March 23, 2023

Volume XIII, Number 82

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Decisions, Decisions - The Thorny Problems At The Heart Of Stakeholderism

In yesterday's post, I highlighted a new discussion paper arguing that Twitter's leaders through its stakeholders "under the bus" in favor of the interests of the stockholders.   According to the authors, stakeholder governance "refers to the increasingly influential view that corporate leaders should be encouraged and relied on to use their discretion to serve stakeholders and not only shareholders".   Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo, How Twitter Pushed Stakeholders Under The Bus, 25 (Jan. 2023).  

It is easy to assert that directors should serve the interests, but it is very difficult to define how they should do so.  Often there will be many potential stakeholders such as employees, customers, the community.  In some cases, the interests of these stakeholders may be attenuated  and difficult to identify.  Even when the set of potential stakeholders can be accurately determined, how should their interests be weighed?  Some may be tempted to apply the test of pareto efficiency - i.e., directors may approve only those transactions in which at least one stakeholder is better off and no stakeholder is made worse off.  However, this may not result in the most efficient allocation of resources.  Thus, some may opt for Kaldor-Hicks efficiency - i.e., directors may approve only those transactions in which the gain of some stakeholder(s) outweighs the pain of the other stakeholder(s).  

Pareto efficiency and Kaldor-Hicks efficiency are economic theories, not legal standards.   If legislatures or courts impose stakeholderism on corporate boards, will either of these theories become the rule of decision or will some other rule be fashioned?  Today, directors at least know whose interest they serve and must advance.

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XIII, Number 27
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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