COVID-19 Puts Others at the Table With Shareholders

Tuesday, May, 5, 2020 by 

The argument that companies need not consider wider communities is no longer plausible.

Even before the pandemic, the view was gaining momentum that company executives should care about people beyond their shareholders. The Business Roundtable statement last August was the beginning of the end for “Econ 101” thinking that only shareholders matter — an idea that had, during the 1970s and ’80s, jumped quickly from the classroom to Milton Friedman’s popular books to actual practice.

The Covid-19 pandemic will be Econ 101’s death knell, at least for the next several years and perhaps beyond. Going forward, corporate decision-makers will need to weigh effects of corporate activity on workers, communities and others.

One early marker of the shift is the way Treasury Secretary Steven Mnuchin has called on publicly traded companies, private high schools and universities and others to turn away government support under the CARES Act, even though they technically qualify for them. Mnuchin’s stance is entirely appropriate under the circumstances. But it is fundamentally at odds with the traditional perspective, embodied in Judge Learned Hand’s oft-cited statement that no one is “bound to choose that pattern which best pays the treasury,” and there is no “patriotic duty” in doing so. Hand was referring to taxes rather than government loans, but the logic applies to both. It is a remarkable indication of Econ 101’s demise for a Treasury secretary — in a Republican administration at that — to suggest instead that just because decision-makers can do something doesn’t mean they should.

Another indication of the rise of stakeholder capitalism involves activist investors, who are especially strong advocates of Econ 101 principles. Lazard’s most recent report on activism noted a significant slowing of campaigns in recent months, and said that “as corporate behavior and priorities change in this new market paradigm, so too will activists’ ability to publicly agitate for change. Overall near-term activity is likely to remain subdued as activists face ongoing market volatility, uncertainty related to the duration and severity of the crisis as well as the risk of being criticized as opportunistic and self-serving.” Activist campaigns may return in full force, but going forward they will be conducted in a different environment.

A key reason the pandemic will shift us forcefully toward stakeholder capitalism is that the government will remain more directly involved in the economy for an extended period. With a larger role for government comes more focus on stakeholders beyond shareholders.

The Federal Reserve — through the Main Street Lending Program, the Primary and Secondary Market Corporate Credit Facilities, and the Term Asset-Backed Securities Loan Facility, along with additional programs that may be created under the CARES Act (which still has available about $250 billion in funding) — may wind up owning 5-15% of corporate debt in the economy, and a larger share of investment-grade debt. And further rounds of stimulus will probably be necessary as we cycle through additional rounds of intermittent social distancing. The government may also impose new requirements on supply chains and production facilities. An early example of this is the use of the Defense Production Act to force meat-processing plants to remain open.

Even with expanded actions by governments, however, companies will continue to play a crucial and central role. The response to the crisis has, for example, underscored the centrality of biopharma and technology firms, along with the logistics sector. The result will be a capitalism that would be familiar to Americans in the 1950s, with norms that balance shareholder interests with broader social concerns and a more interventionist regulatory state.

To be sure, none of this change will be simple. Where exactly do the government’s legitimate interests end, and how exactly should the interests of other stakeholders be weighed against those of shareholders? There will be messy disagreements, but the debate about whether or not to have them is over.

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Peter R. Orszag at

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Mary Duenwald at

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