Friday, July 15, 2022

Padfield on Crony Stakeholder Capitalism

I have posted a draft of my latest paper, Crony Stakeholder Capitalism (Kentucky Law Journal, forthcoming), on SSRN (here).  The abstract is below.  Comments are most welcome.

Capitalism in the context of corporate governance may be understood as an economic system that equates efficiency with corporate managers only pursuing projects that they reasonably expect will have a positive impact on the value of the corporation’s shares (accounting for opportunity costs). Such projects may be referred to as positive net-present-value (NPV) projects. Stakeholder capitalism, on the other hand, may be understood a number of different ways, including: (1) an improved form of calculating NPV; (2) a conscious choice to sacrifice some NPV in order to advance broader social objectives; (3) a form of rent-seeking; (4) a form of green-washing; (5) a manifestation of the agency problem whereby managers prioritize their personal political preferences over NPV; (6) a manifestation of the agency problem whereby managers prioritize their personal financial wealth over NPV; (7) a form of crony capitalism. Of these, an argument can be made that only the first is both legal and efficient, at least in the case of Delaware corporations operating under the relevant default rules. Given the high risk of stakeholder capitalism thus constituting illegal or inefficient conduct, this Essay argues that decisions justified on the basis of stakeholder capitalism (as opposed to NPV calculations) should not be presumed to be fully informed and free of material conflicts, as is the case when the business judgment rule otherwise applies. Rather, such conduct should be subject to enhanced scrutiny to account for the omnipresent specter of illegal/inefficient motives. Such a rule would be similar to what is already often the case in Delaware when corporations defend against hostile takeovers, due to the omnipresent specter of managerial entrenchment motives.

Following an Introduction, this Essay proceeds as follows. First, because the argument that stakeholder capitalism can constitute a form of crony capitalism is at least somewhat novel, the connection between the two is fleshed out. Second, Senator Marco Rubio’s Mind Your Own Business Act (MYOBA) is analyzed as a potential solution to the problem of crony stakeholder capitalism. Finally, recommendations are made for improving MYOBA.

Stefan J. Padfield | Permalink


Great and thought-provoking article. I agree that 3-7 probably always seem problematic. But how does the analysis change for public benefit corporations? It seems like in that case #2 is both permissible and expected, if not required, and has been sanctioned by the state as falling under a category of permissible social objectives for firms to pursue. In that case, the next question seems to be how to ensure democratic accountability for private actors that are taking on social goals historically reserved for democratically accountable government (unless we simply buy the argument that by proclaiming a sanctioned social purpose from the enumerated list that these firms are adequately publicly accountable).

Posted by: Emilie Aguirre | Jul 15, 2022 5:18:51 PM

Thanks, Emilie. I think you’re correct about #2 being expressly authorized in the case of benefit corporations. As to your second question, increasing the relevant accountability is obviously what I’m after in arguing for enhanced scrutiny, but my concern is more with duties to shareholders being breached as opposed to democratic accountability more broadly – though there are obviously a lot of additional interesting issues raised by that line of inquiry. It’s an issue I hope to explore more in the future – particularly in terms of an argument that shareholder wealth maximization has social utility independent of shareholder primacy justifications.

Posted by: Stefan | Jul 15, 2022 5:34:20 PM

Stefan, while I am a firm proponent of the abolition of stakeholder capitalism, viewing it as mere virtue signaling and greenwashing, there isn’t much to abolish. Stakeholder capitalism is a mythical animal that captures the imagination of law professors but is rarely, if ever, observed in the wild. The fact that only shareholders can elect directors imposes a discipline that circumscribes the activities of any corporation, including activities normally justified under the business judgement rule. I’m reminded of this line from Highway 61 Revisited: “God say, ‘You can do what you want Abe, but next time you see me comin', you better run.’” “Woke” corporations that have faced the wrath of “God” include Whole Foods, Etsy, Danone and currently, Unilever. There are more than 5000 Certified B Corps around the world dating from 2006, but only eleven trade on major U.S. stock exchanges. PBC’s are a much newer idea; nevertheless there are only fifteen that are public. Most of these B Corps/PBC’s (they tend to overlap) have insignificant market capitalization, coupled with significant insider ownership. Woke corporations either barely exist as public companies, or exist for a nanosecond until Paul Singer or Nelson Peltz come calling. Therefore I view the MYOBA as a completely unnecessary piece of political theater which plays to the white supremacist wing of the Republican base, and is not worthy of your laudable attempt to fix it.

Posted by: Paul Rissman | Jul 16, 2022 8:16:44 AM

On "the white supremacist wing of the Republican base", compare Glenn Loury & John McWhorter on the "excesses and dangers of critical race theory" at the 29:30 mark (also on "corporate wokeism" at 1:01:49) here: .

Posted by: Stefan | Jul 17, 2022 4:48:18 AM

ICYMI: I have uploaded a follow-up post here:

Posted by: Stefan | Jul 19, 2022 12:53:21 PM

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