Lynn M. LoPucki
For more information about this Project email firstname.lastname@example.org
Lynn M. LoPucki is the Security Pacific Bank Professor of Law at the UCLA Law School
What is the Stakeholder Takeover Project?
The Stakeholder Takeover Project is a plan for corporate stakeholders to use their market power to force corporations to act in socially responsible ways. A corporation’s stakeholders are the employees and managers who work for it, the customers who buy from it, the suppliers who sell to it, the lenders and investors who provide its capital, and the communities in which the corporation does business. To act responsibly means to act in a manner that saves the planet, preserves the environment, provides meaningful and secure employment, respects human rights, treats people fairly, and improves peoples’ lives.
The project is based on five premises:
- People want corporations to change.
- Stakeholders have the power to force change.
- Change requires standardized information.
- The ESG information system is nearly complete.
- Stakeholders need to act now.
Public support for CSR may be as high as 80%. Studies show that large majorities of customers are willing to pay more for the products and services of responsible corporations. Fifty-five percent of surveyed Americans say they would take a pay cut to work for a responsible company. Forty-four percent “worry a great deal about climate change” and twenty-six percent of total US-domiciled assets under management are invested using socially responsible investment strategies.
They supply all the corporations’ resources. Acting collectively, stakeholders can change corporate behavior by preferring responsible corporations in all their dealings—as customers, employees, suppliers, communities, investors, and credit extenders.
To prefer responsible corporations, potential stakeholders must know which ones they are. That information must be accurate, comparable across corporations, tailored to the potential stakeholders, easy to use, and available at the point of decision making.
The Global Reporting Institute (GRI), Sustainable Accounting Standards Board (SASB), and other non-governmental organizations have promulgated competing reporting standards. The Securities Exchange Commission is considering a proposal to require public companies to report fully to GRI, SASB, or some other set of standards. The Wall Street Journal predicts that the new requirements may be effective “as early as 2022.”
(I am a recent convert to this view.) Stakeholders need to insist that the reporting standards chosen will provide all stakeholder groups, not just investors, with the information they need to effectively express their preferences in market choices. Once a set of standards are chosen, they will be difficult to change.
An effective information system would enable stakeholders to control corporations. The ramifications are huge and complex. Stakeholder control would extend potentially to any change in corporate behavior for which data are furnished and wide stakeholder support exists.
What are the Objections?
So far, there are thirteen: (Click on each objection to view its response.)
- CSR can’t be ranked. Corporate social responsibility is too subjective to be captured meaningfully in numerical data.
- Corporations won’t participate. Corporations will not voluntarily report to standards that disadvantage them.
- Corporations will resist. Corporations will not voluntarily give up their control.
- Corporations will cheat. Corporations would be collecting and reporting their own social responsibility data. They will cheat.
- Corporations will obfuscate. Corporations will use their financial clout to confuse potential stakeholders about which rating and ranking systems are best.
- Corporations will evade. Corporations will respond to the ESG information system strategically. For example, instead of curbing their emissions, corporations may divest their emitting operations to unaffiliated nonreporting corporations.
- Cost. Corporate social responsibility is going to cost more, and customers won’t pay it.
- Stakeholders lack competence. Stakeholders are not competent to make corporate decisions.
- Stakeholders lack power. Stakeholders don’t have enough financial power to change corporate behavior.
- Stakeholders are divided. Corporate social responsibility will be divisive, as illustrated by the controversies over athletes kneeling during the national anthem and voter identification laws.
- Markets are undemocratic. To ensure everyone an equal voice, governments, not markets, should control corporations.
- Repurposing will harm corporations. The corporation is a highly successful institution. Tinkering with it may destroy the corporation’s effectiveness.
- Repurposing hasn’t happened. If stakeholders could control corporations, they would have done it already.
