利益相关者主义的代理成本:来自AT&T薪酬合同的证据

IF 1.4 Q4 BUSINESS, FINANCE
Stephen Bryan, Robert Nash, Ajay Patel
{"title":"利益相关者主义的代理成本:来自AT&T薪酬合同的证据","authors":"Stephen Bryan,&nbsp;Robert Nash,&nbsp;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&amp;T's CEO Mr. John Stankey. We gather detailed compensation contract data for the years 2018–2023. Delving deeply into AT&amp;T's compensation structure, we use AT&amp;T's contract as a model to identify and analyze specific examples of agency costs of stakeholderism. Lessons learned from dissecting AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's recent compensation contracting efforts.</p><p>Table 1 documents the components of AT&amp;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&amp;T's CEO (Mr. Stankey). Table 1 presents data from several recent AT&amp;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&amp;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&amp;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&amp;T stock.</p><p>The ESG bonus is included in the non-equity incentive plan. AT&amp;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&amp;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&amp;T Proxy, <span>2022</span>, p. 53), and STIP captures “key strategic and transformation initiatives and team effectiveness.” (AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's compensation contracting suggests that AT&amp;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 &amp; 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&amp;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&amp;T compensation contracts suggests that AT&amp;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&amp;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&amp;T provides evidence consistent with empire-building. In 2022, AT&amp;T's proxy required six pages to document its extensive ESG infrastructure (AT&amp;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 &amp; Analysis (CD&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's explicit actions to placate the increasingly influential and vocal special interest groups.9 We can then ask: is AT&amp;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&amp;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&amp;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&amp;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&amp;T's disclosures to identify whether AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;P Global ESG Scores for AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T initiated the ESG bonus. The operating results were lower during the year immediately following the ESG bonus adoption. Finally, Figure 4 shows AT&amp;T's stock price performance over the same period.