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 in:European financial management : the journal of the European Financial Management Association 2021-03, Vol.27 (2), p.189-195
Main Author: Fama, Eugene F.
Format: Article
Language:English
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.
ISSN:1354-7798
1468-036X
DOI:10.1111/eufm.12297