Some aspects of corporate social responsibility cannot be captured meaningfully in numbers, but others can. GRI, SASB, and dozens of other organizations have proposed hundreds of standards that make it possible to measure aspects of corporate social responsibility both meaningfully and numerically. Many of those standards specify how the reporting corporation must calculate a quantity.
For example, GRI standard 302-1 requires the corporation to report “the total energy consumption within the organization, in joules or multiples” and “the total fuel consumption within the organization, in joules or multiples.” The corporation must break that consumption down by “fuel types used” including whether the type is renewable or nonrenewable.
Similarly, GRI standard 416-2 requires that, with respect to the health and safety impacts of its products and services, the corporation report “the total number of . . . incidents of non-compliance with regulations resulting in a fine or penalty.” Whether or not the data are adjusted for the corporation’s scale or industry, both these numbers would be comparable across corporations and meaningful.
Hundreds of nonprofit and for-profit organizations are already digesting corporations’ social responsibility reports and comparing the corporations’ levels of social responsibility. Organizations publishing rankings include Newsweek magazine, Barron’s magazine, GreenPeace; organizations publishing ratings, include CDP and CSRHub. My ranking of S&P 500 companies based on greenhouse gas emissions reported to the EPA is here.
First, public companies may have no choice. The Securities Exchange Commission is discussing a proposal that would require each public company to fully report to a third-party set of standards of their choice or to explain why they do not.
Second, corporations will voluntarily report if the consequences of not reporting are worse. Once a core of large, public companies reports to the same set of standards, the corporations that report will appear at the top of the rankings and those that do not report will appear at the bottom. (This already occurs.) If stakeholders respond to the rankings by favoring the reporting companies, the non-reporting companies will be pressured to report. Unless government mandates comprehensive reporting, the reporting decision will not be all or nothing. Companies strong on human rights can report only on human rights; companies that provide good working conditions can report only on working conditions. The more corporations report and the stronger the public response to reporting, the greater will be the pressure on nonreporting corporations to start reporting.
First, they don’t have to. Shareholders, directors, and officers will continue to make the corporation’s decisions. Those decisions will be constrained by the stakeholders’ market decisions, but that is nothing new.
Second, by publishing corporate responsibility reports and asserting in advertising that they are responsible, corporations have already accepted responsibility as the right path. The information system need only force corporations to actually do what they claim to be doing already.
Third, corporations have no clear reason to resist. CSR gives officers and directors the opportunity to be the good guys. Most will welcome that opportunity.
Lastly, although corporations are dragging their feet on CSR reporting, they are increasingly reporting to third party standards.
Corporations collect and report their own financial data, and sometimes they do cheat. Corporate cheating on social responsibility reporting will be controlled by the same methods used to control corporate cheating in financial reporting. Independent third parties—including CPAs—will audit the reports. Governments will regulate, whistleblower protections will apply, and shareholders and other injured parties will bring class actions against officers and directors caught cheating. As with financial reporting, social responsibility reporting won’t be perfect, but it will be adequate to do the job.
Corporations that lose under the best rating and ranking systems may apply their superior resources to promote inferior systems under which they win. Arguably, corporations have done that in automobile rating and bond rating. Producers funded second-best raters and enabled them to dominate. That may occur with respect to corporate social responsibility rankings even after reporting is standardized. An important difference, however, is that some of the information used to rate automobiles (repair records) and bonds (the quality of the mortgages in particular mortgage pools) is not publicly available. Corporate CSR rankings can be based solely on publicly available data. They can be entirely transparent and also cheap and easy to compile. Public debate may enable the public to reach a consensus. That consensus will not be that a single corporate responsibility ranking is best. It will be that a single corporate responsibility ranking is best for stakeholders with a particular set of values. No single ranking system may or need dominate.
Corporate strategic response is not a bug in the system, it is the method by which the system works. Divestment is a strategic response that proves the system is effective at changing corporate behavior. The system should be designed to channel that response toward “evasions” that increase CSR.
