Shareholder primacy, the precept that public corporations should be operated for the benefit of their owners, has been under attack in the United States.

Shareholder primacy, the precept that public corporations should be operated for the benefit of their owners, has been under attack in the United States. It is a basic foundation of the laws of corporate governance. Yet the idea of “stakeholder capitalism” has been all the rage, in which shareholders are demoted to be equal to employees, activists, the environment, and other concerns.

How does the performance of stakeholder capitalism compare with that of shareholder capitalism? A new working paper published by business school researchers Benjamin Bennett, René Stulz, and Zexi Wang answers that question: poorly.

Delaware is the most popular state for public corporations. Nevada is the second-most popular. Nevada passed a law in 2017 that weakened shareholder primacy. The paper compares Nevada corporations before and after the law on a variety of measurements. It finds that after the law passed:

Perhaps most disappointingly for stakeholder capitalism activists, the ESG scores of Nevada corporations went down after the law was passed. The environmental score dropped by 7 percent; the social score dropped by 16.6 percent; and the governance score dropped by 15.4 percent. “The decrease in the Social score is the most direct evidence that stakeholders do not benefit from the Bill since this score incorporates how employees, customers, and the community in which a firm operates are treated by the firm,” the paper says.

The paper is well-designed to avoid being muddied by composition effects. It only considers corporations that were incorporated in Nevada two years before and two years after the law change, not ones that moved in or out in that window. They use firms incorporated in other states as the control group.

Jason Willick wrote about this paper for the Washington Post, and he pointed out why stakeholder capitalism was always a peculiar fit for the anti-CEO left. “After all, the antithesis of shareholder power is not necessarily more powers for employees, or the community, or disadvantaged groups; it’s more power for corporate executives, who can wield it as they please with less accountability,” he wrote.

The paper puts it this way: “By weakening shareholder primacy, the law potentially enables management to entrench itself and pursue investment strategies that align with managerial preferences but might not have been adopted under shareholder supremacy.”

The Friedmanite view on shareholder primacy, demagogued as being a defense of greedy corporate elites, is actually an argument for a check on those elites’ power. Removing shareholder primacy gives corporate executives more leeway for self-dealing and reduces the ways they can be held accountable for poor decisions. That’s not good for anyone except the executives.