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Transcript of the 2023 Wallenberg Lecture, 'Three Conceptions of Capitalism' delivered by Prof. Lucian Bebchuk.

I'm delighted to be here. I've been involved with the ECGI for many years and have been one of the many who've benefited from its activities and the dissemination of knowledge. Also, from its  leadership in this field.

So, let me start. I thought it would be fitting, since the lecture is named after the Wallenberg family, to start by relating what I'm going to talk about to the Wallenberg family example. It's an inspiring example. I've read much about it before coming to deliver this Wallenberg lecture. You've heard a lot about it already from Peter Wallenberg, who heads the Foundation. It's an inspiring example of a family that, over a long time, has been committed to using its wealth for the betterment of society and with a clear impact. The question is, what should we learn from the Wallenberg family example? One possible inference is that maybe we should advocate and hope that business leaders, in general, follow the Wallenberg example and run businesses much more to the benefit of stakeholders and society than what we have seen in the business world thus far.

And when you look at this question, people here can have two different views. One view, one answer, would be, to quote a well-known presidential candidate in the US, "Yes, we can”. We should just urge corporate leaders until they see the light. The answer that I will put on the table for you today is no. We cannot. No matter how inspiring this example is, we cannot expect that, by and large, corporate leaders are going to follow this example and use their discretion in the way that the Wallenberg have done. But we should use this inspiring example to think about how to fashion the rules of the game of capitalism so that we do advance this commitment to the benefit of society, even when business leaders themselves cannot be assumed to be driven by the moral and societal commitments that the Wallenbergs have displayed.

So, my general question, and I know that many of you have been thinking about this, is, there is an ongoing and heated debate about how to make capitalism work better for society, for employees, for other stakeholders, for protecting the planet, which is a pressing issue nowadays. In this connection, one question that has been debated is, what guidance should we give to corporate leaders when they run their businesses?

I'll talk today about three kinds of traditional alternative conceptions about this question, and I'll suggest to you a number of questions that each of us should ask in choosing among those conceptions, which conception to follow. I'll use this language to explain why I support one of the conceptions and reject others.

So, there are three rival conceptions that have different variations, but those are conceptions that have had a lot of traction in public discourse, in politics, and in scholarship over the last half-century: Friedmanesque capitalism, managerial stakeholderism, and democratic capitalism.

Friedmanesque capitalism, named after Milton Friedman, supports a vision of the world in which we have profit-maximizing firms operating alongside limited government. An alternative view that has become increasingly influential over the last decade expresses dissatisfaction with the Friedmanite paradigm and suggests addressing the problems of society and stakeholders by encouraging and relying on corporate leaders to use their discretion to serve not only shareholders but also stakeholders. This view has been increasingly endorsed by many corporate leaders.

There are two versions of managerial stakeholderism that we try to distinguish. One is stakeholderism as a mere instrument for improving long-term shareholder wealth, and a pluralistic version in which all stakeholders are an independent end. One version is often referred to as enlightened shareholder value. It reflects an enlightened recognition of the fact that if you don't look after the stakeholders, this will hurt the company's profits in the long term. Therefore, corporations should protect stakeholders if, when, and only to the extent that doing this would serve long-term value. Our argument has been that, if you assume corporate leaders seek to maximize long-term shareholder value, then this enlightened shareholder value is not operationally different than simply long-term shareholder value.

There's another version that some people have advanced, saying that we need this enlightened shareholder value because we're concerned that corporate managers are sometimes myopic. They don't give enough weight to long-term consequences, and any stakeholder-oriented actions have long-term effects. For example, treating your employees well will have long-term benefits. To the extent that corporate leaders are myopic, urging them to look at the long term is not going to make a difference. And secondly, if you understand that the main problem is short-term incentives, then the way to address them is not to urge corporate leaders to pay attention to the long term. The best way to address this problem is to give corporate leaders incentives to focus on the long term, such as using incentive pay which is tied to long-term shareholder value.

An alternative version was incorporated in some constituency statutes that were adopted by some US states, giving an independent weight to the interests of different stakeholder groups and urging corporate leaders to look at the aggregate of interests. That could lead to operationally different instructions than a Friedmanesque guideline. That's not the version most used by proponents of stakeholderism. But whichever version is used, sometimes it's for political convenience. As long as you're relying on is the discretion of corporate leaders and not having their choices second-guessed by courts, then in the end you're relying on their discretion. The key question is how they are going to use their discretion.