</p><p>Table 2 provides details on the ESG bonus. AT&amp;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&amp;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&amp;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&amp;T lists entities that have granted Special Recognition (AT&amp;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&amp;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&amp;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&amp;T's compensation structure (Panel A) and compare to that of the average firm in the S&amp;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&amp;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&amp;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&amp;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&amp;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&amp;P 500 data (Panel B) reveals no significant difference across the market.</p><p>Focusing on the relation between AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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":"{\"title\":\"Agency costs of stakeholderism: Evidence from compensation contracting at AT&T\",\"authors\":\"Stephen Bryan,&nbsp;Robert Nash,&nbsp;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&amp;T's CEO Mr. John Stankey. We gather detailed compensation contract data for the years 2018–2023. Delving deeply into AT&amp;T's compensation structure, we use AT&amp;T's contract as a model to identify and analyze specific examples of agency costs of stakeholderism. Lessons learned from dissecting AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's recent compensation contracting efforts.</p><p>Table 1 documents the components of AT&amp;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&amp;T's CEO (Mr. Stankey). Table 1 presents data from several recent AT&amp;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&amp;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&amp;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&amp;T stock.</p><p>The ESG bonus is included in the non-equity incentive plan. AT&amp;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&amp;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&amp;T Proxy, <span>2022</span>, p. 53), and STIP captures “key strategic and transformation initiatives and team effectiveness.” (AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's compensation contracting suggests that AT&amp;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 &amp; 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&amp;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&amp;T compensation contracts suggests that AT&amp;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&amp;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&amp;T provides