{"title":"Agency costs of stakeholderism: Evidence from compensation contracting at AT&T","authors":"Stephen Bryan, Robert Nash, Ajay Patel","doi":"10.1111/jacf.12670","DOIUrl":null,"url":null,"abstract":"<p>Agency costs of stakeholderism are the costs arising from the additional conflicts of interest that emerge when moving from shareholder primacy to stakeholder primacy.</p><p>In the opening passage of the Spring 2024 edition of this journal, the editors articulated the advantage of focusing on sustainability, as opposed to the more widely used ESG. Noting a major concern, McCormack (<span>2024</span>, p. 2) explained that ESG represents “a wide variety of open-ended disputes that are often more social and political than economic in nature, and so subject to major confusion.” We agree and endeavor to reduce some of that confusion. In our paper, we recognize McCormack's concern and approach this important issue from an economic perspective (rather than a political or social perspective) by evoking agency theory, one of the most powerful instruments in the financial economist's toolkit.</p><p>Agency theory involves the economic analysis of conflicts of interest. Another article from the 2024 Spring issue identified the important role of conflicts of interest in terms of understanding ESG. Specifically, in the Epilogue to his new book, Chew (<span>2024</span>, p. 28) notes that “conflicts between shareholders and stakeholders—and among different stakeholder groups themselves—are everywhere.” In another article from the Spring 2024 issue, Denis (<span>2024</span>) further contends that agency costs stemming from the paradigm shift from shareholder to stakeholder primacy may outweigh the benefits of stakeholder-centric endeavors (such as CSR). Therefore, from that Spring 2024 issue, we can conclude that conflicts of interest involving stakeholders are pervasive and potentially very large. In this paper, we seek to build upon these important insights. First, we formally define the agency costs of stakeholderism and then we identify specific examples of how these costs may arise and how these costs may affect firm value.</p><p>Our paper considers the agency costs of stakeholderism in compensation contracts. Harkening back to the days of Friedman (<span>1970</span>) and Jensen and Meckling (<span>1976</span>), financial economists have long suggested that firms design management compensation contracts to minimize agency costs and maximize shareholder value. The seminal study by Jensen and Meckling (<span>1976</span>) provided an initial taxonomy of agency costs. Specifically, Jensen and Meckling (<span>1976</span>) identified agency costs of equity and agency costs of debt and presented examples of each.</p><p>Applying this theory, previous studies of compensation structure, summarized by Yermack (<span>1995</span>) and Bryan, Hwang, and Lilien (<span>2000</span>), primarily focus on the agency costs of equity and emphasize the role of equity-based executive compensation in managing this conflict of interest by establishing a more direct link between manager and shareholder wealth. Further drawing upon this theory, John and John (<span>1993</span>) and Bryan, Nash, and Patel (<span>2006</span>) number among the empirical studies that explicitly consider how the agency costs of debt may also affect compensation structure. However, in addition to the agency costs of equity and the agency costs of debt, Denis (<span>2024</span>) suggests that there are agency costs that may fall into a different classification category (i.e., the agency costs of stakeholderism). We concur with Denis (<span>2024</span>) that there is more to the story.</p><p>The most recent chapter of that story begins in August 2019 when the Business Roundtable (BRT) Restatement of the Purpose of a Corporation urged managers to commit to the needs of all stakeholders. Viewed as a major philosophical transition (even labeled a “tectonic shift” by some observers), the BRT statement ushered in a brave new world of contracting challenges involving a less familiar breed of agency costs, notably the agency costs of stakeholderism. To better understand our new contracting environment, we need to better understand the agency costs of stakeholderism.</p><p>The transition from a monistic (shareholder) to a pluralistic (stakeholder) focus adds many complications. To try to make sense of the complications, we start small and simple—we consider one compensation contract from one firm. Specifically, we study the compensation contract for AT&T's CEO Mr. John Stankey. We gather detailed compensation contract data for the years 2018–2023. Delving deeply into AT&T's compensation structure, we use AT&T's contract as a model to identify and analyze specific examples of agency costs of stakeholderism. Lessons learned from dissecting AT&T's compensation contract should serve us well when diagnosing agency costs of stakeholderism in other contexts.</p><p>Edmans et al. (<span>2024</span>) and Cohen et al. (<span>2023</span>) identify the need for studies such as ours that focus on firm-level contracting decisions. Cautioning that the performance impact of environmental and social initiatives is not unambiguously positive, Edmans et al. (<span>2024</span>) emphasize the urgency to thoroughly consider the unique factors of each firm's contracting environment. Furthermore, Edmans et al. (<span>2024</span>, p. 20) “highlights the importance of academic research taking a more granular or more situational approach.” Accordingly, our detailed, firm-level analysis will allow us to observe critical intricacies of AT&T's contracting structure that may have been undetected if not examined under the microscope of our granular, situational analysis.</p><p>Our subsequent discussion and analysis of AT&T's very nuanced compensation structure provides further detail (such as to the potential opacity brought on by the addition of an ESG-based component of manager pay). The overall complexity of contemporary pay structure reinforces the conclusion by Larcker and Tayan (<span>2023</span>) that the intricacies of modern compensation arrangements can contribute to investor confusion. Even before the advent of widespread ESG-based pay Faulkender and Yang (<span>2010</span>) referred to the compensation-setting process as a “black box.” Today, given the additional challenge of identifying relevant and measurable ESG goals (and then being able to objectively assess performance in reaching those goals), that “black box” is increasingly resembling an Enigma machine. We hope that the insights from our in-depth investigation of the evolution of the AT&T compensation structure will help to crack the code inherent in many compensation arrangements and thus help us better understand the costs and benefits of this important contract.1</p><p>While focusing on the specifics of the AT&T compensation contract, our study may also provide greater insights regarding the generalities of financial contracting. Larcker and Tayan (<span>2023</span>), when identifying limitations of our understanding of corporate governance, alert us that “we do not know the economic ramifications of higher stakeholder orientation” (p. 5) and “we do not know the role that stakeholder interests should play in governance or how these should be prioritized relative to shareholder interests” (p. 5). Larcker and Tayan (<span>2023</span>) refer to such deficiencies as “gaping holes” in our knowledge of corporate governance. We will know more following our thorough evaluation of AT&T's compensation structure and our detailed consideration of agency costs of stakeholderism. Reaching a better understanding of the agency costs of stakeholderism will move us closer to the goal of Larcker and Tayan (<span>2023</span>, p. 5) of better understanding the “economic ramifications of higher stakeholder orientation.”</p><p>Furthermore, foreshadowing knowledge to be gained from the analysis of agency costs of stakeholderism, Tirole (<span>2001</span>) predicted that the shift to a stakeholder society would require a rewriting of the rules of corporate governance and a reconfiguration of institutions to assuage decision-makers to internalize the welfare of stakeholders. Unfortunately, as we will discuss throughout our analysis, this rewriting and reconfiguring is challenging and has recently created vulnerabilities that are prone to exploitation by rent-seeking managers and other opportunists. We label the impact of this potential exploitation as the agency costs of stakeholderism. Our deep dive into AT&T's compensation contract will help us to better identify, measure, and manage these important, but we contend, under-analyzed contracting costs.</p><p>Here's what we know about AT&T's recent compensation contracting efforts.</p><p>Table 1 documents the components of AT&T's CEO compensation from 2018 to 2023. In bold font is the pay structure for 2021, the year of adoption of an incentive plan to pay an ESG-linked bonus to AT&T's CEO (Mr. Stankey). Table 1 presents data from several recent AT&T Summary Compensation Tables contained in the respective yearly proxies. The Summary Compensation Table presents the amounts and types of compensation paid to the CEO and other executives. We focus on CEO compensation, although compensation for other executives is included in the proxy disclosure.</p><p>Table 1 shows that the CEO is paid a mix of salary, equity-based compensation, and non-equity incentive plan cash bonuses. The mix of pay components that are incentive-based (at-risk pay) should theoretically reward both short-term and long-term results. As explained in the footnotes and in the Compensation Discussion and Analysis (CD&A), salary is a fixed cash component of compensation, determined as a function of experience and skill, as well as market comparisons. Equity-based compensation is intended to motivate and reward managers to fulfill the long-term objectives of the company and “align executive and stockholder interests.” (AT&T Proxy, <span>2022</span>, p. 51).</p><p>There were two types of equity-based pay included in this contract, performance shares and restricted stock units. The value of the Performance Shares depends on the stock price and also on return on invested capital (ROIC), a non-GAAP quantitative measure, modified by a factor reflecting total shareholder returns (TSR). The value of the restricted stock units also depends upon the performance of the underlying AT&T stock.</p><p>The ESG bonus is included in the non-equity incentive plan. AT&T refers to this plan in the proxy as the short-term incentive plan (STIP). This plan is based on a mixture of quantitative financial metrics as well as qualitative ESG outcomes.</p><p>The first two elements of the non-equity incentive plan (adjusted EPS and free cash flow) are technically non-GAAP, but these measures are popular choices for bonus targets. The use of non-GAAP values allows firms to remove items from the measures that they do not believe are directly under the control of management. For instance, a one-off asset impairment is typically excluded in adjusted EPS. Some such adjustments seem to make sense, namely that the underlying event (e.g., asset impairment) may be exogenous (e.g., act of nature or act of war). More equitably, as the CEO has no control over the event, CEO compensation should not be penalized. On the other hand, some adjustments might be viewed as “protecting” the CEO's pay from past bad decisions. For instance, continuing with the same example, the impairment may be the result of obsolescence (e.g., a stranded asset), which stems from a bad investment decision authorized by the CEO. Hence, such discretion allows CEO compensation to be protected (or “insulated”) from managerial missteps. Also, by definition, non-GAAP means that the FASB and the SEC have not codified a particular measure through the standard-setting process. This adds flexibility as to how the bonus metric is measured, even though it is a quantitative value. We further recognize that such metrics, by allowing for discretion regarding measurement, open the door for selective adjustments in order to ensure the bonus targets are met.