Sustainable Finance: A New Policy Agenda Supporting Investor-Sanctioned Guardrails
White Paper Proposes Legal Shift From Shareholder Primacy to Stakeholder Capitalism
On September 28, after more than a year of work, The Shareholder Commons and B Lab released their policy white paper, From Shareholder Primacy to Stakeholder Capitalism: A Policy Agenda for Systems Change.
The paper outlines proposals for changes to corporate and securities law that would end the era of shareholder primacy. We propose:
- giving tools to corporate executives, investment managers, and other fiduciaries to account for their social and environmental impacts; and
- having these fiduciaries take responsibility for their role in maintaining a more just, inclusive, equitable, and prosperous economic system.
With the rules in place, investors could work together to establish sustainability guardrails that end extractive corporate behavior and refocus business on quality jobs, healthy communities, human dignity, and a more resilient ecosystem.
The Corporate Response
One of the immediate responses to the paper was a thoughtful critique from Wachtell, Lipton, Rosen and Katz, a law firm known as a fierce defender of the prerogatives of corporate management. Martin Lipton, its longtime leader, invented the “poison pill” defense. (Full disclosure: He did so with the assistance of the longtime dean of Delaware corporate law and my mentor, Lew Black.)
In recent years, Lipton has proposed a vision for the conduct of business that is very close to what we imagine in the white paper. His New Paradigm, along with the World Economic Forum’s Davos Manifesto and the Business Roundtable’s statement, strongly endorse measures by business to account for all stakeholders in their decision-making. The difference in our approaches is that they rely on the voluntary actions of individual companies to reimagine the ethos of business. In contrast, we do not believe that company-level decisions will be sufficient to address systemic issues like climate change, pervasive racial injustice, and growing inequality.
Companies Cannot Fight the Market Alone
It is not that we doubt the good intentions of corporate executives: The question is one of economics, not individual goodwill. A market economy depends on competing companies striving to maximize their profits; we rely on that competition to price and allocate goods and services. Capitalism’s upside is that competition encourages profits that result from efficiency and innovation; its downside is that it also can encourage profits that come from exploiting the planet and its inhabitants. The real difficulty is that profits from those two sources cannot be easily distinguished. On a profit and loss statement, a dollar earned from efficient energy use looks just like a dollar earned by skimping on emission controls.
On a profit and loss statement, a dollar earned from efficient energy use looks just like a dollar earned by skimping on emission controls.
It would be great if companies could simply decide to focus on the good profits and leave the bad behind. But in a market economy, companies that do the right thing— and only the right thing— will be put at a competitive disadvantage. They need a level, sustainable playing field to compete on, otherwise, in the struggle for margin, talent and reduced capital costs, there will be unrelenting pressure to conclude that every dollar of profit available is a good dollar.
Business leaders often argue that no conflict really exists because the interests of shareholders and other stakeholders always converge, at least over the long run. Often this is true — many companies have done extremely well by doing good. But not all interests converge over the long run. Consider the billions of dollars tobacco companies have made since it was discovered that it was deadly and addictive, the amount that the oil and gas industry invested in climate denial over decades, or the millions in contributions to dark money pools that have supported racial gerrymanders across the country.
But not all interests converge over the long run. Consider the billions of dollars tobacco companies have made since it was discovered that it was deadly and addictive, the amount that the oil and gas industry invested in climate denial over decades, or the millions in contributions to dark money pools that have supported racial gerrymanders across the country.
These are not short-term decisions that companies made in order to make their next quarter. These are investments with returns measured over decades in which companies have clearly increased the financial value they delivered to their own shareholders while burdening our economy with disease, climate change and racial injustice.
Guardrails Can Level the Playing Field
This tension cannot be wished away. The white paper proposes a solution: rules that facilitate and encourage investor-sanctioned guardrails. Such guardrails would allow shareholders to insist that all companies that they own forgo profits earned through the exploitation of people and planet. Unlike executives, the institutional shareholders who control the markets are diversified, so that their success rises and falls with the success of the economy rather than any single company.
Unlike executives, the institutional shareholders who control the markets are diversified, so that their success rises and falls with the success of the economy rather than any single company.
This means that these institutions suffer when individual companies pursue profits with practices that harm the economy. We believe that by leveling the competitive playing field, these changes will pave the way for the type of corporate behavior imagined by the New Paradigm, the Davos Manifesto and the Business Roundtable statement. But without guardrails, companies will continue to be trapped in an equilibrium in which their own financial returns necessarily trump competing systemic interests.
Far from being “state corporatism,” as the memo claims, a system that enables guardrails is “human capitalism,” where workers, citizens, and other humans whose savings fund corporations are given a say in the kind of world they live in. Will it be one in which all compete in a manner that rejects unjust profits? Or, in contrast, will it be one in which corporations continue to lobby against regulation that protects workers while the corporate executives make 300 times the median salary of their employees?
We are glad to begin this dialogue. Many of the changes to fiduciary law that we recommend would clarify that the executives and institutions have the discretion to focus on the very issues that the New Paradigm and the Business Roundtable raise. But we firmly believe that until we level the playing field, companies will not be able to end practices that are both financially profitable and socially destructive, at least not if we want to maintain a market economy. Rules and norms that give institutional investors the ability to impose universal guardrails that eliminate the option of unsustainable practices can create that level playing field.
B The Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