Divestment of emitting operations doesn’t solve the emissions problem, but it does make the problem easier to solve through regulation. Corporations that have genuinely divested their emitting operations (not transferred them to a supplier) no longer have any reason to oppose emissions regulation.
If the emitting operations in this example remain in the corporation’s supply chain, good standards require the corporation to report those emissions. Another possibility is that the stakeholders of nonreporting corporations or the government can require nonreporting corporations to report.
Corporate social responsibility may or may not cost more. Companies are already spending billions of dollars annually to make corporate social responsibility disclosures; effective disclosures may cost no more. Reducing greenhouse gas emissions and other forms of pollution is expensive; but living with the consequences of emissions and pollution and litigating over them may be even more expensive. Even if corporate social responsibility does cost more, numerous studies have shown that customers are willing to pay more for responsible companies’ products and services. Employees are also willing to accept lower pay to work for responsible companies.
True, but stakeholders won’t be deciding what products or services corporations should make or how much corporations should pay their executives or employees. Stakeholders will make only the decision they have always made—what products or services they want to buy and from whom, what employers they want to work for, what corporations they want to invest in, and what corporations they want to attract to their communities. Stakeholders already decide whether to use their market power to reduce greenhouse gas emissions, eliminate air and water pollution, punish corporate lawbreakers, eliminate child and forced labor, improve employee working conditions, or accomplish something else. The difference will be that they have much better information.
In theory, stakeholders could force corporations to pay so little for corporate CEOs, that corporations could not hire competent ones. In reality, there is no danger of that occurring. CEO pay is set by insiders, not markets. It would not be in the interests of those insiders to cut pay below the levels needed for optimal corporate performance.
Corporate directors, shareholders, and managers will continue to decide how to achieve corporate goals. But stakeholders will be setting those goals.
Stakeholders as a group have complete power over the corporation, because they price and provide 100% of the corporation’s resources. If they don’t like the behavior of the corporation with which they are dealing, any or all of them can shift their business to some other corporation. Some customers may be so financially constrained that they must buy for the lowest price available. But even those customers may have a choice among sellers at that lowest price.
Some corporate responsibility issues are controversial and so are divisive. But others, such as reducing greenhouse gases and other forms of pollution, obeying the law, providing safe working conditions, not benefitting from forced labor, maintaining a diverse workforce, and safeguarding human rights have widespread public support. Those are the issues on which reporting will be required. Reporting on controversial issues would be pointless. It would not enable stakeholders to change corporate behavior because the corporation would both gain and lose from any stance it takes.
When a consensus exists among voters in favor of socially responsible corporate action, government should require it and enforce those requirements. Government does not, however, appear able to do that. Corporations exercise substantial control over government. If government does require corporate social responsibility, its requirements will displace the market control advocated here. Until then, stakeholder markets have the potential to do what government cannot. The government remains free to do what it can.
Experts disagree on the corporation’s purpose. Some believe the corporation’s purpose is merely to make money. Others believe corporations determine their own purposes, and those purposes include providing stakeholder and public benefit. Whatever the corporation’s purpose, the Stakeholder Takeover Project does not propose to change it. Corporations are welcome to try to make as much money as possible for shareholders. Once an effective information system is in place, corporations will have to conduct themselves in a manner satisfactory to potential stakeholders to make that money. That is nothing new. Corporations have always made their money by satisfying stakeholder preferences. What is new is that the ESG information system will enable stakeholders to know which corporations are serving their environmental and social preferences and to what degrees.
To prefer socially responsible corporations in their transactions, stakeholders must know which corporations they are. The system that will provide that information is almost entirely in place, but not yet effective. It will become effective only when a substantial number of corporations report to the same set of standards. If no single set of standards emerges, the government may choose a set of standards.
What are the Next Steps?
I am working on five projects:
- GHG Emissions Project.
- CSR Reporting Project.
- GRI-SASB Comparison Project.
- ESG Benefit Estimation.