</p><p>Notably, the 20% weighting for strategic initiatives was added for the first time in this (<span>2022</span>) proxy statement. According to AT&T's <span>2022</span> proxy (p. 51), the final “payouts are based on achievement of predetermined goals, with potential for adjustment (up or down) by the committee to align pay with performance.” Strategic goals were chosen as determinants of the STIP bonus “for their link to our business strategy” (AT&T Proxy, <span>2022</span>, p. 53), and STIP captures “key strategic and transformation initiatives and team effectiveness.” (AT&T Proxy, <span>2022</span>, p. 54).</p><p>Below are descriptions of the strategic goals, referred to as “strategic measures criteria,” followed by the outcomes (“accomplishments”). Importantly, because the ESG bonus measure is qualitative, there is additional flexibility regarding how the final bonus is determined. We emphasize that the extent of flexibility is important. As we noted with respect to the accounting-based measures, there are numbers but there is also considerable discretion as to how the numbers are tabulated. Suggesting even greater subjectivity, the qualitative assessments involve neither numbers nor tabulations. The heightened ambiguity is likely to contribute to heightened agency costs of stakeholderism.</p><p>All items indented and bordered are quoted from AT&T's <span>2022</span> Proxy, unless otherwise noted.</p><p>Strategic metric results—20% weighting</p><p>We next contemplate how these strategic measures can be accurately quantified or meaningfully evaluated. We also investigate how measurement issues may contribute to agency costs of stakeholderism.</p><p>Jensen (<span>2001</span>), Zingales (<span>2019</span>), and Bebchuk and Tallarita (<span>2022</span>) all argue that the inability to accurately measure the attainment of ESG goals is a primary catalyst for agency problems of ESG-compensation (and hence, a primary catalyst for agency costs of stakeholderism). We know that good corporate governance requires both effective external monitoring and rigorous managerial accountability. Our subsequent analysis suggests that AT&T's compensation schemes allow for neither.</p><p>Recognizing the potential for the agency costs of stakeholderism, Zingales (<span>2019</span>) condemns the recent lurch towards stakeholderism for contributing to a “dangerous power grab.” Facilitating the “grab” is stakeholderism's pluralistic objective function that effectively makes managers unaccountable for performance. Jensen (<span>2001</span>) concludes that there are no principled criteria for evaluating the performance of managers charged with multiple, sometimes competing, objectives (as under stakeholderism). When accountable to everyone, managers are ultimately accountable to no one. Unaccountable managers have immunity to opportunistically pursue self-interests.</p><p>Others have criticized the lack of audit and enforcement over whether firms actually achieve ESG goals to warrant the bonus. Often cited is the difficulty in verifying ESG outcomes. The question arises about who will do that work. The accounting profession claims it is their turf. However, numerous consulting companies now contend they are equipped to handle such audit functions of ESG data (Maurer, <span>2022</span>). That is, unlike partnerships that perform accounting assurance (i.e., the Big Four), a new cadre of organizations is emerging that focuses on “sustainability audits,” seeking to provide assessment of environmental impact. These third-party entities most typically engage in measuring the more quantifiable effects and outcomes (such as greenhouse gas emissions).2</p><p>Firms may also seek a related type of attestation of environmental performance by fulfilling the requirements for certification by third-party organizations. For example, as evidence of successful emissions management AT&T cites that it has met the standards of independent assessors such as the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the Task Force on Climate Related Financial Disclosure (TFCD). See pp. 26–27 of this essay. Endeavoring to be anointed by a third-party certification agent appears to be a “good news, bad news” situation. The good news is that these organizations have clearly defined, quantifiable standards. The bad news, as identified by Gosling (<span>2024</span>), is that those standards may not be optimal for the specific firm. Recognizing the perhaps hidden, but important, costs of pursuing this type of certification, Gosling (<span>2024</span>, p. 17) cautions that the mandate to meet standards as pronounced from afar by a third-party imposes an “unjustified fettering of the board's discretion” to optimally formulate policy. Accordingly, we view the economics of the decision to pursue these external certifications as analogous to that of agreeing to financial covenants in debt contracts (i.e., both provide benefits from bonding, but both impose costs from loss of flexibility). Such trade-offs should be carefully weighed as part of the analysis of the agency costs of stakeholderism.3</p><p>Sharing this skepticism, SEC Commissioner Hester Peirce (SEC, May 25, 2022) argues that ESG will be impossible to reasonably define, and therefore to enforce. A likely consequence is that the use of ESG metrics in executive compensation contracts will prove only tenuously effective in delivering real progress because of measurement difficulty.</p><p>Ratings organizations have also emerged to provide firm-level assessments of ESG standing. A major issue with these ratings is measurement error and the relatively low correlation across ESG ratings. Correlation coefficients range between 0.38 and 0.71. The low correlations may affect the motivation of companies to improve their ratings. (Berg et al., <span>2019</span>). By comparison to ESG ratings, credit ratings have a correlation of 0.92 (Agnew et al., <span>2022</span>). This is another instance of less effective monitoring contributing to more extensive agency costs, and thus larger agency costs of stakeholderism.</p><p>Further focusing on weaknesses of monitoring, Bebchuk and Tallarita (<span>2022</span>) conclude that the use of ESG bonuses has a “questionable promise” and poses significant “perils” unless measurement and assessment issues can be resolved. Indeed, as we identify in our AT&T example, most of the ESG performance measures are qualitative. There is concern that qualitative-based awards are cover for missing the mark on quantitative financial measures. In other words, the bonus may be insulated from poor financial performance (Temple-West, <span>2022</span>).</p><p>Cautioning of further measurement issues Tirole (<span>1994</span>), emphasizes that the ability to subject managers to yardstick comparison is a central tenet of successful performance-based incentive plans. However, ESG-performance goals are frequently vague and subject to manipulation. More cynical, Bebchuk and Tallarita (<span>2022</span>) argue that the vagueness, opacity, and susceptibility to manipulation result from an intentional effort to create opportunities for self-interested managers to exploit the lack of accountability and inflate payouts. An absence of objective criteria for evaluation renders managerial pay for ESG-efforts as perfunctory. Overall, a lack of managerial accountability may cause ESG-based compensation to become ineffective, if not counterproductive, thus further exacerbating the agency costs of stakeholderism.</p><p>In sum, when performance is not judged with a rigorous and unwavering yardstick, managers are not held accountable, and not differentiated into winners and losers (i.e., if everyone gets a trophy, what happens to the incentive to compete?). Therefore, it may be that ESG-related pay is not truly at risk and may be paid regardless of performance.4 Again, this contributes to the agency costs of stakeholderism.</p><p>Emphasizing that the effectiveness of performance-based incentives is contingent upon valid measures of performance, Tirole (<span>1994</span>) further equates the absence of a yardstick to the presence of a “quiet life” for unaccountable (or under-accountable) managers. Described by Hicks (<span>1935</span>) and Bertrand and Mullainathan (<span>1999</span>, <span>2003</span>), the “quiet life” theory holds that managers may be willing to expend resources to appease potentially contentious stakeholders (sacrificing efficiency and shareholder value) in order to enjoy the personal benefits of more amicable relationships and a more serene existence. This loss of value represents an additional agency cost of stakeholderism.</p><p>Another specific measurement issue that plagues ESG-contracting is known as the time-horizon mismatch. As formally articulated by Larcker et al. (<span>2021</span>), a timing mismatch frequently occurs because ESG outcomes typically require many years to fully materialize (e.g., Dyck et al., <span>2019</span>; Fancy, <span>2021</span>; Ittner et al., <span>1997</span>) while compensation payoffs are primarily based on relatively shorter-term results.5 Our analysis of AT&T's compensation contracting suggests that AT&T has not overcome this weakness.</p><p>Providing some insights as to the breadth of this chasm in the timing mismatch, Burchman (<span>2020</span>) reports that even “long-term” incentive plans currently reward performance for 3 years, while climate targets (such as the Paris Agreement's carbon neutrality goals) extend until 2050.6 Accordingly, as summarized by Cordeiro and Sarkis (<span>2008</span>) and Ikram et al. (<span>2023</span>), ESG activities typically impose significant short-term costs, and myopic managers may not be willing to endure the more immediate expected pain (i.e., reduction in financial performance from the upfront ESG costs) to achieve the anticipated long-term environmental and social gain. The value forgone from the underinvestment that may result because of this timing-mismatch likely represents yet another agency cost of stakeholderism.</p><p>Our review of the literature suggests two broad approaches to ameliorate the weakness of timing mismatch. Solution one is to switch to compensation based on long-term performance. That is, if short-term measures are uninformative because of the length of time to realize payoffs (Govindarajan & Gupta, <span>1985</span>), firms should tie compensation more extensively to long-term performance. Calling for a rather dramatic deviation from standard pay practices, Edmans (<span>2023</span>) recommends that compensation design should abandon short-term bonuses and should instead overweight pay structure with the granting of shares that managers must hold for many years. As also noted by Flammer and Bansal (2014) and Delves and Resch (<span>2019</span>), Edmans (<span>2023</span>) argues that long-term incentives are necessary to motivate long-term investments (such as many of the E and S endeavors to protect the environment and to support employees). Thus, one solution to the timing mismatch is to shift compensation from providing short-term bonuses to awarding stock ownership tied to long-term retention of shares. Our analysis of its compensation contracting confirms that AT&T has not chosen this approach.