Corporate law has been wracked by a decades-long debate. A majority of academics and practitioners support shareholder primacy, the view that corporations exist solely to generate financial returns for shareholders. But an increasingly vocal minority supports stakeholder governance, the view that corporate leaders should consider the interests of a broader range of stakeholders, including workers, consumers, and members of surrounding communities. Shareholder primacy theorists have long claimed that stakeholder governance would be costly or ineffective in advancing the interests of stakeholders. But they have recently escalated their attacks by insisting that stakeholder governance rhetoric is potentially dangerous to stakeholders: eminent commentators have suggested that adopting corporate governance measures to promote stakeholder interests could “derail,” “crowd out,” “impede,” “cannibalize” or otherwise prevent governmental reforms and regulations that would do more to advance stakeholders’ interests.

The hypothesis that reformers face a stark choice between internal corporate governance reforms and external regulations plays an important role in the case against stakeholder governance. Workers and other stakeholder constituencies have plainly suffered in the past few decades. Stakeholder governance is a movement born of desperation over the plight of these constituencies, and pessimism about the likelihood of effective and helpful government intervention. The stark choice hypothesis seeks to play one concern against the other.

It is also one of the few arguments for shareholder primacy that would resonate with people focused on stakeholder interests. Critics of stakeholder governance-based reforms sometimes claim that they may be destructive because they would prevent corporate acquisitions and other transactions that would create economic value. But stakeholder governance theorists are likely to accept some loss of economic value to deliver benefits to stakeholders. Only a threat to stakeholder interests is likely to be persuasive. Similarly, critics of stakeholder governance claim that it may not deliver the intended benefits. But that concern alone is not a reason to preclude experimentation with such reforms, especially after decades in which shareholders enjoyed outsized gains and other corporate constituencies suffered deeply while external regulators did little to help. In order to explain why stakeholder governance should not be pursued, shareholder primacy theorists must explain why it would be risky to try. The stark choice hypothesis plays that necessary role in the rhetoric of shareholder primacy theorists.

Read more at Harvard Law School Forum on Corporate Governance