- Corporate Purpose (Legitimacy) Project.
To demonstrate the feasibility of ranking based on readily and publicly available information (Objection 1, above) I ranked S&P 500 companies based on the greenhouse gas (GHG) emissions they reported to the EPA. The rankings are here. I chose the EPA data as the basis for ranking because GHG emissions reporting is mandatory and the emissions are of sufficient importance that potential stakeholders might use them in their decision making.
The EPA’s data are for about 8,000 high-emission facilities and so include about half of all GHG emissions in the US. Matching facilities to companies was difficult and time consuming. I was able to match 132 of the S&P 500 to reported emissions. The other 368 companies “tied for first” by having no reportable emissions.
I found the data inadequate for ranking companies in the same industry. The problem is that neither companies nor facilities are in a single industry. For example, Freeport-McMoRan’s primary industry is metal mining. That company also operates in other industries and has interests in facilities that have different primary industries. I can think of no need that would be filled by rankings of metal mining companies on the basis of emissions unrelated to metal mining.
The dominant GHG emissions ranking systems for companies is the Climate Accountability Institute’s Carbon Majors Project. That project ranks the one hundred largest fossil fuel producers worldwide. Their data are “principally obtained from publicly available sources, but some of the data are proprietary and some are estimated.
My project is to (1) post the rankings of the 132 companies that own facilities and (2) write an article explaining the value of that ranking and exploring the feasibility of separating ranking by industry. The impracticality of ranking by industry is important because most SASB reporting requirements vary by industry classification. I do not yet fully understand how SASB addresses the industries problem. The next step will be to compare SASB’s industry classification systems to the classification system employed by S&P and EPA.
This project is to collect the CSR reports of the S&P 500 companies and analyze them to determine the current state of CSR reporting. One study would compare GHG emissions data from the reports to GHG emissions data from the EPA. Another would determine how often companies provide third-party assurances (audits) of their data. A third will be to examine the accuracy of the companies’ claims to be reporting to GRI and SASB standards. A fourth will be to identify issues on which the reporting is sufficiently standardized that it can be used effectively for comparison of CSR performance. I think the study would be likely to discover unexpected patterns in the reporting and strategies that the companies are employing to improve their CSR ratings and rankings.
The SEC may issue a rule requiring public companies to adopt a standard set and report to it “fully.” Essentially, that means the corporations will be choosing GRI and SASB reporting standards. This project would compare the most important GRI and SASB standards to determine whether rankings based on the data generated by them would serve the needs to stakeholders other than investors. Those standards would include GHG emissions, air and water pollution, legal compliance, supply chain responsibility, and managerial diversity. The purpose of the study is to facilitate the choice between GRI and SASB, whether the choice is made by the SEC or the companies.
GRI standards do not differ by industry; SASB standards do. The industry problem revealed by my GHG Emissions Study suggest that SASB standards might not support CSR rankings with respect to some or all standards. If it would not, that might affect the SEC’s decision whether to include SASB standards as an alternative.
ESG Benefit is benefit—such as revenues or services—received by the corporation through stakeholder markets. Market participants confer ESG Benefit by choosing to deal with the corporation. A substantial body of research has sought to quantify the advantages from a perception of high CSR performance. That literature reaches conclusions such as: “Customers buying coffee will pay 10% more” or “employees work for 10% less” if the company is perceived as a high performer. This paper would try to project those findings across the economy as a whole to estimate the amounts of ESG benefit available to corporations that compete for high rankings.
Many legal scholars believe that corporations are effective creators of wealth only because they pursue it single-mindedly. If corporate performances were judged on any basis other than returns to shareholders (stock price), the corporations would become less effective. Those scholars—and Delaware corporate law—oppose allowing directors to provide benefits to stakeholders for any reason other than shareholder wealth maximization. This paper would examine the beliefs of those scholars and likely provide assurance that repurposing through stakeholder markets would not interfere with corporate function as they see it.