</p><p>Solution two is to switch compensation philosophy from “pay for performance” to “pay for progress.” Toplensky (<span>2024</span>) opines that the challenge of effectively achieving ESG goals is balancing between short-term and long-term. Our math suggests that the optimal balance between short-term and long-term is a set of measures and rewards centered on the intermediate term. Applying directly to ESG contracting, Burchman (<span>2020</span>) suggests that pay structure should set intermediate milestones to encourage incremental advances toward long-term goals. That is, compensation contracts should establish medial targets, the achievement of which would facilitate the firm's movement along a trajectory to ultimately accomplish its long-term ESG objectives.</p><p>However, when it comes to basing ESG-compensation on rewarding incremental steps, the theory appears to be sound, but putting it into practice appears difficult. FW Cook (2022) and Edmans (<span>2021</span>) challenge the firm's ability to accurately measure short-run progress in terms of meeting long-term goals (which are difficult themselves to define). Our analysis of the AT&T compensation contracts suggests that AT&T, like most firms today, struggles to define specific milestones along that desired future path and is challenged to measure progress in any reliable way. Accordingly, AT&T has made no discernable attempts (at least publicly available ones) to establish intermediate, measurable milestones to facilitate progress toward achieving longer-term objectives. Without measurability, there is no accountability. Without accountability, the agency costs of stakeholderism (such as this underinvestment) will likely continue.</p><p>Our case study of ESG activity at AT&T provides evidence consistent with empire-building. In 2022, AT&T's proxy required six pages to document its extensive ESG infrastructure (AT&T Proxy, <span>2022</span>, pp. 32–37). (We condense and outline this infrastructure in Appendix A).</p><p>Table 4 shows the components of this ESG infrastructure (or “empire”) under various headings that we created. For instance, there are 13 titled positions mentioned in the Compensation Discussion & Analysis (CD&A) of the 2022 Proxy that are associated in some way with ESG.7 Examples include: Senior Vice President—Corporate Social Responsibility, Chief Sustainability Officer, Chief Diversity and Development Officer, Chief Inclusion Officer, and Assistant Vice President—Global Environmental Sustainability, among others. There were approximately 35 different boards, committees, councils, or programs, such as the Contributions Council, CSR Governance Council, and CEO's Diversity Council, among others. Also disclosed and discussed in the CD&A are various Policies and Principles, such as Human Rights Policy, Code of Conduct and Anti-Bribery and Anti-Corruption (ABAC) Policy, and Principles of Conduct for Suppliers, among others. Finally, there were eight reporting regimes and disclosure initiatives to which AT&T subscribes, such as the Global Reporting Initiative, Sustainability Accounting Standards, the Climate Disclosure Project Assessment, and the Transparency Report, among others.</p><p>Table 2 shows the prevalence of ESG References, along with other pertinent disclosures. The Total # of ESG References (column 2) is a simple word count of the number of times ESG was mentioned in the corresponding proxy statement. Almost all of AT&T's infrastructure for ESG was put in place over the past few years, evidenced by a simple word count (search term: ESG). When we revisit this word count for AT&T in 2024, its ESG infrastructure appears to be shrinking, a phenomenon we will subsequently discuss.</p><p>As we further attempt to identify and understand the various agency problems of stakeholderism, we may also consider the firm's choice to extensively engage in ESG-related activities (i.e., empire building) as an especially pernicious symptom of the “quiet life” syndrome. Jensen and Murphy (<span>1990</span>) recognize that firms increasingly face pressures to satisfy special interest groups. Such pressures are mounting in intensity, as Jensen and Murphy (<span>1990</span>) warn of the incursion of “uninvited guests” into the firm's contracting processes. Numbering among the “uninvited guests” who are today crashing the ESG party would be social activists, DEI advocates, managers of sustainability-focused investment funds, and environmental ideologues. The virtue signal of initiating ESG-focused activities (such as building an empire of ESG infrastructure) may help to evict the “uninvited guests” and thus should help to make a manager's life more “quiet.”8 Such a quest for “quiet” is characteristic of a classic agency problem, in which the manager captures the benefits of a more serene (or “quiet”) existence, while the shareholders bear the costs. In our Table 4 and in Appendix A, we document AT&T's explicit actions to placate the increasingly influential and vocal special interest groups.9 We can then ask: is AT&T, by assembling an ESG empire, paying to alleviate special interest pressures and thus achieve a “quiet” life for its management? As evidenced by AT&T's ESG infrastructure, appeasing these “guests” requires incurring non-trivial expenditures. While we do not have access to information to assess the profitability of each investment, such commitment of resources by AT&T may be interpreted as another agency cost of stakeholderism.</p><p>Furthermore, in 2023–2025, we have witnessed a backlash to ESG initiatives. Specifically, Edmans (<span>2024</span>) notes that ESG has become “weaponized” and is enduring attacks across multiple fronts. Elon Musk laments that ESG is a social media-spawned “scam” perpetuated by “woke mob rule” (Tett, <span>2022</span>). Marsh (<span>2024</span>) identifies that political opposition has triggered high-visibility companies to downplay or camouflage their social and environmental undertakings (intentionally misdirecting or de-emphasizing ESG efforts through an effort known as “green-hushing”). Cutter and Glazer (<span>2024</span>) note similar instances of green-hushing whereby high-profile firms take explicit actions to present a lower profile regarding ESG efforts (such as by redacting the use of ESG-centric language, re-titling leadership positions, and re-branding committees and task forces). As one of the highest of the high-profile companies, AT&T may be especially vulnerable to such opposition to ESG and therefore may be more likely to engage in greenhushing activities. In our subsequent empirical analysis, we track AT&T's disclosures to identify whether AT&T is reacting to the recent anti-ESG rhetoric by doing less ESG (or at least, engaging in less public pronouncement about its ESG initiatives).</p><p>To provide evidence of a potential change in AT&T's ESG infrastructure, Table 4 also contains an update for Proxy (Fiscal) Year of 2024 (<span>2023</span>). We searched the proxy to determine if the same positions, committees, boards, principles, reports, etc. were still mentioned 2 years later. Although we cannot verify these missing (N/M or not mentioned) entities were discontinued, one could reasonably conclude they are inactive, either perhaps terminated or combined with another entity. They may also have simply not been mentioned in the current report. However, it is likely the related activity was reduced or the role diminished from earlier years’. There was a grand total for Proxy (Fiscal) Year 2022 (<span>2021</span>) of 65 ESG-related references. The number of N/Ms for Proxy (Fiscal) Year 2024 (<span>2023</span>) was 28, or 43% (28/65). Thus, AT&T appears to be responding to the recent pushback against ESG undertakings by scaling back its ESG infrastructure or, at least, reducing mention of its ESG infrastructure.10 The resultant inefficiencies from this ebb and flow can be also attributed as agency costs of stakeholderism.</p><p>Also, we note from Table 1 that total CEO compensation actually increased following the decrease in the size of AT&T's ESG empire. Specifically, Table 1 indicates that CEO total compensation rose by 7% from 2021 to 2023, despite the likely reduction in ESG-related infrastructure.11 We argue that this is additional evidence of a disconnect between ESG performance and CEO compensation (which further contributes to the agency costs of stakeholderism).</p><p>Managers may also extract rents by diverting firm resources to preferred charitable and environmental causes. Even before being codified into the frameworks of Friedman (<span>1970</span>) and Jensen and Meckling (<span>1976</span>), there was the Managerial Discretion Model from Williamson (<span>1963</span>) which considered how self-interested managers, through purportedly philanthropic initiatives, deploy the firm's assets in ways that bolster the manager's status, power, and prestige. Cordeiro and Sarkis (<span>2008</span>); Masulis and Reza (<span>2015</span>); Brown et al. (<span>2006</span>); Krüger (<span>2015</span>), and Jensen and Murphy (<span>1990</span>) similarly note the temptation of managers to commandeer shareholder resources to finance expenditures that enhance personal utility by sponsoring pro-stakeholder endeavors, such as supporting favored charitable or environmental undertakings. Accordingly, the possibility of managers destroying shareholder value by misusing corporate resources for personal aggrandizement is nothing new to agency theorists. What is new is that the movement toward the stakeholder paradigm not only provides license to managers to actively engage across stakeholder populations, but actually <i>rewards</i> managers for deploying resources to social, environmental, and other non-shareholder constituencies. Therefore, somewhat perversely, stakeholderism provides incentives for managers to do the very things that Friedman (<span>1970</span>) and Jensen and Meckling (<span>1976</span>) identified as likely to destroy shareholder value. We argue that a large part of navigating this new world of contractual schizophrenia is accurately recognizing the benefits and the costs of stakeholderism, including the agency costs that are the focus of this essay.</p><p>When classifying different members of the ESG ecosystem, Edmans (<span>2024</span>) identifies “opportunists” as those seeking to capitalize upon the recent surge of popular support for ESG to capture additional economic benefits (such as taking actions to bolster compensation).</p><p>Being labelled an opportunist suggests that some questionable action is being undertaken. Undertaking a questionable action typically requires motive and opportunity. For “opportunistic” managers, we argue that one motive was to convince shareholders to grant additional ESG-linked compensation, or to otherwise contrive concessions to their compensation structure, that are favorable to managers.</p><p>It is intuitive that people react to incentives in predictable ways, unless however a bonus is somehow essentially guaranteed (maybe because the target outcome is set so low, or the target outcome is made to be so ambiguous that achievement can be virtually assured just by using judgment or qualitative attributes). Making the outcome a foregone conclusion of “success” would not require any incentivized behavioral adjustments to achieve the result.</p><p>Additionally, there is concern that qualitative-based awards are cover for missing the mark on quantitative financial measures. Perceiving this type of circumstance more skeptically, Temple-West (<span>2022</span>) interprets such a bonus as providing insulation from poor financial performance. Indeed, some observers have theorized that the motive for linking executive compensation to ESG is to hide weak financial performance (Rajgopal, <span>2021</span>). Similarly, Gao et al. (<span>2024</span>) document that poorly performing firms increase CSR actions, compared to similar firms. A frequently referenced adage is: “Firms do good by doing well.” That is, stronger financial performance generates the additional resources that facilitate the undertaking of ESG endeavors. Interestingly, our finding, and that of Gao et al. (<span>2024</span>), suggests the opposite.