Lynn Stout, Pro-sociality, and the Campaign for Corporate Enlightenment

Table of Contents

1. Battling the Enemy

2. Shifting Battle Lines

3. Human Nature

4. Stable Stakeholders?

5. Remembering and Looking Ahead

6. References

The Corporate Issue: A Tribute to Lynn Stout

1. Why Lynn Stout Took Up the Sword Against Share Value Maximization, by Margaret Blair, https://doi.org/10.1515/ael-2020-0083.

2. Beating Shareholder Activism at Its Own Game, by Margaret Blair, https://doi.org/10.1515/ael-2019-0040.

3. Ownership (Lost) and Corporate Control: An Enterprise Entity Perspective, by Yuri Biondi, https://doi.org/10.1515/ael-2019-0025.

4. The Shareholder Value Mess, by Jean-Philippe Robé, https://doi.org/10.1515/ael-2019-0039.

5. Executive Pay and Labor’s Shares: Unions and Corporate Governance from Enron to Dodd-Frank, by Sanford M. Jacoby, https://doi.org/10.1515/ael-2019-0073.

6. How America’s Corporations Lost Their Public Purpose, and How it Might be (Partially) Restored, by David Ciepley, https://doi.org/10.1515/ael-2019-0088.

7. The Contest on Corporate Purpose: Why Lynn Stout was Right and Milton Friedman was Wrong, by Thomas Clarke, https://doi.org/10.1515/ael-2020-0145.

8. Lynn Stout, Pro-sociality, and the Campaign for Corporate Enlightenment, by Donald Langevoort, https://doi.org/10.1515/ael-2020-0067.

1 Battling the Enemy

The contributions to this CONVIVIUM tribute to Lynn Stout and her work focus mainly on what she had to say about the purpose of the corporation, and the institutional mechanisms for best serving that purpose. She was absolutely clear about the shareholder primacy and all its champions in academia and out in the real world occupy a swamp that has to be drained. Her campaign was to give corporate directors and managers the autonomy to pursue long-term value, coupling enlightened corporate interests with broader societal interests, banishing forever cares about short-term profits and high stock prices.

In this brief essay, I want to call something else Lynn was passionate about: building a better account (both theoretical and empirical) of human nature and motivation. This was the subject of a book that extended well beyond the corporate world (Cultivating Conscience [2011]) and was implicit in her most complete set of thoughts about corporate governance, The Shareholder Value Myth (2012). Lynn understood that such a behavioral account was needed to support her theory of corporate purpose. The main CONVIVIUM contributions say little about this aspect of her work, so I am bringing her thoughts about human motivation frontstage.

Lynn was also intensely interested in the politics of corporate governance. She wanted her ideas to matter to those with influence. As I began to write this essay, I thought about a corporate governance seminar I taught a couple of years ago. On the first day I presented my students with a Game of Thrones-style map of the “governance wars” on-going in both academia and the real world. I divided the contested territory into encampments under three main banners: shareholder primacy, stakeholder primacy and managerialism. The first two represent either soft or hard constraints on managerial choices that favor one or the other category of claimants. The third (managerialism) is more complicated. Pure managerialism embraces economic freedom and self-accountability, without being beholden to either shareholders or stakeholders. Corporate libertarianism, in other words. Fervent managerialists invoke the greater good in Hayekian terms of what they create via this freedom, without accepting accountability for much beyond compliance with positive law. To them, competitive markets provide all the discipline needed.

Over the course of the semester, we would read contemporary works by prominent corporate academics. The students would be expected to point to where each author could be best situated on the map, and where they might either clarify or muddy the stakes along different fronts. What alliances with other powers might help their champions gain power without too much compromise, for example?

As a start I had my students read competing excerpts from work by Lucian Bebchuk and Lynn Stout. Bebchuk, of course, is the academic exemplar for shareholder primacy, fighting for stronger shareholder rights and managerial accountability. Lynn was a bit harder: committed to stakeholders, but believing that managerial autonomy in the name of team production is a direct pathway to corporate social responsibility. In this sense, she was in her own place, albeit with many very committed and enthusiastic adherents, trying to forge a strong alliance between like-minded forces from other encampments to isolate and take down shareholder primacy. Most of my students were soon rooting for her side.