A third conception, which is my own view, is different from Friedmanesque capitalism because it's deeply concerned about the externalities that companies impose on the world, the array of effects companies have on their environment. It's skeptical that corporate leaders should be expected to serve stakeholders beyond what would serve shareholder value. Instead, it combines the traditional focus of corporations on shareholder value with strong governmental regulations and policies that would constrain and incentivize companies. These incentives would work together with the traditional way that corporations operate, leading to good outcomes.

For example, if you care about climate change, use carbon taxes and subsidies or have labor-protecting laws to protect the interests of employees.

How should anyone make a choice between these different conceptions or variants thereof, or decide to which conception they are closest? I suggest to you that there are four questions that you should ask yourself. One question is how well capitalism, and by this, capitalism in the Milton Friedman sense of profit-maximizing firms alongside limited government. How well this is working for stakeholders? Milton Friedman saw that this is going to work well for everyone or at least as well as is possible in this world. An alternative view is that it's not working well. That's what has driven the stakeholderism movement. Rebecca Henderson, in a nice articulation, said, "The world is on fire." So when you answer this question, obviously there is a continuum of answers. The more you think that this capitalism works well and we can leave it to operate as is, that drives you toward Friedmanesques capitalism. The less well you think it works, it moves you either towards managerial stakeholderism or towards Democratic capitalism.

The second question is whether corporate leaders can exercise discretion. One view is that corporate leaders can be expected to be guided by the stipulated corporate purpose that society will communicate to them. The managerial stakeholderists strongly hold this view. Milton Friedman, he didn't like the implications of this view, but if you read his famous essay, you see that he saw that if we tell corporate leaders to look after the stakeholders, if we say that that's acceptable corporate social responsibility, which he was very much rejecting, he saw that they will indeed go and do it, so they would go out and serve stakeholders big time. An alternative view that the Democratic capitalists subscribe to is that it's not going to happen because of the incentives of corporate leaders.

A third question is whether government interventions are beneficial when they happen. Are they at all feasible given political gridlock, lobbying by interest groups, and so forth? Friedmanesque's capitalists answer this question by a resounding no. Milton Friedman believed that government interventions are the problem, not the solution to any societal ill’s. The managerial stakeholders don't take a strong view on this, but if you read the writings, the main motivation they have is they don't really hope that governmental interventions are going to do the job, and therefore, they are putting their chips, so to speak, on the discretion of corporate leaders. Democratic capitalists, on the other hand, they think that because they don't really... They're not very hopeful that the discretion of corporate leaders is going to be effective. They think that governmental interventions are indispensable.

The fourth key question you might want to ask yourselves is to what extent is corporate political spending and lobbying detrimental or perhaps on the other side, beneficial, or at least acceptable. On the view of Milton Friedman, corporate politicking is beneficial. It's actually a necessary counterweight to the desire of bureaucrats to expand their tariff and intervene wherever possible. Therefore, we need the corporate countervailing force. Managerial stakeholders don't have a strong view about this. They don't focus on this issue, but they take corporate politicking as given, and this premise that it's given also is part of the motivation why they want corporate leaders to step in and help. On the other hand, Democratic capitalists think that what we need is for the democratic process to provide adequate constraints on the operations of companies. Therefore, it's very important to limit the ability of corporations to impede governmental interventions. Again, where you stand on this would lead you in one direction or another.

Some implications: there is now a lot of debate on the Business Round Table statement on corporate purpose, about the Davos Manifesto, and so forth. Usually, when you read the literature or you read the media coverage of this, it often seems to conflate all the critics, all those who do not accept managerial stakeholderism in one group. They think about all of them as people who are committed to shareholder primacy because they are not stakeholders. But I think that's a big mistake because those two positions, even though they are similar in that they don't want to urge corporate leaders and to rely on them to serve stakeholders, they are fundamentally different, as I just described. To put it together, they have at least four drastic differences. Friedmanesque's capitalists and Democratic capitalists start from very different premises as to the outcomes of capitalism. Democratic capitalists think about this as very worrisome. Friedman's capitalists think that this is the best of possible worlds. They very much differ in the role they would like governmental interventions to play. They very much differ in what they think is the necessary role of regulation on corporate politicking.