</p><p>Our detailed analysis of compensation contracting at AT&T provides support for many of the above arguments advanced in these studies. We start with a simple time series plot of ESG scores. Figure 1 provides the time series of S&P Global ESG Scores for AT&T. Beginning at 68 (out of 100) in 2013, the rating dropped to 62 by 2016, then rose to 75 by 2020, seesawed for a couple of years (to 74, then to 77), and finally finished at 63 as of 2023, nearly tied with the lowest in the series. We note that the score peaked in 2022, immediately after the initiation of the ESG-linked bonus. As the establishing of a bonus plan that is tied to ESG shows that the firm is “doing something,” the ESG-certification services that create the various ratings may view the company more favorably simply because of the presence of the bonus.12 We further note the score's drop during 2023 (from 77 in 2022 to 63 in 2023). Is it coincidental that AT&T's ESG score drops so sharply during the same year it substantially downplayed its ESG efforts while possibly significantly dismantled its ESG infrastructure?</p><p>More importantly, what is interesting to us is there appears to be no connection between the ESG score and the ESG-based compensation paid to AT&T's CEO. From Table 2, we see that the CEO got paid a sizable ESG-based bonus when doing more ESG in 2021 and 2022. The CEO also got paid a sizable ESG-based bonus when doing less ESG in 2023 (the year in which he led AT&T to a considerably lower ESG rating). What is even more interesting about the ESG score is that here is one instance where ESG performance can be assessed quantitatively (i.e., the ESG score dropped from 77 in 2022 to 63 in 2023), but then the drop in ESG score appears to be unimportant because the CEO was still subsequently awarded 120% of target payout (as we document in Table 2).</p><p>Figures 2 and 3 report select operating and market-based financial results for AT&T (revenues, operating income, operating cash flow, and free cash flow) as well as measures of market value and stock price performance. These exhibits provide points of reference around 2021, the year that AT&T initiated the ESG bonus. The operating results were lower during the year immediately following the ESG bonus adoption. Finally, Figure 4 shows AT&T's stock price performance over the same period.</p><p>Table 2 provides details on the ESG bonus. AT&T discloses that the target award amount for the STIP was $5,600,000, but Mr. Stankey achieved 123% of that amount (Proxy, <span>2022</span>, p. 63). During 2021, the final payout under the STIP was $6,888,000 ($5,600,000 * 1.23). Why pay out 123%? Why not 122% or 124%? We seek to understand.</p><p>Given such nebulous and non-quantifiable goals, here is how AT&T attempted to justify the payout for ESG performance.</p><p>The Committee approved 100% payout of the strategic metric (20% weighting) for all the Named Executive Officers (NEOs), based on the accomplishments listed below. (<span>2022</span> Proxy, page 57)</p><p>Given the qualitative nature of the new strategic metric, AT&T appears to use various indicators of success to justify the payout. To provide a measure of external validation to authenticate ESG outcomes (“accomplishments”), AT&T lists entities that have granted Special Recognition (AT&T Proxy, <span>2022</span>, page A-2). Examples of such Special Recognition include honors bestowed by DiversityInc (top 50 companies for diversity), the Hispanic Association on Corporate Responsibility, JUST Capital (America's most just companies), and so on.</p><p>Per a new disclosure requirement from the SEC, firms must provide what executives were actually paid (realized) for the year, in addition to the pay they were granted. For Mr. Stankey at AT&T, data regarding realized compensation is shown below, juxtaposed to the grant day pay valuations.\n\n </p><p>We argue that the title of the above insert (“Pay-at-Risk”) is perhaps a misnomer. Because measurement is difficult, and accountability is questionable, ESG-based bonuses may be used to provide countervailing compensation when other components of pay happen to be lower. Note from the above data that Performance Share Payout and Restricted Stock Units Payout (both adversely affected by the recent poor performance of AT&T's stock) provided actual compensation far below the target amount. However, the payout from the Short-Term Incentive Plan (which includes the ESG bonus) substantially exceeds the target, smoothing the value of overall compensation by offsetting the weaker market-based performance. Thus, pay risk may be reduced if increases in the ESG bonus may be used to make up for decreases in other components of compensation.13 Because efforts to engineer reductions in managers' risk represent another type of agency cost, we may add this to our list of contributors to agency costs of stakeholderism.</p><p>In Table 3, we consider the percentage composition of AT&T's compensation structure (Panel A) and compare to that of the average firm in the S&P 500 (Panel B). We focus on Non-Equity Incentive pay because it incorporates the ESG-based compensation. From column 6 of Panel A, note the increase in AT&T's Non-Equity Incentive pay (as a percentage of total compensation) that occurs upon the advent of awarding ESG-based pay in 2021. AT&T's initial granting of ESG-based pay in 2021 results in an almost doubling of Non-Equity Incentive pay as percentage of total compensation (i.e., 27.8% in 2021 vs. 15.5% in 2020). This suggests that AT&T made a concerted effort to increase the ESG incentive-based pay in 2021 (which coincided with its decrease in operating and financial market performance). We next extend our analysis to the entirety of the sample period represented in Table 3. A comparison of AT&T's Non-Equity Incentive pay that includes the ESG-bonus (years 2021–2023) to that of the pre-bonus period (years 2013–2020) indicates a significant increase during the years of the ESG bonus (Wilcoxon non-parametric test p-value of 0.018). Applying a similar test to the S&P 500 data (Panel B) reveals no significant difference across the market.</p><p>Focusing on the relation between AT&T's performance and the CEO compensation, we can see from Figures 2 and 3 that the operating and financial metrics generally indicate weaker performance during the years in which the ESG-bonus was paid (2021–2023).</p><p>Also, note from Figure 4 that AT&T's share price has trended lower during the years of the ESG-bonus. This negative movement in the share price would diminish the value of any equity-linked compensation—the value of restricted stock would erode and the value of options would be underwater. However, the ESG-linked bonus emerges as an offset to the decrease in value of the equity-based pay.</p><p>More broadly, we typically think of agency costs resulting from managers extracting an extra amount of pay. We suggest another type of agency cost resulting from managers extracting an extra <i>type</i> of pay. Specifically, the AT&T example has introduced us to a new type of ESG-based pay, where measurability is nebulous and accountability is subjective. Such ambiguity injects opportunity for smoothing or hedging the CEO's compensation whereby ESG-linked compensation may be going up when equity-linked compensation is going down. This offset provides an advantage to managers by taking the risk out of pay-at-risk.14</p><p>Agency costs of stakeholderism are the costs attributable to and arising from conflicts of interest that emerge when moving from shareholder primacy to stakeholder primacy. Our dissection of AT&T's compensation contract and our subsequent examination of agency costs of stakeholderism may offer insights as to why ESG has struggled to achieve its once lofty ambitions. As emphasized in the 2024 Spring edition of this journal, prior literature identifies symptoms of ESG's decline. Specifically, Edmans (<span>2024</span>) laments ESG's failure to fulfill its original promise because of “exploitation by opportunists and imposters.” Chew (<span>2024</span>) warns that the “pitfalls” of ESG may offset the benefits, while Denis (<span>2024</span>) cautions that the movement toward stakeholder orientation “opens a Pandora's Box.” Accordingly, we seek to add value by applying economic discipline from agency theory to organize and better understand costs that may have resulted from “exploitation”, have exemplified “pitfalls,” and have appeared to emerge from “Pandora's Box.” For these reasons, we suggest that agency costs of stakeholderism have contributed to the decline in investor support of ESG and contend that the management of these costs will primarily chart ESG's future.</p><p>To provide detailed evidence, we study the CEO compensation contract for AT&T and identify specific agency costs of stakeholderism, especially as in relation to ESG-based bonuses. We are struck by how this movement of ESG bonuses has so little application of sound management practice behind it, one part of which is the assignment of accountability, which depends on reasonable measurability. For example, AT&T states that short-term incentive payouts, paid in cash, are “based on achievement of predetermined goals, with potential for adjustment (up or down) by the Committee to align pay with performance.” (AT&T Proxy, <span>2022</span>, page 51). However, a reading of the proxy shows the goals related to ESG to be general, if not ambiguous. Such ambiguity further contributes to the agency costs of stakeholderism. Without well-defined ground rules in place, will this be another bridge to nowhere? The value destruction associated with that bridge would be represented in the agency costs of stakeholderism.</p><p>Additionally, Jensen (<span>2001</span>) argues that Stakeholder Theory, which holds that managers should give the interests of all stakeholders at least equal weighting with those of shareholders, is plagued by the inability of executives to navigate the trade-offs between the often-conflicting preferences of the firm's varied claimants. That is, if tasked to be accountable to everyone, managers actually become accountable to no one. Jensen (<span>2001</span>) concludes that, if there is no principled approach to make decisions, there is no way to evaluate managerial performance. Accordingly, managers are unfettered to pursue favored projects, frequently resulting in extraction of shareholder wealth. The resultant value destruction can be considered agency costs of stakeholderism.</p><p>Throughout our essay, we provide documentation and analysis that highlights the magnitude and significance of agency costs of stakeholderism. Nevertheless, despite our emphasis on negative aspects of our current contracting environment, we remain optimistic regarding the fortitude of the financial markets to evolve and address these newly categorized agency conflicts. We hope that our examination of the agency costs of stakeholderism will help guide markets in devising solutions to important contracting problems that continue to arise as we seek the optimal balance between shareholder and stakeholder primacy.</p>","PeriodicalId":46789,"journal":{"name":"Journal of Applied Corporate Finance","volume":"37 2","pages":"60-76"},"PeriodicalIF":1.4000,"publicationDate":"2025-05-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jacf.12670","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Applied Corporate Finance","FirstCategoryId":"1085","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jacf.12670","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Agency costs of stakeholderism are the costs arising from the additional conflicts of interest that emerge when moving from shareholder primacy to stakeholder primacy.
