG-related proxy proposals: The number of shareholder-sponsored proxy proposals related to ESG considerations increased for a period of time but has since declined. Meanwhile, “anti-ESG” proposals have been put forth, which have also received low support.3
Institutional investors: Large institutional investors that long took passive stances on ESG-related issues for a time became more assertive. For example, each of the “Big Three” index funds—BlackRock, Vanguard, and State Street Global Advisors—launched advocacy campaigns to shape the governance practices of their portfolio companies in areas relating to social responsibility. By 2023, they had pulled back from this advocacy. (We discuss this trend more fully later.)
ESG metrics: Data providers use survey data and publicly observable metrics to rate companies along a variety of stakeholder dimensions. These data are sold to institutional investors to inform investment decisions or for use in magazine rankings. Examples of such data providers include MSCI, HIP (“Human Impact + Profit”), and TruValue Labs (available through FactSet). Examples of published indices include Barron’s 100 Most Sustainable Companies, Bloomberg Gender Equality Index, Ethisphere Institute’s Most Ethical Companies, and Newsweek Top Green. The Sustainability Standards Board (SASB) has tried to standardize the reporting of these metrics. (We discuss ESG measurement more fully later in this chapter and in Chapter 14.)
Employee and customer activism: Employees of some companies have become more vocal in expressing their views to management on environmental or social issues. Social media and internal corporate communications platforms have facilitated this process. Employee activism has forced companies to change corporate policies, withdraw from commercial activities, and take public stances on social issues about which the company might have traditionally remained silent. At the same time, opponents of ESG, including certain customer groups, have pressured companies to set aside social policy stances as part of their activities (see the following sidebar).
Of these sources, institutional investors have played a particularly prominent role in promoting stakeholder interests. In 2014, Vanguard launched a program of direct engagement with portfolio companies to discuss governance-related topics. It dubbed this program “quiet diplomacy.” Vanguard subsequently included ESG criteria in this effort.7 In 2017, State Street Global Advisors launched what it called the “Fearless Girl” campaign to advocate that its portfolio companies increase the number of women on their boards.8
For a time, BlackRock was the most vocal of the Big Three investors in advocating that companies give greater consideration to stakeholder interests. For more than a decade, BlackRock CEO Larry Fink has written an annual letter to the CEOs of the companies in BlackRock’s investment portfolio, often encouraging them to address a variety of stakeholder-related issues. In 2016, he advocated they lay out “a strategic framework for long-term value creation” and stated that “generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors.”9 The next year, Fink encouraged greater attention to “long-term sustainability” and discussed such topics as globalization, wage inequality, tax reform, and a more secure retirement system for workers.10 In 2018, he argued that a company needs to have a “sense of purpose” that serves all stakeholders and that “to prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”11
In subsequent years, however, Fink shifted away from an explicit promotion of ESG. His 2023 letter avoided the term “ESG” entirely and mentioned the term “sustainability” only once.12 In 2024, he omitted all references to ESG, DEI, and climate change—instead advocating for “energy pragmatism.”13 The company also removed previous letters from its website.
Because of the size and ownership positions of the Big Three, they are positioned to influence corporate practice. Gormley, Gupta, Matsa, Mortal, and Yang (2023) showed that the campaign launched by these funds to increase boardroom diversity in the United States led corporations to add 2.5 times as many female directors in 2019 as they did in 2016.14 The recent pullback in their advocacy likely has had a countervailing impact.
In response to pressure from stakeholder groups, more than 180 CEOs affiliated with the Business Roundtable agreed to revise the association’s statement on the purpose of a corporation, to emphasize a commitment to all stakeholders and not just shareholders. According to the association:
Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance that include language on the purpose of a corporation. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders. It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.
Under the revised statement, association members commit to:
Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.15
We discuss the implications of this commitment next.
