Outside the Box: A year after the Business Roundtable ‘stakeholder capitalism’ letter, Europe’s record proves the strategy doesn’t deliver

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Seattle City Councilor Teresa Mosqueda and farm workers outside the Starbucks annual shareholders meeting in 2019. They were protesting working conditions at Darigold cooperative farms, which supply Starbucks.

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It has been a year since 181 CEOs of the Business Roundtable pledged to explicitly move shareholders down the priority list, opting to give greater weight to the interests of other stakeholders when committing resources of their firms. If elected, Democratic presidential candidate Joe Biden has promised to “put an end to the era of shareholder capitalism.”

While stump speeches and grand statements may sound good, what’s the track record for stakeholder capitalism in practice? 

Look no further than Europe: The modern stakeholder movement in the United States is an attempt to import European corporatism into U.S. corporate practice and public policy. Spoiler alert: Europe provides a cautionary tale from which to learn, not an attractive model to import.

In new research, I examined the 50 most valuable companies in three key countries in the European Union (Germany, Netherlands and France) in addition to the U.K., and benchmarked these companies to peer companies in the United States, pulling out the companies’ records on ESG (environment, social and governance factors) and linking them to their valuations. What the data reveal is that the enterprise valuations of U.S. corporations dominate those of their European peers. Thus, European firms lag behind their American counterparts on this clear, widely available metric.

It is a more complicated story with various stakeholder metrics, in part, because of the disparate level of disclosures and unclear metrics. Stakeholder orientation was measured in my analysis along six dimensions: (i) concern for the environment; (ii) concern for workers; (iii) how good a corporate citizen is the firm; (iv) the composition of the firm’s board of directors and size of the CEO’s compensation; (v) the presence of blockholders and the size of their holdings; and (vi) barriers to takeovers by activists.

On the surface, European firms are more transparent than American firms at disclosing environmental (“E”) data related to greenhouse gas emissions and characteristics of their workforce (labor-related “S” or social data), such as the proportion of women in management, the proportion of women in the workforce, the rate of employee turnover, and the proportion of the workforce that is unionized. But roughly half of the American firms disclose such “E” and “labor-related S” data, and when they do disclose this data, the American firms’ track records are no worse (and sometimes even better) than their European peers.

The relative absence of “E” and “S” disclosure related to labor is not associated with valuation discounts of European firms relative to their American counterparts.

A factor largely absent from much of the ESG discussion is the issue of corporate welfare. Remarkably, both the top European and American firms get sizable subsidies and loans from the U.S. taxpayer. Uncle Sam provides a generous allowance to big corporations on both sides of the Atlantic.

What’s harder to find is precise data on European state assistance to EU-headquartered companies. European firms in the sample have been sanctioned by the Securities and Exchange Commission or the Justice Department at rates similar to that of U.S. firms. However, I am not aware of a systematic database of all regulatory violations of European firms. That is somewhat surprising for a system that claims it cares about “S,” especially when these top firms are drawing upon tax contributions from Europeans across the income spectrum. Presumably a capitalism aimed at greater accountability would include or at least make it possible to measure accountability to the taxpayer.

Europe has long been plagued by high-profile corporate scandals, from German auto maker Volkswagen’s Dieselgate scandal to the recent implosion of Wirecard, which might explain why its authorities are less keen to showcase its shortcomings.

Predictably, CEOs in the US are paid two to four times that of their European counterparts. American boards are smaller relative to European co-determined boards with worker representatives. My research reveals little evidence that co-determined European boards are any better than Anglo-Saxon boards.

Perhaps the most noteworthy correlations I observe are between valuation discounts of Dutch and French firms relative to U.S. firms, and the concentration of ownership with a few blockholders there. For example, 41% of Dutch firms have a single blockholder that owns 25% or more of the firm. Analogous numbers are 47% of French firms, 54% of German firms and 8% of U.K. firms. But American firms with such a concentration of ownership (25% or higher) is only 2% to 15%.

In the U.S. and U.K., blockholders, when they exist, are typically institutional investors, such as BlackRock BLK, +0.16% or Vanguard. When push comes to shove, these institutions are likely to side with activists to discipline entrenched managers.

But this is not the case in continental Europe. Blockholders in EU firms are strategic holders who enjoy disproportionate control rights. This distorted balance of power, in favor of these strategic owners, is a key contributor to the valuation discount between U.S. and EU firms.

Cuddly European corporatism is not as attractive as it appears at an intellectual level without looking closely at the data. These companies suffer large valuation discounts primarily because they seek to entrench and protect incumbent owners and managers. Entrenched, established mega firms in Europe implicitly prevent entrepreneurial upstarts from upending the existing order. Co-determined worker-based boards are likely to block ventures that make their lives uncomfortable via creative destruction. 

The absence of a European Google GOOGL, +2.38% GOOG, +2.74%, Amazon AMZN, +2.85%, Netflix NFLX, +11.60% or Tesla TSLA, +6.41% is no accident.

The optimistic take on these findings is that U.S. stakeholderists want to somehow import the environmental and labor-related social practices from Europe without the blockholder-centric governance practice.

A skeptical interpretation is that the American version of capitalism, where the Big Three institutional investors — BlackRock, Vanguard and State Street STT, -1.57% — dominate ownership without the resources or willingness to discipline management, may have created a power vacuum. A few influential U.S. CEOs have jumped into that vacuum to entrench themselves by claiming to be “E” and “S” friendly. 

Time will tell whether the U.S. fully adopts European corporatism. But one thing is certain: The data suggest that this model does not actually deliver shareholder or stakeholder value.

Shiva Rajgopal is the Kester and Byrnes Professor at Columbia Business School and a senior scholar at the Jerome A. Chazen Institute for Global Business.