Prior to the outbreak of Covid-19, corporate leaders pledged to look after all stakeholders, not just deliver value to shareholders. Did they live up to these promises? A new empirical study examines more than 100 major public company acquisitions that were announced during the pandemic and shows that corporate leaders failed to look after stakeholder interests.
Support for stakeholder capitalism is at its peak. In the years immediately before the Covid-19 pandemic, business leaders, asset managers, and academics have theorized that corporate leaders can be relied on to deliver value to all stakeholders, not only shareholders. During the pandemic, amidst an health and economic crisis that heightened risks for stakeholders, business leaders and corporate advisors reiterated their pledges to look after stakeholder interests.
Writing on the website of the World Economic Forum, which issued its stakeholder capitalism manifesto just shortly before the eruption of the pandemic, Stanley Black & Decker CEO James Loree stated that “Covid-19 is accelerating stakeholder capitalism…. Companies stepped up to take care of their customers and employees … We need to stop debating whether stakeholder capitalism makes sense – and instead embrace the progress the private sector has built and continue to accelerate.” And prominent corporate advisor and stakeholderism advocate Martin Lipton stated (in a piece written with William Savitt and Carmen X. W. Lu) that “Corporate purpose is important to the recovery from the pandemic.”
But did corporate leaders deliver value to stakeholders during the pandemic? In our recently released study “Stakeholder Capitalism in the Time of Covid,” we empirically document that corporate leaders negotiating deals during this period failed to look after stakeholder interests.
We examine more than 100 public company acquisitions, with an aggregate value exceeding $700 billion, that were announced during the pandemic. We find that those deals provided large gains for target shareholders as well as for corporate leaders themselves. However, although many transactions were perceived as potentially harmful for employees, corporate leaders generally didn’t bargain for any employee protections, including any cash compensation for post-closing termination. And corporate leaders also didn’t negotiate for any protections for customers, suppliers, communities, the environment, or other stakeholders.
Our findings have implications for public policy and the heated debate on stakeholder capitalism.
Examining large corporate acquisitions during the Covid-19 pandemic is a good way to test the claims of supporters of stakeholder capitalism. Indeed, under various stakeholderist theories, corporate leaders selling their company should and could be expected to treat stakeholders nicely and share with them some of the large surplus created by the sale.
In particular, supporters of the implicit-promise theory (proposed in a well-known article by Shleifer and Summers [1988] and defended in the legal literature by Blair and Stout [1999] and Coffee [1988]) maintain that corporate leaders should safeguard stakeholders in acquisition decisions, and indeed do so, because such behavior serves the ex-ante interests of shareholders. Stakeholders, it is argued, would be encouraged to invest more in their relationship with the company, and thus to contribute to the company’s success, if they could expect to be treated well in the event of an acquisition down the road. Therefore, the argument continues, corporate value and the ex-ante interests of shareholders would be served by corporate leaders fulfilling “implicit promises” to treat stakeholders well when considering an acquisition.
Supporters of the purpose-based version of stakeholder capitalism (such as Mayer [2019]) argue that corporate leaders should and do give weight to stakeholder interests because delivering value to stakeholders is a major element of corporate purpose. According to this view, corporate leaders that follow such norms and have such a sense of purpose should and do pay attention to ensuring that stakeholders share in the larger pie produced by the sale of the company.
Both these versions of stakeholderism thus hold that corporate leaders should and do look after the interests of stakeholders when selling the firm. By contrast, the agency critique of stakeholder capitalism ((Bebchuk and Tallarita [2020], Bebchuk, Kastiel and Tallarita [2021], and Bebchuk & Tallarita [2022]) argues that corporate leaders have incentives not to protect stakeholder interests beyond what would serve the interests of shareholders. According to this view, regardless of how desirable it would be for corporate leaders to protect the stakeholders’ interests when selling the company, corporate leaders should not be expected to do so.
Importantly, the Covid-19 pandemic provides an especially good setting for testing these alternative predictions. In addition to the pervasive commitments to stakeholder value expressed by corporate leaders prior to and at the time of the pandemic, the pandemic heightened employees’ and other stakeholders’ concerns and uncertainties, thus arguably increasing their need for protection. Furthermore, shareholders enjoyed a soaring stock market and significant acquisition premiums and were therefore likely to accept the allocation of a fraction of the large acquisition gains to stakeholders. Finally, the pandemic period was accompanied by a boom in deal activity, and the deals we empirically study are economically significant.
