When push comes to shove, is stakeholder capitalism a dud?

Meta’s lawyers stress that the company is ‘not a public benefit corporation’ in motion to dismiss lawsuit on harmful externalities.

There was a time when stakeholder capitalism was all the rage in corporate circles.

This zeal reached something of an apotheosis in the Business Roundtable’s (BRT) “Statement on the purpose of a corporation” in 2019, in which the influential US lobby group appeared to break away from the traditional shareholder primacy model of capitalism – famously attributed to Milton Friedman – towards a more stakeholder-centric one that holds employees, customers, supply chain and communities within a company’s sphere on a more even standing with shareholders.  

The board of Meta recently utilised such language in its successful attempt to convince shareholders to oppose a proposal calling on the tech giant to disclose how its prioritisation of profits was harming society, the environment and diversified shareholders. 

“We believe that protecting our community is more important than maximising our profits,” the board wrote earnestly in their 2022 proxy statement. 

Growing scrutiny

These reassuring words came amid growing scrutiny from regulators and lawmakers following use of social media platforms to spread lies and misinformation, with profound impacts on democracy and elections.  

But Meta’s words also jar with the testimony given by former Facebook employee Frances Haugen. Testifying before the US Senate in October 2021, she said: “I believe Facebook’s products harm children, stoke division and weaken our democracy. The company’s leadership knows how to make Facebook and Instagram safer but won’t make the necessary changes because they have put their astronomical profits before people.” 

The proposal at Meta was filed by The Shareholder Commons. The non-profit was also behind a class action against Meta, filed late last year, which again argued that the firm had ignored its harmful externalities – including to diversified shareholders – through its pursuit of profits.  

Interestingly, lofty words regarding concern for society were absent from the motion to dismiss filed by Meta’s lawyers in December. 

Instead, they asserted that under “well-settled Delaware law, Meta’s directors must govern the corporation so as to maximise long-term value for the corporation”. 

The company, they stressed, is not a “‘public benefit corporation,’ governed by 8 Del. C. § 362, which ‘vitiate[s] any profit maximisation duty,’ and imposes a ‘mandatory, enforceable duty on the part of directors to consider the best interests of [all] corporate constituencies and those affected by the corporation’s conduct when they make decisions’”. 

Investor concerns

Investors too have raised concerns about Meta’s wider impacts, including the relatively recent engagement by New Zealand Super Fund (NZSF), launched following the 2019 Christchurch massacre, an atrocity livestreamed on several online platforms. 

Meta was not the only firm targeted by NZSF and the supporting $13.5 trillion investor group. Twitter and Alphabet, owner of YouTube, were also engaged as part of the effort. 

That engagement, launched just a few months before the BRT statement, was wound up in 2021 after investors concluded that the social media platforms are “highly unlikely to install measures to absolutely prevent the spread” of objectionable content.   

Alphabet’s chief, Sundai Pichai, was one of the 181 CEOs to sign the BRT’s 2019 statement, which included a commitment to “respect the people in our communities and protect the environment by embracing sustainable practices across our businesses”. 

That statement was described by one commentator as a “masterclass in gaslighting. A report one year on by The Test of Corporate Purpose also raised doubts as to whether there was any substance behind it.

The initiative – which was co-led by Hiro Mizuno, ex-CIO at Japan’s government pension fund, Sacha Sadan, then director of investment stewardship at Legal & General Investment Management, and Oxford academic Robert Eccles – found that BRT signatories “did not outperform their S&P 500 or European company counterparts”, in what was described as a “quantitative stress test of corporate purpose.”

Moreover, BRT signatories “underperformed (slightly)” on their pandemic response compared with their S&P 500 and European peers.

The same report also found that Facebook ranked in the bottom quartile of 800 firms assessed for corporate purpose.

Practical issues

Talk of “stakeholder capitalism” has died down in recent years. Shareholder proposals prompted by the BRT statement have stopped being filed, without ever attracting meaningful support. Even those calling on firms to become public benefit corporations are a rarity.  

There are also legitimate practical questions when it comes stakeholderism. These are touched upon by Meta’s lawyers in the motion to dismiss, when they question how feasible it is for a company to direct its decisions by “not only what is in the best interests of the corporation itself, but also what is in the best interests of thousands of other companies (and, indeed, the global market and society as a whole)”.  

This is a fair question. One could go further and ask whether it’s possible and even desirable for companies to police themselves on their externalities. Isn’t that what governments and regulators should do? 

But if that is the case then surely all businesses, including Meta, should be far more circumspect in claiming that they “believe that protecting our community is more important than maximising our profits”. 

Perhaps in the marketing-free words of lawyers, forced to articulate what exactly a company understands as the ultimate duty of its directors, we finally get to something like an honest expression of fundamental principles, devoid of insincere commitments to anything beyond profit.