The second point I wanted to make, is if you are concerned about stakeholders, if you think that "laissez-faire" capitalism isn't working even close to a satisfactory fashion, then you have a choice between stakeholderism,  which many people have been moving towards, and Democratic capitalism. And let me move on to say why, in my view, we should not listen to the siren's song of stakeholderism but rather rely on Democratic capitalism.

Okay, so let me turn to explain why, based on my work, why I support Democratic capitalism and reject managerial stakeholderism. What I'll say in the next several minutes is based on a long series of articles that I and co-authors have written in the last several years, starting with the ‘Illusory Promise of Stakeholder Governance’. I'll try in the course of a few minutes to summarize some of the key conclusions.

On a conceptual level, the key problem that we see is an incentive problem. If you go over the incentives that corporate leaders have and they have an array of factors that provide them incentives, they have compensation schemes, they have market for corporate control constraints, labor market constraints, product markets, and so forth. If you go systematically through this array of incentives, you have to conclude that corporate leaders have some substantial alignment with shareholders, not as much as some people would like. That's the well-known agency problem. But corporate leaders have very little alignment of interest with stakeholders, and therefore you have to conclude that corporate leaders have incentives, not only they don't have incentives to serve stakeholders but they actually have incentives not to serve stakeholder interest beyond what would serve shareholder value.

Now, there is, as anyone who looks at corporate documents or read the newspapers have noticed, there is a lot of stakeholder talk by business leaders and by corporations. There is definitely a great deal of stakeholder rhetoric, and the question is what one makes of it. We have done a significant number of empirical studies trying to look at corporate action and how it compares with corporate rhetoric. And all those papers are available on my homepage if anyone is interested. What we have found in one study after another is that the current stakeholder talk is mostly for show. It's not matched by corporate action. So starting with the first paper, we surveyed a large number of corporations that signed the Business Round Table statement. We found out that almost all of them did not have the decision by the CEO to endorse, to sign the Business Round Table statement, it wasn't ratified by the board, either before or after.

The clear interpretation to us was not that this was a governance failure but rather that this was a reflection of the fact that the CEOs did not see that this was a meaningful commitment. They viewed it more as a public relations move.

Indeed, when we then went on to look at what happened in the signatory Business Round Table companies and we looked at over 140 such companies and we tracked all the communications over the next several years. We saw that almost all of them retained to this date corporate governance guidelines that expressed a commitment to shareholder primacy. They all left director compensation, again, to this date, and director compensation is perhaps the clearest signal that the company sends to the board as to what the company wants the board to pay most attention to. So director compensation is linked substantially to stock price, and it has no connection in any of those companies to stakeholder metrics.

Lastly, a large number of companies are responding to shareholder proposals to get a report about what were the consequences of their endorsing the Business Round Table statement. They took the view that they don't need to file such reports because the Business Round Table statement didn't require them to make any changes beyond what they have been doing in the past. We then also looked at a large number of acquisitions that took place over the last two decades, in states in the United States that have constituency statutes. Those constituency statutes are kind of the best where the word stakeholder is envisioned. Those are statutes that call on corporate leaders, especially in the context of an acquisition, to look after the interests of employees, communities, and so forth and so on. They were passed with the support of unions at the time. Then we found when we went into the documents that reflected what happened in those transactions, we saw that corporate leaders generally used their bargaining power only to obtain benefits for their shareholders and often also to themselves through secure jobs or through substantial monetary payoffs. But you can't find, even though again we were able to document this, even though there were substantial risks to stakeholders as a result of the transaction, reduced labor force, and so forth, there were no deal protections for the interests of employees or other stakeholders.

We did the same thing for all the transactions that took place during the pandemic period. The pandemic period was bad in almost all respects except it was a very good period for those who practice corporate law for M&A transactions. So there was a massive number of transactions, and we saw that this was a good setting to study this issue because this was a period right after the Business Round Table statement, right after the Davos Manifesto.

