Monday, April 17, 2023

Padfield on Crony Stakeholder Capitalism (Final)

My paper, Crony Stakeholder Capitalism, 111 Ky. L.J. 441, 442 (2023), is now available on Westlaw, and I have posted the final version on SSRN here. Below is the abstract.

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


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