In the opening passage of the Spring 2024 edition of this journal, the editors articulated the advantage of focusing on sustainability, as opposed to the more widely used ESG. Noting a major concern, McCormack (2024, p. 2) explained that ESG represents “a wide variety of open-ended disputes that are often more social and political than economic in nature, and so subject to major confusion.” We agree and endeavor to reduce some of that confusion. In our paper, we recognize McCormack's concern and approach this important issue from an economic perspective (rather than a political or social perspective) by evoking agency theory, one of the most powerful instruments in the financial economist's toolkit.
Agency theory involves the economic analysis of conflicts of interest. Another article from the 2024 Spring issue identified the important role of conflicts of interest in terms of understanding ESG. Specifically, in the Epilogue to his new book, Chew (2024, p. 28) notes that “conflicts between shareholders and stakeholders—and among different stakeholder groups themselves—are everywhere.” In another article from the Spring 2024 issue, Denis (2024) further contends that agency costs stemming from the paradigm shift from shareholder to stakeholder primacy may outweigh the benefits of stakeholder-centric endeavors (such as CSR). Therefore, from that Spring 2024 issue, we can conclude that conflicts of interest involving stakeholders are pervasive and potentially very large. In this paper, we seek to build upon these important insights. First, we formally define the agency costs of stakeholderism and then we identify specific examples of how these costs may arise and how these costs may affect firm value.
Our paper considers the agency costs of stakeholderism in compensation contracts. Harkening back to the days of Friedman (1970) and Jensen and Meckling (1976), financial economists have long suggested that firms design management compensation contracts to minimize agency costs and maximize shareholder value. The seminal study by Jensen and Meckling (1976) provided an initial taxonomy of agency costs. Specifically, Jensen and Meckling (1976) identified agency costs of equity and agency costs of debt and presented examples of each.
Applying this theory, previous studies of compensation structure, summarized by Yermack (1995) and Bryan, Hwang, and Lilien (2000), primarily focus on the agency costs of equity and emphasize the role of equity-based executive compensation in managing this conflict of interest by establishing a more direct link between manager and shareholder wealth. Further drawing upon this theory, John and John (1993) and Bryan, Nash, and Patel (2006) number among the empirical studies that explicitly consider how the agency costs of debt may also affect compensation structure. However, in addition to the agency costs of equity and the agency costs of debt, Denis (2024) suggests that there are agency costs that may fall into a different classification category (i.e., the agency costs of stakeholderism). We concur with Denis (2024) that there is more to the story.
The most recent chapter of that story begins in August 2019 when the Business Roundtable (BRT) Restatement of the Purpose of a Corporation urged managers to commit to the needs of all stakeholders. Viewed as a major philosophical transition (even labeled a “tectonic shift” by some observers), the BRT statement ushered in a brave new world of contracting challenges involving a less familiar breed of agency costs, notably the agency costs of stakeholderism. To better understand our new contracting environment, we need to better understand the agency costs of stakeholderism.
The transition from a monistic (shareholder) to a pluralistic (stakeholder) focus adds many complications. To try to make sense of the complications, we start small and simple—we consider one compensation contract from one firm. Specifically, we study the compensation contract for AT&T's CEO Mr. John Stankey. We gather detailed compensation contract data for the years 2018–2023. Delving deeply into AT&T's compensation structure, we use AT&T's contract as a model to identify and analyze specific examples of agency costs of stakeholderism. Lessons learned from dissecting AT&T's compensation contract should serve us well when diagnosing agency costs of stakeholderism in other contexts.
Edmans et al. (2024) and Cohen et al. (2023) identify the need for studies such as ours that focus on firm-level contracting decisions. Cautioning that the performance impact of environmental and social initiatives is not unambiguously positive, Edmans et al. (2024) emphasize the urgency to thoroughly consider the unique factors of each firm's contracting environment. Furthermore, Edmans et al. (2024, p. 20) “highlights the importance of academic research taking a more granular or more situational approach.” Accordingly, our detailed, firm-level analysis will allow us to observe critical intricacies of AT&T's contracting structure that may have been undetected if not examined under the microscope of our granular, situational analysis.
Our subsequent discussion and analysis of AT&T's very nuanced compensation structure provides further detail (such as to the potential opacity brought on by the addition of an ESG-based component of manager pay). The overall complexity of contemporary pay structure reinforces the conclusion by Larcker and Tayan (2023) that the intricacies of modern compensation arrangements can contribute to investor confusion. Even before the advent of widespread ESG-based pay Faulkender and Yang (2010) referred to the compensation-setting process as a “black box.” Today, given the additional challenge of identifying relevant and measurable ESG goals (and then being able to objectively assess performance in reaching those goals), that “black box” is increasingly resembling an Enigma machine. We hope that the insights from our in-depth investigation of the evolution of the AT&T compensation structure will help to crack the code inherent in many compensation arrangements and thus help us better understand the costs and benefits of this important contract.1
While focusing on the specifics of the AT&T compensation contract, our study may also provide greater insights regarding the generalities of financial contracting. Larcker and Tayan (2023), when identifying limitations of our understanding of corporate governance, alert us that “we do not know the economic ramifications of higher stakeholder orientation” (p. 5) and “we do not know the role that stakeholder interests should play in governance or how these should be prioritized relative to shareholder interests” (p. 5). Larcker and Tayan (2023) refer to such deficiencies as “gaping holes” in our knowledge of corporate governance. We will know more following our thorough evaluation of AT&T's compensation structure and our detailed consideration of agency costs of stakeholderism. Reaching a better understanding of the agency costs of stakeholderism will move us closer to the goal of Larcker and Tayan (2023, p. 5) of better understanding the “economic ramifications of higher stakeholder orientation.”
Furthermore, foreshadowing knowledge to be gained from the analysis of agency costs of stakeholderism, Tirole (2001) predicted that the shift to a stakeholder society would require a rewriting of the rules of corporate governance and a reconfiguration of institutions to assuage decision-makers to internalize the welfare of stakeholders. Unfortunately, as we will discuss throughout our analysis, this rewriting and reconfiguring is challenging and has recently created vulnerabilities that are prone to exploitation by rent-seeking managers and other opportunists. We label the impact of this potential exploitation as the agency costs of stakeholderism. Our deep dive into AT&T's compensation contract will help us to better identify, measure, and manage these important, but we contend, under-analyzed contracting costs.
Here's what we know about AT&T's recent compensation contracting efforts.
Table 1 documents the components of AT&T's CEO compensation from 2018 to 2023. In bold font is the pay structure for 2021, the year of adoption of an incentive plan to pay an ESG-linked bonus to AT&T's CEO (Mr. Stankey). Table 1 presents data from several recent AT&T Summary Compensation Tables contained in the respective yearly proxies. The Summary Compensation Table presents the amounts and types of compensation paid to the CEO and other executives. We focus on CEO compensation, although compensation for other executives is included in the proxy disclosure.
Table 1 shows that the CEO is paid a mix of salary, equity-based compensation, and non-equity incentive plan cash bonuses. The mix of pay components that are incentive-based (at-risk pay) should theoretically reward both short-term and long-term results. As explained in the footnotes and in the Compensation Discussion and Analysis (CD&A), salary is a fixed cash component of compensation, determined as a function of experience and skill, as well as market comparisons. Equity-based compensation is intended to motivate and reward managers to fulfill the long-term objectives of the company and “align executive and stockholder interests.” (AT&T Proxy, 2022, p. 51).
There were two types of equity-based pay included in this contract, performance shares and restricted stock units. The value of the Performance Shares depends on the stock price and also on return on invested capital (ROIC), a non-GAAP quantitative measure, modified by a factor reflecting total shareholder returns (TSR). The value of the restricted stock units also depends upon the performance of the underlying AT&T stock.
The ESG bonus is included in the non-equity incentive plan. AT&T refers to this plan in the proxy as the short-term incentive plan (STIP). This plan is based on a mixture of quantitative financial metrics as well as qualitative ESG outcomes.
