While on the campaign trail, Joe Biden declared his intentions to advance a new, more just and sustainable form of capitalism.
“It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders,” Biden declared. For such an idea is “an absolute farce. They have a responsibility to their workers, their community; to their country.”
Biden’s bold declaration to end the rule of profit above all else is part of a growing desire among Americans — and even many corporations and investors themselves — to make the business world more inclusive, fair, and sustainable and leverage the power of the private sector for good. But transforming an entrenched system of profit-driven capitalism to one of stakeholder capitalism will require more than talk. It will require the hard work of passing concrete legislation — legal reform to hold corporations accountable.
So far, two months into Biden’s presidency, that appears nowhere in sight.
What we are seeing instead is a noble, though weak, push — both within the private sector and in public spheres — to increase corporate reporting of environmental, social and governance (ESG) performance. In other words, to encourage companies to publicly disclose how their actions are affecting the planet, employees and the communities they serve.
Many leading investors such as Larry Fink of Blackrock have called on companies to disclose their climate impacts. And at his confirmation hearing, SEC Chair nominee Gary GenslerGary GenslerGOP senator probes San Francisco Fed research on climate, race Toomey presses SEC for answers on climate, ESG agenda The Hill’s Morning Report – Presented by the National Shooting Sports Foundation – House passes relief bill; Biden set for prime time address MORE said the SEC should seek more climate-risk disclosure from companies.
On the surface, increased ESG reporting seems like a step forward. But in reality, it is only a half-step at best. The crux of the issue is described in Gensler’s testimony: “It’s the investor community that gets to decide what’s material.” That means the standard for what’s disclosed is if it affects the companies’ financial position.
This “materiality” standard is problematic for a few reasons. First, it prioritizes financial shareholders as the most important constituent. This is not stakeholder capitalism and even runs counter to the position of elite American CEOs of the Business Roundtable who have declared that companies should deliver value to a broad set of stakeholders including employees, communities and the environment.
A second issue is because the economic effects of “E” factors like carbon emissions are easier to determine than “S” and “G” factors such as board-level and workforce diversity, equity and inclusion, the “E” part of ESG will be over-emphasized. Yet from society’s perspective — and if we are to take stakeholder capitalism seriously — “S” and “G” are just as important as their “E” counterparts.
While the intentions may be admirable, ESG reporting as currently conceived is only playing into the trend of big stakeholder talk, with modest stakeholder action, and will do little to correct the situation President BidenJoe BidenThe Hill’s Morning Report – Biden may find zero GOP support for jobs plan Republicans don’t think Biden really wants to work with them Lack of cyber funds in Biden infrastructure plan raises eyebrows MORE discussed on the campaign trail.
The fundamental issue that remains unaddressed is that there are deeper, structural roadblocks to companies achieving stakeholder capitalism that need to be addressed by legal reform of corporate governance, not by ESG reporting, or voluntary initiatives of companies.
To meet his campaign promises, President Biden’s administration needs to go further in creating new legal frameworks to hold companies accountable and recognize stakeholders in the legal foundation of the company.
Under our current system of corporate governance, companies may choose to prioritize stakeholders, but only if it is in the interest of the shareholders. And obviously they also may not. To effectively shift the system to a stakeholder model, we need to shift from the language of “may” to one of “shall.” That is, companies must have explicit legal responsibility to consider stakeholders, not just an option they may choose only if it is in the long-term interests of shareholders.
Such language is already present in benefit corporation legislation that has passed in 38 U.S. states and a number of international jurisdictions. Benefit corporations must explicitly state a purpose for the corporation beyond profit — and have their social and environmental impacts openly assessed against a credible third-party standard. Recently, U.S. companies Amalgamated Bank (NASDAQ:AMAL) and Veeva Systems (NYSE: VEEV) have taken shareholder votes — both passed with 99 percent support — to change into this type of company, suggesting investors are starting to see the value of stakeholder capitalism too.
President Biden must move beyond the current era of talk and make his statements truly actionable. For instance, Sen. Elizabeth WarrenElizabeth Warren33 Democrats urge Biden to shut down Dakota Access Pipeline The Hill’s Morning Report – GOP pounces on Biden’s infrastructure plan Biden risks first major fight with progressives MORE’s (D-Mass.) Accountable Capitalism Act, introduced in August 2018, would require all corporations with more than $1 billion in revenue to adopt corporate governance like the benefit corporation structure. The only way that we will convince businesses to do good and move away from profit maximization as a primary focus will be by holding them legally accountable to do so.
Christopher Marquis is professor of sustainable global enterprise at Cornell University’s SC Johnson College of Business and author of “Better Business: How the B Corp Movement Is Remaking Capitalism” (Yale University Press, 2020).