evidence consistent with empire-building. In 2022, AT&amp;T's proxy required six pages to document its extensive ESG infrastructure (AT&amp;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 &amp; Analysis (CD&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T's explicit actions to placate the increasingly influential and vocal special interest groups.9 We can then ask: is AT&amp;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&amp;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&amp;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&amp;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&amp;T's disclosures to identify whether AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;P Global ESG Scores for AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;T initiated the ESG bonus. The operating results were lower during the year immediately following the ESG bonus adoption. Finally, Figure 4 shows AT&amp;T's stock price performance over the same period.</p><p>Table 2 provides details on the ESG bonus. AT&amp;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&amp;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&amp;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&amp;T lists entities that have granted Special Recognition (AT&amp;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&amp;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&amp;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&amp;T's compensation structure (Panel A) and compare to that of the average firm in the S&amp;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&amp;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&amp;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&amp;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&amp;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&amp;P 500 data (Panel B) reveals no significant difference across the market.</p><p>Focusing on the relation between AT&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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&amp;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}","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

摘要

利益相关者主义的代理成本是指从股东至上转向利益相关者至上所产生的额外利益冲突所产生的成本。在该杂志2024年春季版的开头,编辑们阐述了专注于可持续性的优势,而不是更广泛使用的ESG。麦科马克(2024,第2页)指出了一个主要的担忧,他解释说,ESG代表了“各种各样的开放式争议,这些争议在本质上往往更多是社会和政治的,而不是经济的,因此容易引起严重的混乱。”我们同意并努力减少这种混淆。在我们的论文中,我们认识到麦科马克的关注,并从经济角度(而不是政治或社会角度)通过唤起代理理论(金融经济学家工具箱中最强大的工具之一)来处理这个重要问题。代理理论涉及对利益冲突的经济分析。2024年春季刊的另一篇文章指出了利益冲突在理解ESG方面的重要作用。具体来说,在他的新书的后记中,周(2024,第28页)指出,“股东和利益相关者之间的冲突——以及不同利益相关者群体之间的冲突——无处不在。”在2024年春季刊的另一篇文章中,Denis(2024)进一步认为,从股东至上到利益相关者至上的范式转变所产生的代理成本可能会超过以利益相关者为中心的努力(如企业社会责任)的好处。因此,从2024年春季的那期杂志中,我们可以得出结论,涉及利益相关者的利益冲突普遍存在,而且可能非常大。在本文中,我们试图以这些重要的见解为基础。首先,我们正式定义了利益相关者主义的代理成本,然后我们确定了这些成本如何产生以及这些成本如何影响公司价值的具体例子。