The first two elements of the non-equity incentive plan (adjusted EPS and free cash flow) are technically non-GAAP, but these measures are popular choices for bonus targets. The use of non-GAAP values allows firms to remove items from the measures that they do not believe are directly under the control of management. For instance, a one-off asset impairment is typically excluded in adjusted EPS. Some such adjustments seem to make sense, namely that the underlying event (e.g., asset impairment) may be exogenous (e.g., act of nature or act of war). More equitably, as the CEO has no control over the event, CEO compensation should not be penalized. On the other hand, some adjustments might be viewed as “protecting” the CEO's pay from past bad decisions. For instance, continuing with the same example, the impairment may be the result of obsolescence (e.g., a stranded asset), which stems from a bad investment decision authorized by the CEO. Hence, such discretion allows CEO compensation to be protected (or “insulated”) from managerial missteps. Also, by definition, non-GAAP means that the FASB and the SEC have not codified a particular measure through the standard-setting process. This adds flexibility as to how the bonus metric is measured, even though it is a quantitative value. We further recognize that such metrics, by allowing for discretion regarding measurement, open the door for selective adjustments in order to ensure the bonus targets are met.
Notably, the 20% weighting for strategic initiatives was added for the first time in this (2022) proxy statement. According to AT&T's 2022 proxy (p. 51), the final “payouts are based on achievement of predetermined goals, with potential for adjustment (up or down) by the committee to align pay with performance.” Strategic goals were chosen as determinants of the STIP bonus “for their link to our business strategy” (AT&T Proxy, 2022, p. 53), and STIP captures “key strategic and transformation initiatives and team effectiveness.” (AT&T Proxy, 2022, p. 54).
Below are descriptions of the strategic goals, referred to as “strategic measures criteria,” followed by the outcomes (“accomplishments”). Importantly, because the ESG bonus measure is qualitative, there is additional flexibility regarding how the final bonus is determined. We emphasize that the extent of flexibility is important. As we noted with respect to the accounting-based measures, there are numbers but there is also considerable discretion as to how the numbers are tabulated. Suggesting even greater subjectivity, the qualitative assessments involve neither numbers nor tabulations. The heightened ambiguity is likely to contribute to heightened agency costs of stakeholderism.
All items indented and bordered are quoted from AT&T's 2022 Proxy, unless otherwise noted.
Strategic metric results—20% weighting
We next contemplate how these strategic measures can be accurately quantified or meaningfully evaluated. We also investigate how measurement issues may contribute to agency costs of stakeholderism.
Jensen (2001), Zingales (2019), and Bebchuk and Tallarita (2022) all argue that the inability to accurately measure the attainment of ESG goals is a primary catalyst for agency problems of ESG-compensation (and hence, a primary catalyst for agency costs of stakeholderism). We know that good corporate governance requires both effective external monitoring and rigorous managerial accountability. Our subsequent analysis suggests that AT&T's compensation schemes allow for neither.
Recognizing the potential for the agency costs of stakeholderism, Zingales (2019) condemns the recent lurch towards stakeholderism for contributing to a “dangerous power grab.” Facilitating the “grab” is stakeholderism's pluralistic objective function that effectively makes managers unaccountable for performance. Jensen (2001) concludes that there are no principled criteria for evaluating the performance of managers charged with multiple, sometimes competing, objectives (as under stakeholderism). When accountable to everyone, managers are ultimately accountable to no one. Unaccountable managers have immunity to opportunistically pursue self-interests.
Others have criticized the lack of audit and enforcement over whether firms actually achieve ESG goals to warrant the bonus. Often cited is the difficulty in verifying ESG outcomes. The question arises about who will do that work. The accounting profession claims it is their turf. However, numerous consulting companies now contend they are equipped to handle such audit functions of ESG data (Maurer, 2022). That is, unlike partnerships that perform accounting assurance (i.e., the Big Four), a new cadre of organizations is emerging that focuses on “sustainability audits,” seeking to provide assessment of environmental impact. These third-party entities most typically engage in measuring the more quantifiable effects and outcomes (such as greenhouse gas emissions).2
Firms may also seek a related type of attestation of environmental performance by fulfilling the requirements for certification by third-party organizations. For example, as evidence of successful emissions management AT&T cites that it has met the standards of independent assessors such as the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the Task Force on Climate Related Financial Disclosure (TFCD). See pp. 26–27 of this essay. Endeavoring to be anointed by a third-party certification agent appears to be a “good news, bad news” situation. The good news is that these organizations have clearly defined, quantifiable standards. The bad news, as identified by Gosling (2024), is that those standards may not be optimal for the specific firm. Recognizing the perhaps hidden, but important, costs of pursuing this type of certification, Gosling (2024, p. 17) cautions that the mandate to meet standards as pronounced from afar by a third-party imposes an “unjustified fettering of the board's discretion” to optimally formulate policy. Accordingly, we view the economics of the decision to pursue these external certifications as analogous to that of agreeing to financial covenants in debt contracts (i.e., both provide benefits from bonding, but both impose costs from loss of flexibility). Such trade-offs should be carefully weighed as part of the analysis of the agency costs of stakeholderism.3
Sharing this skepticism, SEC Commissioner Hester Peirce (SEC, May 25, 2022) argues that ESG will be impossible to reasonably define, and therefore to enforce. A likely consequence is that the use of ESG metrics in executive compensation contracts will prove only tenuously effective in delivering real progress because of measurement difficulty.
Ratings organizations have also emerged to provide firm-level assessments of ESG standing. A major issue with these ratings is measurement error and the relatively low correlation across ESG ratings. Correlation coefficients range between 0.38 and 0.71. The low correlations may affect the motivation of companies to improve their ratings. (Berg et al., 2019). By comparison to ESG ratings, credit ratings have a correlation of 0.92 (Agnew et al., 2022). This is another instance of less effective monitoring contributing to more extensive agency costs, and thus larger agency costs of stakeholderism.
Further focusing on weaknesses of monitoring, Bebchuk and Tallarita (2022) conclude that the use of ESG bonuses has a “questionable promise” and poses significant “perils” unless measurement and assessment issues can be resolved. Indeed, as we identify in our AT&T example, most of the ESG performance measures are qualitative. There is concern that qualitative-based awards are cover for missing the mark on quantitative financial measures. In other words, the bonus may be insulated from poor financial performance (Temple-West, 2022).
Cautioning of further measurement issues Tirole (1994), emphasizes that the ability to subject managers to yardstick comparison is a central tenet of successful performance-based incentive plans. However, ESG-performance goals are frequently vague and subject to manipulation. More cynical, Bebchuk and Tallarita (2022) argue that the vagueness, opacity, and susceptibility to manipulation result from an intentional effort to create opportunities for self-interested managers to exploit the lack of accountability and inflate payouts. An absence of objective criteria for evaluation renders managerial pay for ESG-efforts as perfunctory. Overall, a lack of managerial accountability may cause ESG-based compensation to become ineffective, if not counterproductive, thus further exacerbating the agency costs of stakeholderism.
In sum, when performance is not judged with a rigorous and unwavering yardstick, managers are not held accountable, and not differentiated into winners and losers (i.e., if everyone gets a trophy, what happens to the incentive to compete?). Therefore, it may be that ESG-related pay is not truly at risk and may be paid regardless of performance.4 Again, this contributes to the agency costs of stakeholderism.
Emphasizing that the effectiveness of performance-based incentives is contingent upon valid measures of performance, Tirole (1994) further equates the absence of a yardstick to the presence of a “quiet life” for unaccountable (or under-accountable) managers. Described by Hicks (1935) and Bertrand and Mullainathan (1999, 2003), the “quiet life” theory holds that managers may be willing to expend resources to appease potentially contentious stakeholders (sacrificing efficiency and shareholder value) in order to enjoy the personal benefits of more amicable relationships and a more serene existence. This loss of value represents an additional agency cost of stakeholderism.
Another specific measurement issue that plagues ESG-contracting is known as the time-horizon mismatch. As formally articulated by Larcker et al. (2021), a timing mismatch frequently occurs because ESG outcomes typically require many years to fully materialize (e.g., Dyck et al., 2019; Fancy, 2021; Ittner et al., 1997) while compensation payoffs are primarily based on relatively shorter-term results.5 Our analysis of AT&T's compensation contracting suggests that AT&T has not overcome this weakness.
Providing some insights as to the breadth of this chasm in the timing mismatch, Burchman (2020) reports that even “long-term” incentive plans currently reward performance for 3 years, while climate targets (such as the Paris Agreement's carbon neutrality goals) extend until 2050.6 Accordingly, as summarized by Cordeiro and Sarkis (2008) and Ikram et al. (2023), ESG activities typically impose significant short-term costs, and myopic managers may not be willing to endure the more immediate expected pain (i.e., reduction in financial performance from the upfront ESG costs) to achieve the anticipated long-term environmental and social gain. The value forgone from the underinvestment that may result because of this timing-mismatch likely represents yet another agency cost of stakeholderism.
Our review of the literature suggests two broad approaches to ameliorate the weakness of timing mismatch. Solution one is to switch to compensation based on long-term performance. That is, if short-term measures are uninformative because of the length of time to realize payoffs (Govindarajan & Gupta, 1985), firms should tie compensation more extensively to long-term performance. Calling for a rather dramatic deviation from standard pay practices, Edmans (2023) recommends that compensation design should abandon short-term bonuses and should instead overweight pay structure with the granting of shares that managers must hold for many years. As also noted by Flammer and Bansal (2014) and Delves and Resch (2019), Edmans (2023) argues that long-term incentives are necessary to motivate long-term investments (such as many of the E and S endeavors to protect the environment and to support employees). Thus, one solution to the timing mismatch is to shift compensation from providing short-term bonuses to awarding stock ownership tied to long-term retention of shares. Our analysis of its compensation contracting confirms that AT&T has not chosen this approach.