2 Shifting Battle Lines

Sadly, Lynn did not live to see the battle of ideas play out over the last couple of years. As Thomas Clarke describes in his very thoughtful contribution to this CONVIVIUM, there have been some recent moves that would have made her happy, including the Business Roundtable’s dramatic pivot away from shareholder primacy toward stakeholder interests. An alliance between the stakeholder and managerial camps is an uneasy and perhaps disingenuous one, however, which Clarke also acknowledges. Many shareholder primacists, including Bebchuk, have declared it blatantly political and deceptive. The managerialists are simply looking for higher ground from which to defend their privilege, and thus more willing to applaud the stakeholder enthusiasts without any attention of giving up their goal of managerial autonomy. If the shareholder primacy troops are stalemated or beaten back, the convenient alliance will fall apart.

Lynn was convinced that shareholder primacy needed to be defeated and that both society and long-term shareholders would be far better off as a result. The shareholder primacy response, repeated and updated recently by Bebchuk and Tallerita (2020, forthcoming), is essentially behavioral: if given that much more freedom from shareholder claims and demands, managers will simply serve their own self-interest, appropriating more of the rents. She thus needed to counter the self-interest claim.

In contrast to some of the sociologists who write about the false consciousness of shareholder primacy, Lynn did not simply assume that simply by extinguishing that belief, managers would spontaneously revert to a more pro-social agenda. To be sure, if American or global politics somehow generated an unprecedented public demand for a well-defined form of corporate social responsibility, that unified power might, for a time at least—such as in the aftermath of pandemic devastation—pressure managers to obey (As Lynn and the sociologists often pointed out, there was a period of time just after the Great Depression and World War II when there was evidence of “enlightened managerialism.”)

3 Human Nature

Not wanting just to assume the solution via reference to hoped-for social and political changes, Lynn took a bolder step. She became deeply immersed in the study of human behavior and the evolution of cooperation, ingesting insights from social and cognitive psychology, sociology, neuroscience, primatology and whatever else could help support the prediction that given sufficient autonomy to act responsibly, with the right social cues—most people will do so.

In The Shareholder Value Myth (2012), Lynn puts pro-sociality to work mainly at the level of the individual shareholder, i. e., that shareholder pro-social preferences deserve a voice they now lack whether they invest directly or though intermediaries. But as her earlier work with Margaret Blair had shown, it also connects to boardroom behavior (2001a2001b). Thus it would not be necessary for a strong external norm of corporate social responsibility to emerge victorious from the governance wars or social catastrophe to generate pressure; communicating trust and an expectation of wisdom on the part of the “mediating hierarchs” will often be enough to inspire it. This is a version of “you get from people what you expect from them.” By expecting selfishness, we normalize it and make it more likely. What has to go, then, is the legitimizing of Wall Street beliefs—like many interested in the subject, Lynn would often point to the widely-reported social psychology experiment that showed an increase in cooperative behavior simply by naming the exercise the Community Game rather than the Wall Street Game (Liberman, Samuels, & Ross, 2004).

Lynn was strongly committed to the research on pro-sociality and altruism, but not to an extreme: she repeatedly acknowledges that human beings have Jekyll and Hyde tendencies. After all, choices that are reshaped simply by changing the name of an experiment suggest weak dispositions, not strong ones. She was aware of the view of many scientists that pro-sociality is connected to in-group/out-group bias, with altruism far more prevalent in homogenous networks of kinship and community than with respect to outsiders who compete for status or resources. My own view, at least, is that top managers in public companies view shareholders and stakeholders as out-groups (Langevoort, 2020, p. 403). And Lynn knew that corporate officers and directors may not exhibit normal human traits but rather abnormal ones that facilitate their difficult climb to the top of the global hierarchy. Intense competition does not usually incite selflessness (Langevoort, 2016, pp. 146–48).