本文研究了报酬契约中利益相关者主义的代理成本。早在Friedman(1970)和Jensen和Meckling(1976)的时代,金融经济学家就一直建议企业设计管理层薪酬合同,以使代理成本最小化,股东价值最大化。Jensen和Meckling(1976)的开创性研究提供了代理成本的初步分类。具体来说,Jensen和Meckling(1976)区分了股权的代理成本和债务的代理成本,并分别给出了例子。运用这一理论,Yermack(1995)和Bryan, Hwang, and Lilien(2000)总结的先前关于薪酬结构的研究主要关注股权的代理成本,并强调基于股权的高管薪酬通过在管理者和股东财富之间建立更直接的联系,在管理这种利益冲突方面的作用。进一步借鉴这一理论,John and John(1993)和Bryan, Nash, and Patel(2006)等实证研究明确考虑了债务的代理成本如何影响薪酬结构。然而,除了股权的代理成本和债务的代理成本外,Denis(2024)认为还有一些代理成本可能属于不同的分类类别(即利益相关者主义的代理成本)。我们同意丹尼斯(2024)的观点,故事并非如此。这个故事的最新篇章始于2019年8月,当时商业圆桌会议(BRT)“公司宗旨重述”敦促管理者致力于满足所有利益相关者的需求。BRT的声明被视为一个重大的哲学转变(甚至被一些观察者称为“构造转变”),它开创了一个勇敢的新世界,其中涉及不太熟悉的代理成本,特别是利益相关者主义的代理成本。为了更好地理解我们新的契约环境,我们需要更好地理解利益相关者主义的代理成本。从一元论(股东)到多元论(利益相关者)的转变增加了许多复杂性。为了弄清楚复杂的情况,我们从简单的小事开始——我们考虑来自一家公司的一份薪酬合同。具体来说,我们研究了at&t首席执行官John Stankey先生的薪酬合同。我们收集了2018-2023年的详细薪酬合同数据。深入研究at&t的薪酬结构,我们使用at&t的合同作为模型来识别和分析利益相关者主义代理成本的具体例子。剖析美国电话电报公司薪酬合同的经验教训,应该对我们在其他情况下诊断利益相关者主义的代理成本有很好的帮助。Edmans等人(2024)和Cohen等人(2023)认为有必要进行像我们这样专注于企业层面合同决策的研究。Edmans等人(2024)警告说,环境和社会举措对绩效的影响并非毫无疑问是积极的,他们强调了彻底考虑每个公司承包环境的独特因素的紧迫性。此外,Edmans等人(2024,p。 20)“强调了学术研究采取更细致或更情境化方法的重要性。”因此,我们详细的、公司层面的分析将使我们能够观察到at&t合同结构的关键复杂性,如果不是在我们细致的、情境分析的显微镜下进行检查,这些复杂性可能不会被发现。我们随后对at&t非常微妙的薪酬结构进行了讨论和分析,提供了进一步的细节(例如,增加基于esg的经理薪酬组成部分可能带来的不透明性)。当代薪酬结构的总体复杂性强化了Larcker和Tayan(2023)的结论,即现代薪酬安排的复杂性可能会导致投资者的困惑。甚至在普遍采用基于esg的薪酬之前,Faulkender和Yang(2010)就将薪酬设定过程称为“黑匣子”。今天,考虑到确定相关和可衡量的ESG目标(然后能够客观地评估达到这些目标的表现)的额外挑战,这个“黑匣子”越来越像一台谜机。我们希望通过对at&t薪酬结构演变的深入调查所获得的见解将有助于破解许多薪酬安排中固有的代码,从而帮助我们更好地理解这一重要合同的成本和收益。在关注at&t薪酬合同细节的同时,我们的研究也可能对财务合同的一般性提供更深入的见解。Larcker和Tayan(2023)在确定我们对公司治理理解的局限性时,提醒我们“我们不知道更高的利益相关者导向的经济后果”(第5页)和“我们不知道利益相关者利益在治理中应该发挥的作用,或者相对于股东利益,这些利益应该如何优先考虑”(第5页)。Larcker和Tayan(2023)将这些缺陷称为我们对公司治理知识的“缺口”。在我们对at&t的薪酬结构进行全面评估并详细考虑利益相关者的代理成本后,我们将了解更多。更好地理解利益相关者主义的代理成本将使我们更接近Larcker和Tayan(2023,第5页)的目标,即更好地理解“更高的利益相关者导向的经济后果”。此外,Tirole(2001)预测,向利益相关者社会的转变将需要重写公司治理规则和重新配置制度,以缓和决策者将利益相关者的福利内部化,这预示了从利益相关者主义的代理成本分析中获得的知识。不幸的是,正如我们将在整个分析中讨论的那样,这种重写和重新配置是具有挑战性的,并且最近产生了容易被寻租经理和其他机会主义者利用的漏洞。我们将这种潜在剥削的影响称为利益相关者主义的代理成本。我们对at&t薪酬合同的深入研究将帮助我们更好地识别、衡量和管理这些重要的、但我们认为未被分析的合同成本。以下是我们对美国电话电报公司最近的薪酬合同努力的了解。表1列出了2018年至2023年美国电话电报公司CEO薪酬的组成部分。用粗体字表示的是2021年的薪酬结构,这一年将采用一项激励计划,向at&t首席执行长(斯坦基)支付与esg相关的奖金。表1给出了美国电话电报公司在各自年度代理中包含的几个最近的薪酬汇总表的数据。薪酬汇总表显示了支付给首席执行官和其他高管的薪酬金额和类型。我们关注的是首席执行官的薪酬,尽管其他高管的薪酬也包含在委托书披露中。表1显示了CEO的薪酬组合,包括工资、基于股权的薪酬和非股权激励计划的现金奖金。以激励为基础的薪酬组合(风险薪酬)理论上应该同时奖励短期和长期业绩。正如在脚注和薪酬讨论与分析(CD&amp;A)中所解释的那样,工资是薪酬的固定现金组成部分,是由经验和技能以及市场比较决定的。基于股权的薪酬旨在激励和奖励经理,以实现公司的长期目标,并“协调高管和股东的利益”。(AT&T Proxy, 2022,第51页)。这份合同包括两种基于股权的薪酬,业绩股和限制性股票单位。业绩股的价值取决于股票价格和投资资本回报率(ROIC),这是一种非公认会计准则的量化指标,由反映股东总回报(TSR)的因素修改。 限制性股票单位的价值也取决于相关美国电话电报公司股票的表现。ESG奖金包含在非股权激励计划中。at&t在委托书中将此计划称为短期激励计划(STIP)。该计划基于定量财务指标和定性ESG结果的混合。非股权激励计划的前两个要素(调整后每股收益和自由现金流)在技术上是非公认会计准则,但这些指标是奖金目标的普遍选择。使用非公认会计准则值允许公司从他们认为不直接受管理层控制的措施中删除项目。