Our dataset includes all the acquisitions of US public companies with a value in excess of $1 billion that were announced during the first twenty months of the pandemic. The acquired companies in our sample, in the aggregate, employed more than 400,000 employees and were sold for over $700 billion. For each transaction, we hand-collected and analyzed securities filings and other materials to study in detail the deal and the terms produced by it.
The deals in our sample were the product of significant negotiations. The bargaining process stretched over a long period of time, often involved multiple offers, and frequently included deal protection provisions in return for the terms extracted from the buyers. The key question, of course, is for whose benefit corporate leaders bargained.
“OUR FINDINGS CAST DOUBT ON STAKEHOLDER CAPITALISM’S EXPECTATIONS THAT CORPORATE LEADERS WOULD USE THEIR DISCRETION TO PROTECT STAKEHOLDER INTERESTS.”
Corporate leaders were able to obtain substantial premiums for shareholders, with a mean of 34 percent of the pre-deal market capitalization and aggregate value exceeding $160 billion across all deals. Corporate leaders also obtained substantial gains for themselves, both as shareholders and as executives or directors and, in many cases, they also negotiated for continuing positions after the sale.
But what about the stakeholders? We document that stakeholders faced clear post-deal risks at the time the deals were concluded. Based on our hand-collection and analysis of a wide array of press releases, Q&A sessions, conference call transcripts, investor and analyst presentations, and media coverage of the deals, we found that acquisitions were often expected, by both corporate leaders and media observers, to be followed by cost-cutting, closing or relocation of facilities and offices, and risks to continued employment of some employees.
Despite the clear and present risks to employees, corporate leaders largely did not negotiate for any protections for workers, including any payments to employees in the event of post-deal termination. We also examine the extent to which corporate leaders protected the interests of stakeholders other than employees, including suppliers, creditors, customers, local communities, and the environment. We find that corporate leaders chose to provide little or no protection to these or any other stakeholders.
Some might object that the general lack of stakeholder protections that we document could have been driven by factors leading otherwise stakeholder-oriented corporate leaders to avoid negotiating for stakeholder protections. To examine these potential alternative factors, we study several subsets of our sample, each of which lacking one of these factors, and we examine whether substantial stakeholder protections are present in each subset of deals.
In particular, we examine subsamples based on: (i) deals not driven by economic distress: (ii) deals announced in later stages of the pandemic in which economic activity was returning to normalcy; (iii) deals that received shareholder support by a large margin, so securing some stakeholder protections by reducing premiums somewhat may not have threatened obtaining shareholder approval; (iv) deals to which the Revlon doctrine did not apply; (v) deals governed by constituency statutes; (vi) deals in which the target was represented by “stakeholderist” legal counsel that could have been relied on not to discourage corporate leaders from seeking stakeholder protections; (vii) deals to purchase targets that had high Environmental, Social, and Governance (ESG) ratings and whose leaders could thus be expected to be more stakeholder-oriented; and (viii) deals with acquirers with low ESG ratings and thus might have posed especially significant post-deal risks for stakeholders. We find that each of these subsamples was still characterized by a general lack of stakeholder protections.
Finally, to explore whether our findings could have been driven by some pandemic-related factors that the above testing did not address, we also expand our data back in time and analyze the terms of a set of significant deals that closed during the year preceding the pandemic. This period, during which the Business Roundtable issued its stakeholderist statement on corporate purpose, was characterized by strong public stakeholderist rhetoric. Nonetheless, we find a pattern of lack of stakeholder protections in this pre-pandemic period similar to that documented for the pandemic period deals, suggesting that this pattern is not due to some unidentified pandemic-related factor.
We therefore conclude that our findings are best explained by the incentives of corporate leaders rather than by other factors. We also consider and respond to a number of objections to this conclusion and find them to be unwarranted.
Overall, our findings cast doubt on stakeholder capitalism’s expectations that corporate leaders would use their discretion to protect stakeholder interests. Thus, those who are concerned about the protections of stakeholders, as we are, should not rely on corporate leaders’ stakeholderist pledges but instead focus on external governmental actions that would provide real protection for stakeholders in a wide range of areas. For example, those who are concerned about the effects of corporations on, say, climate change or employee welfare should not harbor illusory hopes that corporate leaders will address such problems on their own; they should instead focus on policy solutions (such as a carbon tax or employment law). The failure of stakeholder capitalism during the pandemic should give pause to all those attracted by the siren songs of stakeholderists.
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