This suggests to me two things worth emphasizing about Lynn’s approach to human behavior in the web of corporate governance. First, she was assuming a societal norms change strong enough to dislodge shareholder primacy, which would persist thereafter in the form of public expectations of corporate social responsibility. That would create at least a soft discipline to shame those caught in self-aggrandizement or the enrichment of cronies—a nudge in the direction of good behavior. As Margaret Blair notes in her contribution to this CONVIVIUM, institutional investing on behalf of enough individuals and households extending along the whole stock market (universal investing) would support the capacity to nudge effectively in society’s name, even if it didn’t go as far as Lynn’s bold proposal. We see this possibility in the rise of institutions like BlackRock and Vanguard a dominating indexers, where portfolio managers surely must be sensing that their vast potential power eventually invites political backlash if not exercised responsibly in accord with public and political expectations. As described in Thomas Clarke’s account, the biggest institutional investors are starting to speak the language of stakeholder responsibility, perhaps as a defensive maneuver or rhetorical cover-up.

The second thing to see is that Lynn’s emphasis on pro-social behavior was also tactical. Her work aimed at public policy as well as academic discourse, and she was aware that managerialists in the real world fear strong stakeholderism more than moderate shareholderism—hence the Business Roundtable’s until-recent embrace of shareholder primacy so long as the business judgment principle gave them a workable locus of control over the decisions that count and kept their massive pay packages heavy on equity. She had a natural audience in powerful members of the legal profession who serve incumbent managers, like Martin Lipton, who appreciated her attacks on strong shareholder primacy and would welcome a vision of managerial autonomy that portrayed boards of directors as platonic guardians. Lynn thus sought to embolden the militants in the managerialist camp, calling on them to reject appeasement with the forces of shareholder authority. The language of pro-sociality in the exercise of power would resonate.

4 Stable Stakeholders?

As we shall see, the shareholder primacy community in both academia and the corporate world wanted nothing to do with human potential, steadfastly painting managers as self-aggrandizers unlikely to serve any interests but their own. Before that, however, it is worth looking more closely at the stakeholder forces, who vary considerably in how best to fight the governance wars. There are many hardliners—veterans of frustrating decades of fighting for real social responsibility—who simply do not trust managers or the political system that enables their power. Soft solutions do not work; expecting the spontaneous emergence of altruism just because shareholder primacy is weakened is laughable.

The stakeholder community is itself a coalition of interests and strategic preferences as to corporate governance. The hardliners want hard-fisted power and legal accountability for managers who lose sight of the public good. Even before her presidential campaign, Elizabeth Warren proposed legislation that would federalize public corporations and create an executive branch agency of corporate oversight with dramatic powers including revoking the charters of those large firms that abuse the public trust. Moderates think much can be accomplished via greater environmental, social and governance transparency, including (as both Yuri Biondi and Jean-Philippe Robe propose in their contributions to this issue) committing the efforts of accountants and auditors to matters of long-term corporate sustainability, without archaic distinctions. Lynn favored at least the transparency part as a nudge to the better behavior she was anticipating once shareholder primacy (with its relentless focus on stock prices) was displaced, and may have been open to tougher discipline. What I am sure of is that she wanted the stakeholder alliance to quit internal squabbling (and excessively hard threats) in the name of defeating or converting shareholder primacy once and for all, with aid from at least some managerialist forces. Questions of how to subdue any anti-social managerial impulses in a fresher setting should wait for that battle to be won.

There are other internal tensions in the stakeholder camp. Labor interests are strong, as Sandy Jacoby’s contribution examines, but somewhat conflicted: labor is also a large institutional investor block through its union pension funds, and thus not quite as likely to take to Lynn’s desire to push back too hard against shareholder power (Labor also has a long-standing antipathy to management, of course; Warren’s bill would guarantee it board seats). And labor’s agenda is naturally focused especially on workplace rights. Others stakeholders may well prioritize other efforts, particularly climate change. To be sure, there is room to cooperate, but coalitions and compromises may not be all that durable. Many of the interests might be more inclined to sue for peace with the larger institutional investor community, especially as it indicates a willingness to work for social goals, too. But the investor community won’t cede primacy. Shareholders and stakeholders are unnatural allies, but managerial power might require that uneasy coalition to succeed. If so, shareholder rights and powers—if not the rhetoric of shareholder primacy—would be harder to dislodge.