例如,一次性资产减值通常不包括在调整后的每股收益中。有些调整似乎是有意义的,即基础事件(如资产减值)可能是外生的(如自然行为或战争行为)。更公平地说,由于CEO对事件没有控制权,CEO的薪酬不应该受到惩罚。另一方面,一些调整可能会被视为“保护”首席执行官的薪酬不受过去错误决策的影响。例如,继续使用相同的例子,减值可能是由于过时(例如,搁浅的资产),这源于首席执行官授权的错误投资决策。因此,这种自由裁量权使首席执行官的薪酬受到保护(或“绝缘”),不受管理失误的影响。此外,根据定义,非公认会计准则意味着FASB和SEC没有通过标准制定过程编纂特定措施。这增加了如何衡量奖金指标的灵活性,即使它是一个定量值。我们进一步认识到,这些衡量标准允许自由裁量权,为选择性调整打开了大门,以确保实现奖金目标。值得注意的是,在这份(2022年)代理声明中,首次增加了战略举措20%的权重。根据at&t 2022年的委托书(第51页),最终的“薪酬是基于预定目标的实现,委员会有可能调整(上调或下调),以使薪酬与绩效保持一致。”战略目标被选为STIP奖金的决定因素,“因为它们与我们的业务战略有联系”(AT&T Proxy, 2022,第53页),而STIP抓住了“关键的战略和转型计划以及团队效率”。(AT&T Proxy, 2022,第54页)。下面是对战略目标的描述,称为“战略度量标准”,然后是结果(“成就”)。重要的是,由于ESG奖金衡量标准是定性的,因此在如何确定最终奖金方面存在额外的灵活性。我们强调灵活性的程度很重要。正如我们在关于以会计为基础的措施方面所指出的那样,有数字,但在如何编制数字方面也有相当大的自由裁量权。定性评估既不涉及数字,也不涉及表格,这显示出更大的主观性。模糊性的增加可能会导致利益相关者主义的代理成本增加。除非另有说明,所有缩进和有边框的项目均引用自at&t的2022代理。战略度量结果- 20%权重我们接下来考虑如何准确量化或有意义地评估这些战略度量。我们还研究了度量问题如何影响利益相关者主义的代理成本。Jensen(2001)、Zingales(2019)、Bebchuk和Tallarita(2022)都认为,无法准确衡量ESG目标的实现是ESG薪酬代理问题的主要催化剂(因此也是利益相关者主义代理成本的主要催化剂)。我们知道,良好的公司治理既需要有效的外部监督,也需要严格的管理问责制。我们随后的分析表明,美国电话电报公司的薪酬方案不考虑这两种情况。认识到利益相关者主义的潜在代理成本,津加莱斯(2019)谴责最近向利益相关者主义的倾斜导致了“危险的权力攫取”。促进“抢夺”的是利益相关者主义的多元目标功能,它有效地使管理者对绩效不负责任。Jensen(2001)得出结论,没有原则性的标准来评估管理人员的绩效,这些管理人员负责多个,有时是竞争的目标(如在利益相关者主义下)。当经理对所有人负责时,他们最终不需要对任何人负责。不负责任的管理者有机会主义地追求自身利益的豁免权。其他人则批评缺乏审计和执法,无法确定公司是否真正实现了ESG目标,以获得奖金。经常被提及的是难以核实ESG成果。问题是谁来做那项工作。会计行业声称这是他们的地盘。然而,许多咨询公司现在认为他们有能力处理ESG数据的此类审计功能(Maurer, 2022)。 也就是说,与执行会计保证的伙伴关系(即四大)不同,一种新的组织骨干正在出现,其重点是“可持续性审计”,寻求提供对环境影响的评估。这些第三方实体通常从事测量更可量化的影响和结果(如温室气体排放)。企业也可以通过满足第三方组织认证的要求来寻求相关类型的环境绩效认证。例如,作为排放管理成功的证据,at&t引用了它达到了独立评估机构的标准,如全球报告倡议组织(GRI)、碳披露项目(CDP)和气候相关财务披露工作组(TFCD)。见本文第26-27页。努力被第三方认证代理选定似乎是一个“好消息,坏消息”的情况。好消息是,这些组织有明确定义的、可量化的标准。坏消息是,正如Gosling(2024)所指出的那样,这些标准可能不是特定公司的最佳选择。Gosling (2024, p. 17)认识到追求这种认证可能隐藏但重要的成本,他警告说,第三方从远处宣布的要求达到标准的要求,给最佳制定政策的“董事会自由裁量权施加了不合理的束缚”。因此,我们认为,决定追求这些外部认证的经济学意义类似于同意债务合同中的金融契约(即,两者都从担保中获益,但都因灵活性的丧失而产生成本)。作为利益相关者主义代理成本分析的一部分,应该仔细权衡这种权衡。美国证券交易委员会委员Hester Peirce (SEC, 2022年5月25日)也持同样的怀疑态度,认为不可能合理地定义ESG,因此不可能强制执行。一个可能的后果是,由于测量困难,在高管薪酬合同中使用ESG指标,在提供实际进展方面的效果将被证明是微弱的。评级机构也开始提供公司层面的ESG评级。这些评级的一个主要问题是测量误差和ESG评级之间相对较低的相关性。相关系数在0.38 ~ 0.71之间。低相关性可能会影响公司提高评级的动机。(Berg et al., 2019)。与ESG评级相比,信用评级的相关性为0.92 (Agnew et al., 2022)。这是另一个不太有效的监测导致更广泛的代理成本,从而导致更大的利益相关者代理成本的例子。Bebchuk和Tallarita(2022)进一步关注了监测的弱点,得出结论认为,除非能够解决测量和评估问题,否则ESG奖金的使用具有“可疑的承诺”,并构成重大“危险”。事实上,正如我们在at&t的例子中发现的那样,大多数ESG绩效指标都是定性的。有人担心,以质量为基础的奖励是为了掩盖在量化财务指标上的失误。换句话说,奖金可能与糟糕的财务业绩绝缘(Temple-West, 2022)。梯若尔(Tirole, 1994)对进一步的衡量问题提出警告,强调使管理人员接受尺度比较的能力是成功的基于绩效的激励计划的核心原则。然而,esg绩效目标往往是模糊的,容易被操纵。更愤世嫉俗的是,Bebchuk和Tallarita(2022)认为,模糊性、不透明性和易受操纵的原因是有意为自利的管理者创造机会,利用缺乏问责制和夸大支出。由于缺乏客观的评估标准,管理人员对esg工作的报酬显得敷衍了事。总体而言,缺乏管理问责可能导致基于esg的薪酬变得无效,甚至适得其反,从而进一步加剧了利益相关者主义的代理成本。总而言之,如果没有严格而坚定的标准来评判业绩,管理者就不会被问责,也不会被区分为赢家和输家(也就是说,如果每个人都得到了奖杯,那么竞争的动力会发生什么变化?)因此,与esg相关的薪酬可能并不真正存在风险,可能会与绩效无关这又一次增加了利益相关者主义的代理成本。