Solution two is to switch compensation philosophy from “pay for performance” to “pay for progress.” Toplensky (2024) opines that the challenge of effectively achieving ESG goals is balancing between short-term and long-term. Our math suggests that the optimal balance between short-term and long-term is a set of measures and rewards centered on the intermediate term. Applying directly to ESG contracting, Burchman (2020) suggests that pay structure should set intermediate milestones to encourage incremental advances toward long-term goals. That is, compensation contracts should establish medial targets, the achievement of which would facilitate the firm's movement along a trajectory to ultimately accomplish its long-term ESG objectives.
However, when it comes to basing ESG-compensation on rewarding incremental steps, the theory appears to be sound, but putting it into practice appears difficult. FW Cook (2022) and Edmans (2021) challenge the firm's ability to accurately measure short-run progress in terms of meeting long-term goals (which are difficult themselves to define). Our analysis of the AT&T compensation contracts suggests that AT&T, like most firms today, struggles to define specific milestones along that desired future path and is challenged to measure progress in any reliable way. Accordingly, AT&T has made no discernable attempts (at least publicly available ones) to establish intermediate, measurable milestones to facilitate progress toward achieving longer-term objectives. Without measurability, there is no accountability. Without accountability, the agency costs of stakeholderism (such as this underinvestment) will likely continue.
Our case study of ESG activity at AT&T provides evidence consistent with empire-building. In 2022, AT&T's proxy required six pages to document its extensive ESG infrastructure (AT&T Proxy, 2022, pp. 32–37). (We condense and outline this infrastructure in Appendix A).
Table 4 shows the components of this ESG infrastructure (or “empire”) under various headings that we created. For instance, there are 13 titled positions mentioned in the Compensation Discussion & Analysis (CD&A) of the 2022 Proxy that are associated in some way with ESG.7 Examples include: Senior Vice President—Corporate Social Responsibility, Chief Sustainability Officer, Chief Diversity and Development Officer, Chief Inclusion Officer, and Assistant Vice President—Global Environmental Sustainability, among others. There were approximately 35 different boards, committees, councils, or programs, such as the Contributions Council, CSR Governance Council, and CEO's Diversity Council, among others. Also disclosed and discussed in the CD&A are various Policies and Principles, such as Human Rights Policy, Code of Conduct and Anti-Bribery and Anti-Corruption (ABAC) Policy, and Principles of Conduct for Suppliers, among others. Finally, there were eight reporting regimes and disclosure initiatives to which AT&T subscribes, such as the Global Reporting Initiative, Sustainability Accounting Standards, the Climate Disclosure Project Assessment, and the Transparency Report, among others.
Table 2 shows the prevalence of ESG References, along with other pertinent disclosures. The Total # of ESG References (column 2) is a simple word count of the number of times ESG was mentioned in the corresponding proxy statement. Almost all of AT&T's infrastructure for ESG was put in place over the past few years, evidenced by a simple word count (search term: ESG). When we revisit this word count for AT&T in 2024, its ESG infrastructure appears to be shrinking, a phenomenon we will subsequently discuss.
As we further attempt to identify and understand the various agency problems of stakeholderism, we may also consider the firm's choice to extensively engage in ESG-related activities (i.e., empire building) as an especially pernicious symptom of the “quiet life” syndrome. Jensen and Murphy (1990) recognize that firms increasingly face pressures to satisfy special interest groups. Such pressures are mounting in intensity, as Jensen and Murphy (1990) warn of the incursion of “uninvited guests” into the firm's contracting processes. Numbering among the “uninvited guests” who are today crashing the ESG party would be social activists, DEI advocates, managers of sustainability-focused investment funds, and environmental ideologues. The virtue signal of initiating ESG-focused activities (such as building an empire of ESG infrastructure) may help to evict the “uninvited guests” and thus should help to make a manager's life more “quiet.”8 Such a quest for “quiet” is characteristic of a classic agency problem, in which the manager captures the benefits of a more serene (or “quiet”) existence, while the shareholders bear the costs. In our Table 4 and in Appendix A, we document AT&T's explicit actions to placate the increasingly influential and vocal special interest groups.9 We can then ask: is AT&T, by assembling an ESG empire, paying to alleviate special interest pressures and thus achieve a “quiet” life for its management? As evidenced by AT&T's ESG infrastructure, appeasing these “guests” requires incurring non-trivial expenditures. While we do not have access to information to assess the profitability of each investment, such commitment of resources by AT&T may be interpreted as another agency cost of stakeholderism.
Furthermore, in 2023–2025, we have witnessed a backlash to ESG initiatives. Specifically, Edmans (2024) notes that ESG has become “weaponized” and is enduring attacks across multiple fronts. Elon Musk laments that ESG is a social media-spawned “scam” perpetuated by “woke mob rule” (Tett, 2022). Marsh (2024) identifies that political opposition has triggered high-visibility companies to downplay or camouflage their social and environmental undertakings (intentionally misdirecting or de-emphasizing ESG efforts through an effort known as “green-hushing”). Cutter and Glazer (2024) note similar instances of green-hushing whereby high-profile firms take explicit actions to present a lower profile regarding ESG efforts (such as by redacting the use of ESG-centric language, re-titling leadership positions, and re-branding committees and task forces). As one of the highest of the high-profile companies, AT&T may be especially vulnerable to such opposition to ESG and therefore may be more likely to engage in greenhushing activities. In our subsequent empirical analysis, we track AT&T's disclosures to identify whether AT&T is reacting to the recent anti-ESG rhetoric by doing less ESG (or at least, engaging in less public pronouncement about its ESG initiatives).
To provide evidence of a potential change in AT&T's ESG infrastructure, Table 4 also contains an update for Proxy (Fiscal) Year of 2024 (2023). We searched the proxy to determine if the same positions, committees, boards, principles, reports, etc. were still mentioned 2 years later. Although we cannot verify these missing (N/M or not mentioned) entities were discontinued, one could reasonably conclude they are inactive, either perhaps terminated or combined with another entity. They may also have simply not been mentioned in the current report. However, it is likely the related activity was reduced or the role diminished from earlier years’. There was a grand total for Proxy (Fiscal) Year 2022 (2021) of 65 ESG-related references. The number of N/Ms for Proxy (Fiscal) Year 2024 (2023) was 28, or 43% (28/65). Thus, AT&T appears to be responding to the recent pushback against ESG undertakings by scaling back its ESG infrastructure or, at least, reducing mention of its ESG infrastructure.10 The resultant inefficiencies from this ebb and flow can be also attributed as agency costs of stakeholderism.
Also, we note from Table 1 that total CEO compensation actually increased following the decrease in the size of AT&T's ESG empire. Specifically, Table 1 indicates that CEO total compensation rose by 7% from 2021 to 2023, despite the likely reduction in ESG-related infrastructure.11 We argue that this is additional evidence of a disconnect between ESG performance and CEO compensation (which further contributes to the agency costs of stakeholderism).
Managers may also extract rents by diverting firm resources to preferred charitable and environmental causes. Even before being codified into the frameworks of Friedman (1970) and Jensen and Meckling (1976), there was the Managerial Discretion Model from Williamson (1963) which considered how self-interested managers, through purportedly philanthropic initiatives, deploy the firm's assets in ways that bolster the manager's status, power, and prestige. Cordeiro and Sarkis (2008); Masulis and Reza (2015); Brown et al. (2006); Krüger (2015), and Jensen and Murphy (1990) similarly note the temptation of managers to commandeer shareholder resources to finance expenditures that enhance personal utility by sponsoring pro-stakeholder endeavors, such as supporting favored charitable or environmental undertakings. Accordingly, the possibility of managers destroying shareholder value by misusing corporate resources for personal aggrandizement is nothing new to agency theorists. What is new is that the movement toward the stakeholder paradigm not only provides license to managers to actively engage across stakeholder populations, but actually rewards managers for deploying resources to social, environmental, and other non-shareholder constituencies. Therefore, somewhat perversely, stakeholderism provides incentives for managers to do the very things that Friedman (1970) and Jensen and Meckling (1976) identified as likely to destroy shareholder value. We argue that a large part of navigating this new world of contractual schizophrenia is accurately recognizing the benefits and the costs of stakeholderism, including the agency costs that are the focus of this essay.
When classifying different members of the ESG ecosystem, Edmans (2024) identifies “opportunists” as those seeking to capitalize upon the recent surge of popular support for ESG to capture additional economic benefits (such as taking actions to bolster compensation).
Being labelled an opportunist suggests that some questionable action is being undertaken. Undertaking a questionable action typically requires motive and opportunity. For “opportunistic” managers, we argue that one motive was to convince shareholders to grant additional ESG-linked compensation, or to otherwise contrive concessions to their compensation structure, that are favorable to managers.
It is intuitive that people react to incentives in predictable ways, unless however a bonus is somehow essentially guaranteed (maybe because the target outcome is set so low, or the target outcome is made to be so ambiguous that achievement can be virtually assured just by using judgment or qualitative attributes). Making the outcome a foregone conclusion of “success” would not require any incentivized behavioral adjustments to achieve the result.
