A panel discussion with Colin Mayer, Mats Isaksson, Martin Lipton, and Ron Gilson at the Millstein Center’s Counter-Narratives Conference.
Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”
By Brea Hinricks
In his recent book, Prosperity: Better Business Makes the Greater Good, Oxford Professor Colin Mayer lays out a framework for radically reconceptualizing business for the 21st century. At the core of his argument is the idea that the purpose of business is not solely to make profits, but to “produce profitable solutions to the problems of people and planet, and in the process it produces profits.”
Mayer’s proposed law and policy reforms, which he detailed in his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), would aim to incentivize companies to create and deliver on a corporate purpose that transcends profit alone. (We discuss Colin’s presentation in greater detail here.)
Mayer debated these ideas during a panel discussion with Mats Isaksson, Head of the Corporate Affairs Division at the OECD, Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz LLP, and Ron Gilson, Professor of Law at Columbia Law School and Stanford Law School. (A full recording of Mayer’s remarks and this panel discussion is available here.)
The Unintended Consequences of Corporate Purpose: A Response by Mats Isaksson
Mats Isaksson agrees that Mayer’s ideas grapple with difficult and fundamental questions of economics and politics, and that neglect of these issues has contributed to increasing inequality and rising populism in many parts of the world. However, he cautions that there are unintended consequences which could flow from a new system where corporate purpose is central and society looks to corporations to address government failures and provide public goods.
Isaksson points out that imposing additional social responsibility on corporations will inevitably result in their demanding a corresponding increase in societal rights, including an increase in their lobbying power and influence over public policy. Leaning on corporations to provide public benefits which have traditionally been provided by governments will cause communities to become even more reliant on them for their livelihood, thereby increasing corporations’ bargaining leverage. Given the considerable amount of political and social power already wielded by corporations, this could prove problematic and would risk a further fanning of the rising populist flames.
Isaksson also wonders whether Mayer’s model would apply only to publicly listed companies, or whether he envisions instituting mechanisms to regulate privately-held companies as well. Given the decreasing number of publicly listed companies in the U.S. and elsewhere, any model seeking to reconceptualize the corporate model must take private company governance into account.
Martin Lipton’s Alternative: The New Paradigm
Martin Lipton supports Mayer’s basic views and proposals: promoting corporate purpose beyond profits, aligning that corporate purpose with social purpose, increasing the trustworthiness of companies, and recognizing the role of corporate culture in promoting purpose and trust. His disagreement with Mayer centers on implementation—legislation, he argues, is not the correct path.
Instead, Lipton has developed The New Paradigm—a roadmap for corporate governance which views it as a “voluntary collaboration among corporations, shareholders, and other stakeholders to achieve sustainable long-term value and resist short-termism.” Lipton envisions The New Paradigm and its corporate governance principles serving as a private sector solution to the problems Mayer identifies, while avoiding the one-size-fits-all drawbacks of legislation and minimally interfering with free markets and business judgment. Under Lipton’s vision, corporations, asset managers, and institutional investors can unilaterally announce (and denounce) their acceptance of and adherence to the principles of The New Paradigm.
This more informal and flexible approach could help to avoid some of the potential unintended consequences of Mayer’s scheme identified by Isaksson. Rather than burdening companies with additional social responsibilities (and therefore opening the door for their claiming additional social rights), Lipton’s approach allows companies to undertake a loftier corporate purpose voluntarily. On the other hand, the drawback is it lacks enforcement mechanisms outside of stakeholders’ shaming of companies for failing to uphold their informal promise to follow the Paradigm, since they can walk away from their pledge at any time without any legal or regulatory consequences.
The New Paradigm also addresses what Lipton views as a major shortcoming of Mayer’s approach: that large asset managers must affirmatively accept whichever mechanism is used to implement corporate purpose and changes to corporate cultures. He argues that asset managers should also “buy in” and pledge to adopt and follow the guidance set out in the Paradigm, which includes guidelines specifically targeted toward them.
Ron Gilson: Framing and Seeking Solutions Outside of Corporate Governance
Ron Gilson has concerns with both Mayer’s framework and Lipton’s New Paradigm. He argues that, fundamentally, Mayer and Lipton are each proposing a solution to the central problem of short-termism―the idea that corporations are overly fixated on short-term profits at the expense of long-term value creation―but that they have framed the issue incorrectly. Instead of a myopic concern with short-termism, principles of corporate governance should also consider that management is often simultaneously motivated to overvalue the long-term prospects of their current strategy, causing them to continue pursuing bad strategies which they hope (and sincerely expect) will turn around in the long-term. (In response, Mayer notes that he is not concerned with combatting short-termism per se and agrees that it is not clear that it is a persistently prevalent problem. Instead, his framework addresses other problems which he believes have been exacerbated by the Friedman doctrine and shareholder primacy.)
Although Mayer and Lipton agree on the need to reconceputualize corporate purpose, they disagree about whether this change should be implemented via legal constraints on management’s behavior. Gilson argues that this difference is largely irrelevant as a practical matter, since Mayer’s proposed changes would not be enforceable in any manner other than through corporate ownership mechanisms. He contends that courts will refuse to intervene to determine the correct balance of stakeholder interests in any particular situation, and that Mayer’s desire to legalize corporate purpose is therefore unrealistic.
Gilson also notes that Mayer’s emphasis on family ownership and other corporate block holders as drivers of corporate purpose could prove to be problematic, since wealth and economic power are already increasingly concentrated in the hands of the few most privileged members of society (again implicating rising populist sentiments). He argues that inequality and populism are issues of “real governance” rather than within the purview of corporate governance, and we should not try to address them through corporate governance laws and regulations. In responding to this critique, Mayer clarified that he does not believe that family owners or block holders should take primacy over all other types of owners; he simply advocates for a diversity of owners which each may be better- or worse-suited to cultivating and enforcing a corporations’ social purpose, depending on the situation.
Gilson argues that The New Paradigm’s concern with the behavior of asset managers also falls outside of the realm of corporate governance. He predicts that asset owners’ increasing concern with ESG and similar factors will lead large institutions to shift their index holdings to the most “socially-responsible” asset managers, replacing the current set of activists (concerned primarily with profits) with a new set of activists (concerned primarily with values). This will be worse than the status quo, Gilson argues, because management and boards can objectively understand the current set of activists’ motivations (again, shareholder profit) and effectively negotiate with them to make deals. Conversely, it will be much harder to determine the “best” outcome in the eyes of activists motivated by values, ESG and societal concerns, for which success is harder to measure and more complex to define.