梯若尔(1994)强调基于绩效的激励措施的有效性取决于有效的绩效衡量标准,他进一步将缺乏衡量标准等同于不负责任(或欠责任)的管理人员的“平静生活”的存在。 “安静生活”理论由Hicks(1935)和Bertrand and Mullainathan(1999,2003)描述,认为管理者可能愿意花费资源来安抚潜在的争议利益相关者(牺牲效率和股东价值),以享受更友好的关系和更平静的存在带来的个人利益。这种价值损失代表了利益相关者主义的额外代理成本。另一个困扰esg收缩的具体测量问题是时间范围不匹配。正如Larcker等人(2021)所正式阐述的那样,由于ESG成果通常需要多年才能完全实现(例如,Dyck等人,2019;Fancy, 2021; Ittner等人,1997),而薪酬支付主要基于相对较短期的结果,因此经常发生时间不匹配我们对美国电话电报公司薪酬合同的分析表明,美国电话电报公司尚未克服这一弱点。Burchman(2020)报告称,即使是“长期”激励计划,目前也会奖励3年的绩效,而气候目标(如《巴黎协定》的碳中和目标)则会延续到2050.6年。因此,正如Cordeiro和Sarkis(2008)和Ikram等人(2023)所总结的那样,ESG活动通常会带来巨大的短期成本。而目光短浅的管理者可能不愿意忍受更直接的预期痛苦(即前期ESG成本导致财务业绩下降),以实现预期的长期环境和社会收益。由于这种时间错配可能导致的投资不足所放弃的价值可能代表了利益相关者主义的另一种代理成本。我们对文献的回顾提出了两种广泛的方法来改善时间不匹配的弱点。解决方案一是转向基于长期业绩的薪酬。也就是说,如果由于实现回报的时间较长,短期衡量标准无法提供信息(Govindarajan & Gupta, 1985),公司应该更广泛地将薪酬与长期绩效联系起来。Edmans(2023)呼吁对标准薪酬做法进行相当大的偏离,他建议薪酬设计应放弃短期奖金,而应通过授予经理必须持有多年的股票来加重薪酬结构。正如Flammer和Bansal(2014)以及Delves和Resch(2019)所指出的那样,Edmans(2023)认为,长期激励对于激励长期投资(例如许多E和S为保护环境和支持员工所做的努力)是必要的。因此,解决时间错配的一个办法是,将薪酬从提供短期奖金转为授予与长期持有股票挂钩的股权。我们对其薪酬合同的分析证实,at&t并没有选择这种方式。解决方案二是将薪酬理念从“按绩效支付”转变为“按进度支付”。Toplensky(2024)认为,有效实现ESG目标的挑战在于平衡短期和长期目标。我们的计算表明,短期和长期之间的最佳平衡是以中期为中心的一系列衡量和奖励。Burchman(2020)建议,直接应用于ESG合同,薪酬结构应该设定中间里程碑,以鼓励向长期目标渐进推进。也就是说,薪酬合同应该建立医疗目标,实现这些目标将促进公司沿着轨道前进,最终实现其长期ESG目标。然而,当将esg薪酬建立在奖励渐进步骤的基础上时,理论似乎是合理的,但将其付诸实践似乎很困难。FW Cook(2022)和Edmans(2021)质疑公司在实现长期目标方面准确衡量短期进展的能力(长期目标本身很难定义)。我们对美国电话电报公司薪酬合同的分析表明,美国电话电报公司,像今天的大多数公司一样,努力沿着预期的未来道路确定具体的里程碑,并面临着以任何可靠的方式衡量进展的挑战。因此,at&t没有做出明显的尝试(至少是公开的尝试)来建立中间的、可衡量的里程碑,以促进实现长期目标的进展。没有可衡量性,就没有问责制。如果没有问责制,利益相关者主义的代理成本(比如这种投资不足)可能会继续下去。我们对美国电话电报公司ESG活动的案例研究提供了与帝国建设相一致的证据。2022年,at&t的委托书要求六页纸来记录其广泛的ESG基础设施(at&t委托书,2022年,第32-37页)。(我们在附录A中浓缩和概述了这个基础结构)。表4显示了我们创建的各种标题下的这个ESG基础设施(或“帝国”)的组件。 例如,在2022年代理的薪酬讨论和分析(CD&amp;A)中提到的13个头衔职位在某种程度上与esg有关,包括:企业社会责任高级副总裁、首席可持续发展官、首席多元化和发展官、首席包容官和助理副总裁——全球环境可持续发展等。大约有35个不同的董事会、委员会、理事会或项目,如捐款委员会、企业社会责任治理委员会和首席执行官多元化委员会等。CD&amp;A中还披露和讨论了各种政策和原则,例如人权政策,行为准则和反贿赂和反腐败(ABAC)政策,以及供应商行为原则等。最后,美国电话电报公司签署了八项报告制度和披露倡议,如全球报告倡议、可持续会计准则、气候披露项目评估和透明度报告等。表2显示了ESG参考文献的流行程度,以及其他相关披露。ESG引用总数(第2列)是ESG在相应的代理声明中被提及的简单字数统计。在过去的几年里,at&t几乎所有的ESG基础设施都已到位,简单的字数统计(搜索词:ESG)就能证明这一点。当我们在2024年重新审视at&t的字数统计时,它的ESG基础设施似乎正在萎缩,我们将在后面讨论这一现象。当我们进一步试图识别和理解利益相关者主义的各种代理问题时,我们也可以将公司选择广泛参与与esg相关的活动(即帝国建设)视为“安静生活”综合症的一种特别有害的症状。Jensen和Murphy(1990)认识到,企业越来越多地面临着满足特殊利益集团的压力。正如Jensen和Murphy(1990)所警告的那样,这种压力越来越大,“不速之客”会侵入公司的合同流程。如今,社会活动家、DEI倡导者、以可持续发展为重点的投资基金经理和环保理论家等都是“不速之客”。发起以ESG为重点的活动(比如建立ESG基础设施帝国)所发出的美德信号,可能有助于驱逐“不请自来的客人”,从而有助于让管理者的生活变得更加“安静”。这种对“安静”的追求是典型的代理问题的特征,在这种问题中,管理者从更平静(或“安静”)的存在中获取利益,而股东则承担成本。在我们的表4和附录A中,我们记录了at&t为安抚越来越有影响力和直言不讳的特殊利益集团而采取的明确行动然后我们可以问:通过组建一个ESG帝国,at&t是否为减轻特殊利益压力而付出了代价,从而为其管理层实现了“平静”的生活?正如at&t的ESG基础设施所证明的那样,安抚这些“客人”需要招致不小的支出。虽然我们无法获得信息来评估每项投资的盈利能力,但at&t的这种资源承诺可能被解释为利益相关者主义的另一种代理成本。此外,在2023-2025年,我们目睹了对ESG倡议的强烈反对。