It was also a period in which stakeholders were viewed as especially vulnerable. Employees, communities, and the like. So again, we went into the documents and we found that in this very large number of transactions, with an aggregate value close to a trillion dollars, corporate leaders generally did not negotiate for any material protections for any group of stakeholders but rather focused on shareholder interests and the interests of private managers.

Actually, the Twitter acquisition by Musk is a good example. We did a case study about this particular acquisition because we saw that this provides a vivid example of this point that we are trying to press because Twitter was a company that, for many years, has engaged with a great deal of stakeholder rhetoric. It had this fond label for its employees, they were called the tweeps, and the company has expressed, again and again, its commitment to look after the interests of the tweeps. It had strong commitments to other values, to the type of discourse they are trying to advance and so forth. However, when negotiating the deal with Musk, in order to get the massive premium to the shareholders and some significant private benefits to the corporate leaders themselves, we argue that the corporate leaders, and here we are not blaming Musk, Musk was maximizing his own interests. We are blaming the corporate leaders for acting in a way that was so starkly different from their own rhetoric over so many years from the commitments they have themselves expressed. We claim that they, as it were, pushed the stakeholders under the bus.

Within several months, 75% of the tweeps were out of a job, and many of them even mistreated in ways that were unnecessary. All of this is something that we explained could have been dealt with when negotiating the deal but was not.

Some of you might say that maybe the positive effects are not that large, maybe it's just the beginning and it will get better. But certainly, stakeholderism cannot hurt. Our view is that embracing stakeholderism can indeed hurt and can be counterproductive from the perspective of society and the very stakeholders that many of the stakeholderists would like to protect. There are two main ways in which embracing stakeholderism can hurt. One is by making corporate leaders less accountable to shareholders or to anyone else because stakeholderists push for giving and relying on expanded discretion of corporate leaders and, managements all over the world have been using the stakeholderist argument, to try to get more defference from institutional investors, less support from institutional investors, to hedge funds, activists, and so forth.

Their argument is we need to have some space, we need to get some defference so you can let us operate without intervention for the long term to the benefit of society. And indeed, there is some evidence that some of the business leaders who have been pushing for stakeholders and endorsing it have been partly motivated by the hope of getting this substantial defference from institutional investors. In our view, embracing stakeholderism, which means making corporate leaders less accountable to shareholders, but really not accountable to anyone else, is not going to benefit stakeholders and is not going to benefit shareholders. It's only beneficial for the private interests of managers, but not for others.

The other adverse effect is that of the spreading belief that we can count on corporate leaders to look after the interests of stakeholders, which is shifting energy from the real action, from trying to press governments to take action to protect stakeholders and trying to press companies to stop intervening in politics and channeling this energy to a lot of activism that is trying to go after companies and try to nudge them in one way or another to make commitments that, according to our studies, do not turn out to be meaningful.

If you take the example of climate change, which I know is probably in the minds of many of you. All the effort that we have to get companies to express commitments to a reduction of carbon emissions by 2050, which would be decades after the CEOs who express those commitments would be out of office, channeling all this energy in that direction is not going to move the needle. It can just have two adverse effects. One effect that people might feel, on the margin, less urgency about the situation, they might think private ordering is coming to the rescue, and we can count on it, or at least let's wait a decade and see how well it worked, and it gives some argument for the private sector towards regulators that they don't need to intervene because private ordering will take care of things.

There are now also around some versions of stakeholderism that are not managerial. I call them not managerial because they try not to rely as much on the discretion of corporate leaders. But still, what they share with stakeholderism is to try to work with the corporate governance instruments to try to rewire, so to speak, the internal corporate governance processes. For reasons that the paper will explain, none of them can really make significant difference in the effects of stakeholderism, and in the end, society would be best, and stakeholders would be best, if we leave the internal governance processes, as they have worked well, as the economic engine of our world for a long time, but just face companies through governmental reforms with the cost of the externalities they impose. And this way, make capitalism work best for society.


By Prof. Lucian Bebchuk, the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School and inaugural Fellow of the European Corporate. Governance Network

Three Conceptions of Capitalism Presentation

Recording of the 2023 Wallenberg Lecture at the Modern Capitalsim and Corporate Purpose Conference, held at the Copenhagen Business School, in September 2023.

This article features in the ECGI blog collection Responsible Capitalism

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