Additionally, there is concern that qualitative-based awards are cover for missing the mark on quantitative financial measures. Perceiving this type of circumstance more skeptically, Temple-West (2022) interprets such a bonus as providing insulation from poor financial performance. Indeed, some observers have theorized that the motive for linking executive compensation to ESG is to hide weak financial performance (Rajgopal, 2021). Similarly, Gao et al. (2024) document that poorly performing firms increase CSR actions, compared to similar firms. A frequently referenced adage is: “Firms do good by doing well.” That is, stronger financial performance generates the additional resources that facilitate the undertaking of ESG endeavors. Interestingly, our finding, and that of Gao et al. (2024), suggests the opposite.
Our detailed analysis of compensation contracting at AT&T provides support for many of the above arguments advanced in these studies. We start with a simple time series plot of ESG scores. Figure 1 provides the time series of S&P Global ESG Scores for AT&T. Beginning at 68 (out of 100) in 2013, the rating dropped to 62 by 2016, then rose to 75 by 2020, seesawed for a couple of years (to 74, then to 77), and finally finished at 63 as of 2023, nearly tied with the lowest in the series. We note that the score peaked in 2022, immediately after the initiation of the ESG-linked bonus. As the establishing of a bonus plan that is tied to ESG shows that the firm is “doing something,” the ESG-certification services that create the various ratings may view the company more favorably simply because of the presence of the bonus.12 We further note the score's drop during 2023 (from 77 in 2022 to 63 in 2023). Is it coincidental that AT&T's ESG score drops so sharply during the same year it substantially downplayed its ESG efforts while possibly significantly dismantled its ESG infrastructure?
More importantly, what is interesting to us is there appears to be no connection between the ESG score and the ESG-based compensation paid to AT&T's CEO. From Table 2, we see that the CEO got paid a sizable ESG-based bonus when doing more ESG in 2021 and 2022. The CEO also got paid a sizable ESG-based bonus when doing less ESG in 2023 (the year in which he led AT&T to a considerably lower ESG rating). What is even more interesting about the ESG score is that here is one instance where ESG performance can be assessed quantitatively (i.e., the ESG score dropped from 77 in 2022 to 63 in 2023), but then the drop in ESG score appears to be unimportant because the CEO was still subsequently awarded 120% of target payout (as we document in Table 2).
Figures 2 and 3 report select operating and market-based financial results for AT&T (revenues, operating income, operating cash flow, and free cash flow) as well as measures of market value and stock price performance. These exhibits provide points of reference around 2021, the year that AT&T initiated the ESG bonus. The operating results were lower during the year immediately following the ESG bonus adoption. Finally, Figure 4 shows AT&T's stock price performance over the same period.
Table 2 provides details on the ESG bonus. AT&T discloses that the target award amount for the STIP was $5,600,000, but Mr. Stankey achieved 123% of that amount (Proxy, 2022, p. 63). During 2021, the final payout under the STIP was $6,888,000 ($5,600,000 * 1.23). Why pay out 123%? Why not 122% or 124%? We seek to understand.
Given such nebulous and non-quantifiable goals, here is how AT&T attempted to justify the payout for ESG performance.
The Committee approved 100% payout of the strategic metric (20% weighting) for all the Named Executive Officers (NEOs), based on the accomplishments listed below. (2022 Proxy, page 57)
Given the qualitative nature of the new strategic metric, AT&T appears to use various indicators of success to justify the payout. To provide a measure of external validation to authenticate ESG outcomes (“accomplishments”), AT&T lists entities that have granted Special Recognition (AT&T Proxy, 2022, page A-2). Examples of such Special Recognition include honors bestowed by DiversityInc (top 50 companies for diversity), the Hispanic Association on Corporate Responsibility, JUST Capital (America's most just companies), and so on.
Per a new disclosure requirement from the SEC, firms must provide what executives were actually paid (realized) for the year, in addition to the pay they were granted. For Mr. Stankey at AT&T, data regarding realized compensation is shown below, juxtaposed to the grant day pay valuations.
We argue that the title of the above insert (“Pay-at-Risk”) is perhaps a misnomer. Because measurement is difficult, and accountability is questionable, ESG-based bonuses may be used to provide countervailing compensation when other components of pay happen to be lower. Note from the above data that Performance Share Payout and Restricted Stock Units Payout (both adversely affected by the recent poor performance of AT&T's stock) provided actual compensation far below the target amount. However, the payout from the Short-Term Incentive Plan (which includes the ESG bonus) substantially exceeds the target, smoothing the value of overall compensation by offsetting the weaker market-based performance. Thus, pay risk may be reduced if increases in the ESG bonus may be used to make up for decreases in other components of compensation.13 Because efforts to engineer reductions in managers' risk represent another type of agency cost, we may add this to our list of contributors to agency costs of stakeholderism.
In Table 3, we consider the percentage composition of AT&T's compensation structure (Panel A) and compare to that of the average firm in the S&P 500 (Panel B). We focus on Non-Equity Incentive pay because it incorporates the ESG-based compensation. From column 6 of Panel A, note the increase in AT&T's Non-Equity Incentive pay (as a percentage of total compensation) that occurs upon the advent of awarding ESG-based pay in 2021. AT&T's initial granting of ESG-based pay in 2021 results in an almost doubling of Non-Equity Incentive pay as percentage of total compensation (i.e., 27.8% in 2021 vs. 15.5% in 2020). This suggests that AT&T made a concerted effort to increase the ESG incentive-based pay in 2021 (which coincided with its decrease in operating and financial market performance). We next extend our analysis to the entirety of the sample period represented in Table 3. A comparison of AT&T's Non-Equity Incentive pay that includes the ESG-bonus (years 2021–2023) to that of the pre-bonus period (years 2013–2020) indicates a significant increase during the years of the ESG bonus (Wilcoxon non-parametric test p-value of 0.018). Applying a similar test to the S&P 500 data (Panel B) reveals no significant difference across the market.
Focusing on the relation between AT&T's performance and the CEO compensation, we can see from Figures 2 and 3 that the operating and financial metrics generally indicate weaker performance during the years in which the ESG-bonus was paid (2021–2023).
Also, note from Figure 4 that AT&T's share price has trended lower during the years of the ESG-bonus. This negative movement in the share price would diminish the value of any equity-linked compensation—the value of restricted stock would erode and the value of options would be underwater. However, the ESG-linked bonus emerges as an offset to the decrease in value of the equity-based pay.
More broadly, we typically think of agency costs resulting from managers extracting an extra amount of pay. We suggest another type of agency cost resulting from managers extracting an extra type of pay. Specifically, the AT&T example has introduced us to a new type of ESG-based pay, where measurability is nebulous and accountability is subjective. Such ambiguity injects opportunity for smoothing or hedging the CEO's compensation whereby ESG-linked compensation may be going up when equity-linked compensation is going down. This offset provides an advantage to managers by taking the risk out of pay-at-risk.14
Agency costs of stakeholderism are the costs attributable to and arising from conflicts of interest that emerge when moving from shareholder primacy to stakeholder primacy. Our dissection of AT&T's compensation contract and our subsequent examination of agency costs of stakeholderism may offer insights as to why ESG has struggled to achieve its once lofty ambitions. As emphasized in the 2024 Spring edition of this journal, prior literature identifies symptoms of ESG's decline. Specifically, Edmans (2024) laments ESG's failure to fulfill its original promise because of “exploitation by opportunists and imposters.” Chew (2024) warns that the “pitfalls” of ESG may offset the benefits, while Denis (2024) cautions that the movement toward stakeholder orientation “opens a Pandora's Box.” Accordingly, we seek to add value by applying economic discipline from agency theory to organize and better understand costs that may have resulted from “exploitation”, have exemplified “pitfalls,” and have appeared to emerge from “Pandora's Box.” For these reasons, we suggest that agency costs of stakeholderism have contributed to the decline in investor support of ESG and contend that the management of these costs will primarily chart ESG's future.
To provide detailed evidence, we study the CEO compensation contract for AT&T and identify specific agency costs of stakeholderism, especially as in relation to ESG-based bonuses. We are struck by how this movement of ESG bonuses has so little application of sound management practice behind it, one part of which is the assignment of accountability, which depends on reasonable measurability. For example, AT&T states that short-term incentive payouts, paid in cash, are “based on achievement of predetermined goals, with potential for adjustment (up or down) by the Committee to align pay with performance.” (AT&T Proxy, 2022, page 51). However, a reading of the proxy shows the goals related to ESG to be general, if not ambiguous. Such ambiguity further contributes to the agency costs of stakeholderism. Without well-defined ground rules in place, will this be another bridge to nowhere? The value destruction associated with that bridge would be represented in the agency costs of stakeholderism.
Additionally, Jensen (2001) argues that Stakeholder Theory, which holds that managers should give the interests of all stakeholders at least equal weighting with those of shareholders, is plagued by the inability of executives to navigate the trade-offs between the often-conflicting preferences of the firm's varied claimants. That is, if tasked to be accountable to everyone, managers actually become accountable to no one. Jensen (2001) concludes that, if there is no principled approach to make decisions, there is no way to evaluate managerial performance. Accordingly, managers are unfettered to pursue favored projects, frequently resulting in extraction of shareholder wealth. The resultant value destruction can be considered agency costs of stakeholderism.
Throughout our essay, we provide documentation and analysis that highlights the magnitude and significance of agency costs of stakeholderism. Nevertheless, despite our emphasis on negative aspects of our current contracting environment, we remain optimistic regarding the fortitude of the financial markets to evolve and address these newly categorized agency conflicts. We hope that our examination of the agency costs of stakeholderism will help guide markets in devising solutions to important contracting problems that continue to arise as we seek the optimal balance between shareholder and stakeholder primacy.