June 25, 2020 Jeffrey D. Sachs | From Financial Times
Robert Armstrong (Opinion, August 24) holds that the dubious appeal of environmental, social and governance investing “is for dupes only”. I would add that belief in the beneficence of shareholder primacy is for dupes only.
The problem with US corporations today is that it is too easy for managers to harm others, including through environmental destruction, financial fraud, tax evasion, lobbying for narrow interests, addictive products, and campaign contributions to compliant legislators. In short, it’s all too easy to raise corporate valuations by harming others rather than by producing quality products at competitive prices.
ESG is a limited response to these ills. Yet the real action must come through corporate law reform and regulation of companies for the common good. Stakeholder capitalism aims to change corporate law and practice so that company directors and managers desist from imposing harms on others other than through competition on quality and price. Stakeholder capitalism is now commonplace in Europe, but is still debated in the wild west of Wall Street (with its never-ending stream of frauds), US Big Coal and Oil (disdaining climate dangers), US Big Tech (massive misuse of personal data) and the US food industry (built on addictive, obesogenic foods).
Mr Armstrong cites a study at Harvard Law School showing that stakeholder capitalism would “increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance”.
The real problem in the US today is not “corporate slack” in which managers are not accountable to shareholders, the overblown academic concern of the 1970s. The real problem is that corporate managers and boards are not accountable to society for the massive ills they are causing.
Mr Armstrong raises the question of whether American corporate law actually requires shareholder primacy, for example in Delaware, where many companies are incorporated. Experts are divided on the point. One approach is for companies to reincorporate as Delaware public benefit corporations wherein the public benefit company “shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation”.
A stronger step would be to insist that all corporations hereafter operate by the standards of benefit companies.