One thing that has helped sustain the stakeholder coalition is a liberal-progressive political agenda: climate change and worker rights have their natural home in Democratic politics, a base for including diversity, greater income equality, etc. That is also a back channel connection to an important segment of institutional investors as well. But there are new invaders on our battle map, distinctly anti-progressive but open to using the levers of corporate governance to demand that managers pledge allegiance to the nation and its self-interests. These populists are extremely distrustful of the institutional shareholder community and the upper-income elites it mainly serves. This is a fairly underdeveloped political movement so far, but there are unmistakable signs of growth, which if it continues might recall the image of barbarians at the gate invoked in the early days of the governance wars. That could threaten the stability of the stakeholder coalition, perhaps impelling the shareholder and managerial forces to join in mutual self-protection. Indeed, Mark Roe has written about the large-firm preference for Delaware law in terms of placing the making of corporate law in a jurisdiction especially uninterested in populist rabble-rousing, from the left or the right (Roe, 2005). Oddly, the right set of breaks in the battling to subdue the invaders, could lead to a managerialist solution to maintain the peace, something not far from what Lynn would want. But that is just one of many future directions the governance wars could take. Since I am writing this comment in the midst of a still-growing pandemic, I’ve been looking back and asking what plagues do to battle lines and encampments, and perceptions about what is truly at stake.

5 Remembering and Looking Ahead

The principal-agent theory from which shareholder primacy derives was famously wedded to the classical economic model of human behavior: the pursuit of self-interest. Lynn’s alternative theory of pro-sociality under conditions of trust took direct aim at this dismal vision. While some notable contemporary economists have expanded their behavioral expectations in a variety settings, those who focus on financial markets tend to stay close to convention on the assumption that those who deviate from relentless and rational self-interest will be weeded out of the competition.

Hence the critique of corporate law stakeholderism put forth by scholars like Bebchuk, who was particularly bothered by the Business Roundtable’s recent pivot. The principal claim is that the forces that incentivize managers in the labor market are just too strong as against soft efforts such as authorization to consider other stakeholder interests. When sensitivity to stakeholders is value maximizing, they are free to pursue it. They don’t need encouragement, either: “Supporters of enlightened shareholder value have not provided any evidence that corporate leaders suffer from a cognitive bias that leads them to systematically under-estimate the relevance of some factors (namely stakeholder effects) but not others” (Bebchuk & Tallarita, 2020, forthcoming).

Both Lynn and I might disagree with this point about bias. There is plenty of empirical research on myopia and other traits that narrow the scope of what constitutes good business judgment, driven by prevailing norms and expectations. The well-documented motivated inference bias predicts that choices will reflect prevailing values and preferences, often enough, the status quo. When the status quo is short-termist, it naturally restricts the choice architecture, and privileges voices that conform. Once again, we get the behavior we expect; self-fulfilling prophecies abound.

As to the strength of the incentives managers face, we would probably both agree to an extent. As an academic, Lynn was seeking to demonstrate that shareholder primacy was a false god and a destructive one, to undermine the conventional view. That would be a first step (by no means sufficient in and of itself) toward its social and political rejection, which would in turn prompt a reordering of incentives. Lynn was arguing that what we know about human nature would enable this transition more easily than cynics think: de-normalizing the assumption of self-interest would produce the trust that was the predicate to her optimism about director and manager behavior. We can’t reject her claim simply by saying that, under current institutional norms and practices, we observe little in the way of pro-sociality. She is trying to disrupt those norms and practices.

So that step in her argument matters a lot. If managers are more naturally inclined toward selfishness absent a strong in-group pull, they will need a stronger discipline. Bebchuk thinks a strengthened form of shareholder primacy is necessary and would be sufficient, but that requires rejecting the stakeholder alternative within corporate law (though he acknowledges the legitimacy of promoting the public good through efficient forms of positive law and regulation).

If Lynn is wrong about human nature’s potential, society’s choice as to corporate governance is either Bebchuk’s solution or some higher intensity form of stakeholderism. Maybe a strong culture shift toward a shared commitment to survival in the aftermath of the modern manifestation of the plague that the world is facing would step up the demands. But that seems overly optimistic. If that is not enough, it could come through legislation or administrative fiat, be it from the left (Senator Warren’s bill) or the right.

I may be a little less sanguine about human behavior than Lynn seemed to be, and decidedly unenthusiastic about the more authoritarian solutions on the stakeholder side. Thus I anticipate that much good will come from innovations in how society measures and publicizes the economic costs of selfishness and the value of cooperation, and by expanding the diversity of voices in the boardroom and executive suites. Beyond that, let’s hope that she is right about innate human potential and the possibility of change.