具体来说,Edmans(2024)指出,ESG已经“武器化”,并在多个方面遭受攻击。埃隆·马斯克哀叹ESG是社交媒体催生的“骗局”,由“觉醒的暴民统治”延续(Tett, 2022)。Marsh(2024)指出,政治上的反对促使高知名度的公司淡化或掩饰其社会和环境事业(通过一种被称为“绿色掩饰”的努力,故意误导或淡化ESG努力)。Cutter和Glazer(2024)注意到类似的“绿色掩饰”案例,即知名公司采取明确行动,在ESG方面表现出较低的姿态(例如修改以ESG为中心的语言的使用,重新命名领导职位,以及重新塑造委员会和工作组的品牌)。作为知名度最高的公司之一,at&t可能特别容易受到这种对ESG的反对,因此可能更有可能从事环保活动。在我们随后的实证分析中,我们追踪了at&t的披露情况,以确定at&t是否通过减少ESG行动(或至少减少对其ESG计划的公开声明)来应对最近的反ESG言论。为了提供at&t ESG基础设施潜在变化的证据,表4还包含了2024年(2023年)代理(财政)年度的更新。我们搜索了委托书,以确定2年后是否还提到相同的职位、委员会、董事会、原则、报告等。 虽然我们无法证实这些缺失的(N/M或未提及的)实体是否已停产,但人们可以合理地得出结论,它们可能已停产或与另一个实体合并。它们也可能只是在本报告中没有被提及。然而,与早些年相比,相关活动可能减少了,或者作用减弱了。”代理(财政)年度2022(2021)共有65个esg相关参考。2024年(2023年)代理(财政)年度的N/ m数为28,或43%(28/65)。因此,at&t似乎正在通过缩减其ESG基础设施或至少减少提及其ESG基础设施来应对最近对ESG事业的抵制这种潮起潮落所导致的低效率也可以归结为利益相关者主义的代理成本。此外,我们从表1中注意到,随着美国电话电报公司ESG帝国规模的缩小,首席执行官的总薪酬实际上有所增加。具体来说,表1表明,尽管与esg相关的基础设施可能会减少,但从2021年到2023年,CEO的总薪酬增长了7%我们认为,这是ESG绩效与CEO薪酬之间脱节的又一证据(这进一步加剧了利益相关者主义的代理成本)。管理者也可以通过将公司资源转移到慈善和环保事业中来提取租金。甚至在被编入弗里德曼(1970)和詹森和梅克林(1976)的框架之前,威廉姆森(1963)就提出了管理自由裁量权模型,该模型考虑了自利的管理者如何通过所谓的慈善活动,以提高管理者的地位、权力和声望的方式部署公司的资产。Cordeiro and Sarkis (2008);Masulis and Reza (2015);Brown et al. (2006);kr<s:1>格尔(2015)、詹森和墨菲(1990)同样注意到管理者的诱惑,即通过赞助有利于利益相关者的努力(如支持受青睐的慈善或环境事业)来征用股东资源,为提高个人效用的支出提供资金。因此,对于代理理论家来说,管理者通过滥用公司资源来实现个人扩张而破坏股东价值的可能性并不新鲜。新的是,向利益相关者范式的运动不仅为管理者提供了积极参与利益相关者群体的许可,而且实际上奖励了将资源部署到社会、环境和其他非股东群体的管理者。因此,有些反常的是,利益相关者主义激励管理者去做弗里德曼(1970)和詹森和梅克林(1976)认为可能破坏股东价值的事情。我们认为,在这个契约精神分裂症的新世界中,导航的很大一部分是准确认识利益相关者主义的收益和成本,包括本文关注的代理成本。在对ESG生态系统的不同成员进行分类时,Edmans(2024)将“机会主义者”定义为那些寻求利用最近大众对ESG的支持激增来获取额外经济利益(例如采取行动提高薪酬)的人。被贴上机会主义者的标签意味着正在采取一些可疑的行动。采取可疑行为通常需要动机和机会。我们认为,对于“机会主义”经理人来说,一个动机是说服股东给予额外的与esg相关的薪酬,或者在薪酬结构上做出对经理人有利的让步。直觉告诉我们,人们会以可预测的方式对激励做出反应,除非奖金在某种程度上是有保证的(也许是因为目标结果设定得很低,或者目标结果设定得很模糊,以至于仅仅通过判断或定性属性就可以确定成就)。让结果成为“成功”的既定结论并不需要任何激励的行为调整来实现结果。此外,有人担心,以质量为基础的奖励是为了掩盖在定量财务指标上的失误。坦普尔-韦斯特(Temple-West, 2022)对这种情况持怀疑态度,他将这种奖金解释为与糟糕的财务业绩隔绝。事实上,一些观察人士认为,将高管薪酬与ESG挂钩的动机是为了掩盖疲弱的财务业绩(Rajgopal, 2021)。同样,Gao等人(2024)的研究表明,与同类公司相比,表现不佳的公司增加了企业社会责任行动。一个经常被提及的格言是:“公司做得好才能做得好。”也就是说,更强的财务业绩会产生额外的资源,从而促进ESG努力的开展。有趣的是,我们的发现以及Gao等人(2024)的发现表明情况恰恰相反。 我们对at&t薪酬合同的详细分析为上述研究中提出的许多论点提供了支持。我们从ESG分数的简单时间序列图开始。图1提供了标普全球ESG评分的时间序列。从2013年的68分(满分100分)开始,到2016年下降到62分,到2020年上升到75分,连续几年起伏不定(从74分到77分),到2023年最终降至63分,几乎与该系列的最低分持平。我们注意到,在启动与esg挂钩的奖金后不久,该指数在2022年达到峰值。由于建立与ESG相关的奖金计划表明公司正在“做一些事情”,因此创建各种评级的ESG认证服务可能仅仅因为奖金的存在而对公司更有利我们进一步注意到2023年的分数下降(从2022年的77降至2023年的63)。美国电话电报公司的ESG分数在同一年急剧下降,以至于它大大低估了其ESG努力,同时可能大幅拆除了其ESG基础设施,这是巧合吗?更重要的是,令我们感兴趣的是,在ESG得分和支付给at&t首席执行官的基于ESG的薪酬之间似乎没有任何联系。从表2中我们可以看到,CEO在2021年和2022年做了更多的ESG工作,获得了相当可观的ESG奖金。这位首席执行官在2023年(在他领导下,美国电话电报公司的ESG评级大幅下降)减少了ESG工作,但却获得了一笔数额可观的ESG奖金。关于ESG得分,更有趣的是,这里有一个可以定量评估ESG绩效的例子(即,ESG得分从2022年的77降至2023年的63),但ESG得分的下降似乎并不重要,因为CEO随后仍获得了目标支出的120%(如我们在表2中所示)。图2和图3报告了at&t的精选运营和基于市场的财务结果(收入、运营收入、运营现金流和自由现金流),以及市场价值和股票价格表现的度量。这些展品提供了2021年左右的参考点,这一年at&t启动了ESG奖金。