Journal Article

How Would Directors Make Business Decisions Under a Stakeholder Model?

Miller, Robert T.

2022

Overview

Under the stakeholder model of corporate governance, directors may confer benefits on corporate constituencies other than shareholders without regard to whether doing so produces benefits for the shareholders even in the long run. Contrary to what advocates of stakeholder theory often say, stakeholder theory does not put all corporate constituencies on a par, letting directors give equal consideration to the interests of all constituencies. Rather, stakeholder theory uniquely disadvantages shareholders, allowing directors to transfer value from shareholders to other constituencies but never from other constituencies to shareholders. More importantly, although critics of the stakeholder model going back to Berle have complained that the model provides directors with no clear standard by which to make business decisions, this criticism grossly understates the problem. In fact, the stakeholder model says nothing at all about which interests of the various constituencies are legitimate interests, much less about how such interests should be balanced against each other. As a result, the model provides no normative criteria of any kind on the basis of which we can intelligibly say that one business decision is any better—or any worse—than any other. Consequently, under stakeholder theory, every possible decision is as good and as bad as every other possible decision. The stakeholder model is thus not just insufficiently determinate but radically indeterminate. The question thus becomes whether there are any plausible normative criteria that can be added to the stakeholder model to make it reasonably determinate. Some obvious candidates are Kaldor-Hicks efficiency, hypothetical bargains among the corporate constituencies (both ex ante and ex post), and Delaware doctrines about the apportionment of merger consideration among different classes of shareholders, but it turns out that none of these can supply the normative lacuna in the stakeholder model. The model could be supplemented with a robust normative theory, such as that in Rawls's A Theory of Justice, Mill's act utilitarianism, or Aquinas's natural law theory, but this would require directors to become experts in moral philosophy and so echoes the improbabilities of Plato: until directors become moral philosophers or moral philosophers directors, there shall be no coherent stakeholder governance. The view that decisions made under the stakeholder model are necessarily unprincipled is confirmed from the writings of leading stakeholder advocates who expressly concede that, under a stakeholder model, the decisions of directors will be essentially political—i.e., determined not according to any rational, normative principles but by the varying abilities of different interest groups to pressure or lobby the directors. As an attempt to explain how directors should make business decisions, the stakeholder model is thus hopelessly and fatally flawed.

• Publisher: American Bar Association
• Subject: Advocacy / Analysis / Business / Candidates / Commercial law / Constituents / Corporate directors / Corporate governance / Corporate social responsibility / Criteria / Decision making / Decisions / Determinate / Directors / Ethics / Governance / Interest groups / Laws, regulations and rules / Management / Morality / Natural law / Normativity (Ethics) / Norms / Philosophers / Political activity / Political aspects / Political power / Stakeholders / State laws / Stockholders / Symposium / Theory / Utilitarianism