Lynn M. LoPucki

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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:
  1. People want corporations to change.
  2. 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.

  3. Stakeholders have the power to force change.
  4. 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.

  5. Change requires standardized information.
  6. 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.

  7. The ESG information system is nearly complete.
  8. 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.”

  9. Stakeholders need to act now.
  10. (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.)

  1. CSR can’t be ranked. Corporate social responsibility is too subjective to be captured meaningfully in numerical data.
  2. Corporations won’t participate. Corporations will not voluntarily report to standards that disadvantage them.
  3. Corporations will resist. Corporations will not voluntarily give up their control.
  4. Corporations will cheat. Corporations would be collecting and reporting their own social responsibility data. They will cheat.
  5. Corporations will obfuscate. Corporations will use their financial clout to confuse potential stakeholders about which rating and ranking systems are best.
  6. 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.
  7. Cost. Corporate social responsibility is going to cost more, and customers won’t pay it.
  8. Stakeholders lack competence. Stakeholders are not competent to make corporate decisions.
  9. Stakeholders lack power. Stakeholders don’t have enough financial power to change corporate behavior.
  10. 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.
  11. Markets are undemocratic. To ensure everyone an equal voice, governments, not markets, should control corporations.
  12. Repurposing will harm corporations. The corporation is a highly successful institution. Tinkering with it may destroy the corporation’s effectiveness.
  13. Repurposing hasn’t happened. If stakeholders could control corporations, they would have done it already.

What are the Next Steps?

I am working on five projects:

  1. GHG Emissions Project.
  2. 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.

  3. CSR Reporting Project.
  4. 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.

  5. GRI-SASB Comparison Project.
  6. 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.

  7. ESG Benefit Estimation.
  8. 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.

  9. Corporate Purpose (Legitimacy) Project.
  10. 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.

Links to standards promulgators