在采用ESG奖金后的一年中,公司的经营业绩有所下降。最后,图4显示了at&t在同一时期的股价表现。表2提供了ESG奖金的详细信息。at&t披露,STIP的目标奖励金额为560万美元,但斯坦基实现了该金额的123% (Proxy, 2022年,第63页)。在2021年,STIP的最终支出为6,888,000美元(5,600,000美元* 1.23)。为什么要支付123%?为什么不是122%或124%呢?我们寻求理解。鉴于这些模糊且不可量化的目标,以下是at&t试图证明ESG绩效支出合理性的方式。根据以下所列成就,委员会批准向所有指定执行官(neo)支付100%的战略指标(20%权重)。(2022 Proxy,第57页)鉴于新战略指标的定性性质,at&t似乎使用了各种成功指标来证明支付的合理性。为了提供一种外部验证措施来验证ESG结果(“成就”),AT&amp;T列出了获得特别认可的实体(AT&T Proxy, 2022,第a -2页)。这种特别认可的例子包括多元化公司(多元化50强公司)、西班牙企业责任协会、JUST Capital(美国最公正的公司)等授予的荣誉。根据美国证券交易委员会(SEC)的一项新的披露要求,除了高管们获得的薪酬外,公司还必须提供高管们当年的实际薪酬(已实现)。对于at&t的斯坦基来说,已实现薪酬的数据如下所示,并与授予日的薪酬估值并列。我们认为,上述插入的标题(“风险支付”)可能是用词不当。由于衡量困难,问责制也有问题,因此,当薪酬的其他组成部分碰巧较低时,基于esg的奖金可能被用来提供补偿性补偿。从上述数据中可以看出,业绩股派息和限制性股票派息(均受到近期at&t股票表现不佳的不利影响)提供的实际薪酬远低于目标金额。然而,短期激励计划(包括ESG奖金)的支出大大超过了目标,通过抵消市场表现的疲软,平滑了总体薪酬的价值。因此,如果ESG奖金的增加可以用来弥补薪酬其他部分的减少,那么薪酬风险可能会降低因为设计降低管理者风险的努力代表了另一种类型的代理成本,我们可以将其添加到利益相关者代理成本的贡献者列表中。 在表3中,我们考虑了at&t薪酬结构的百分比构成(面板A),并与标准普尔500指数中的平均公司(面板B)进行了比较。我们关注非股权激励薪酬,因为它包含了基于esg的薪酬。从面板A的第6栏中,注意到at&t非股权激励薪酬(占总薪酬的百分比)的增加,这是在2021年基于esg的薪酬出现后发生的。at&t在2021年首次授予基于esg的薪酬,导致非股权激励薪酬占总薪酬的比例几乎翻了一番(即2021年为27.8%,2020年为15.5%)。这表明,at&t在2021年共同努力提高了基于ESG激励的薪酬(这与其运营和金融市场业绩的下降相吻合)。接下来,我们将分析扩展到表3所示的整个样本时期。将at&t包含ESG奖金(2021-2023年)的非股权激励薪酬与奖金发放前(2013-2020年)的薪酬进行比较发现,在ESG奖金发放期间,薪酬显著增加(Wilcoxon非参数检验p值为0.018)。对标准普尔500指数数据进行类似的测试(图B),结果显示整个市场没有显著差异。关注at&t的业绩与CEO薪酬之间的关系,我们可以从图2和图3中看到,在支付esg奖金的年份(2021-2023),运营和财务指标普遍表明业绩较弱。此外,从图4中可以看出,在esg奖金发放期间,at&t的股价呈下降趋势。股价的这种负面波动将降低任何与股票挂钩的补偿的价值——限制性股票的价值将受到侵蚀,期权的价值将缩水。然而,与esg挂钩的奖金出现是为了抵消基于股权的薪酬价值的下降。更广泛地说,我们通常认为,代理成本是由管理者收取额外薪酬产生的。我们建议采用另一种类型的代理成本,这是由于管理者提取了一种额外的薪酬。具体来说,at&t的例子向我们介绍了一种基于esg的新型薪酬,这种薪酬的可衡量性是模糊的,问责制是主观的。这种模糊性为CEO的薪酬提供了平滑或对冲的机会,即当与股权挂钩的薪酬下降时,与esg挂钩的薪酬可能会上升。这种抵消为管理人员提供了一个优势,因为它消除了风险支付的风险。利益相关者主义的代理成本是指在从股东至上转向利益相关者至上的过程中,由于利益冲突而产生的成本。我们对美国电话电报公司薪酬合同的剖析,以及随后对利益相关者主义代理成本的考察,可能有助于我们了解ESG为何难以实现其曾经的远大抱负。正如本刊2024年春季版所强调的那样,先前的文献确定了ESG下降的症状。具体来说,Edmans(2024)哀叹ESG未能履行其最初的承诺,因为“机会主义者和冒名顶替者的剥削”。Chew(2024)警告说,ESG的“陷阱”可能会抵消其好处,而Denis(2024)警告说,以利益相关者为导向的运动“打开了潘多拉的盒子”。因此,我们寻求通过运用代理理论中的经济纪律来组织和更好地理解可能由“剥削”导致的成本,从而增加价值,这些成本已经成为“陷阱”的例证,并且似乎已经从“潘多拉的盒子”中出现。基于这些原因,我们认为利益相关者主义的代理成本导致了投资者对ESG支持的下降,并认为这些成本的管理将主要决定ESG的未来。为了提供详细的证据,我们研究了at&t的CEO薪酬合同,并确定了利益相关者主义的具体代理成本,特别是与基于esg的奖金相关的代理成本。令我们震惊的是,这一ESG奖金运动背后几乎没有应用合理的管理实践,其中一部分是责任分配,这取决于合理的可衡量性。例如,美国电话电报公司(at&t)表示,以现金支付的短期激励支出是“基于对预定目标的实现,并有可能由委员会调整(上调或下调),以使薪酬与绩效保持一致。”(AT&T Proxy, 2022,第51页)。然而,对委托书的解读显示,与ESG相关的目标即使不是模棱两可的,也是一般的。这种模糊性进一步增加了利益相关者主义的代理成本。如果没有明确的基本规则,这将是另一座无路可走的桥梁吗?与桥梁相关的价值破坏将体现在利益相关者主义的代理成本中。
本文章由计算机程序翻译,如有差异,请以英文原文为准。

Agency costs of stakeholderism: Evidence from compensation contracting at AT&T

Agency costs of stakeholderism: Evidence from compensation contracting at AT&T

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.

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