Contract costs, stakeholder capitalism, and ESG

Observed contract structures are competitive solutions to the problem of maximizing stakeholder welfare when contracting is costly. Winning contract structures typically set fixed payoffs for most stakeholders, with residual risk borne by shareholders, who then get most of the decision rights. With...

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Bibliographic Details
Published inEuropean financial management : the journal of the European Financial Management Association Vol. 27; no. 2; pp. 189 - 195
Main Author Fama, Eugene F.
Format Journal Article
LanguageEnglish
Published Oxford Blackwell Publishing Ltd 01.03.2021
Subjects
Capitalism
contract structures
Contracts
decision rules
Governance
Portfolios
Stakeholders
Stockholders
Wealth
Welfare
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Summary:Observed contract structures are competitive solutions to the problem of maximizing stakeholder welfare when contracting is costly. Winning contract structures typically set fixed payoffs for most stakeholders, with residual risk borne by shareholders, who then get most of the decision rights. With rising interest in environmental, social, and governance (ESG) issues, there is sentiment for replacing the max shareholder wealth decision rule with max shareholder welfare. This view does not recognize that investors view max welfare in terms of their overall consumption‐investment portfolios. Since firms are not privy to the total ESG exposures of shareholders, max shareholder wealth is the appropriate decision rule.
Bibliography:Thanks to John Doukas, Oliver Hart, Luigi Zingales, and the referee for helpful comments.
ISSN:1354-7798
1468-036X
DOI:10.1111/eufm.12297