Paper Abstract
1065. Mark J. Roe & Roy Shapira, The Power of the Narrative in Corporate Lawmaking, 07/2021; forthcoming in Harvard Business Law Review.
Abstract: The notion of stock-market-driven short-termism relentlessly whittling away at the American economy’s foundations is widely accepted and highly salient. Presidential candidates state as much. Senators introduce bills assuming as much. Corporate interests argue as much to the Securities and Exchange Commission and the corporate law courts. Yet the academic evidence as to the problem’s severity is no more than mixed. What explains this gap between widespread belief and weak evidence?
In this Article, we explore the role of narrative power. Some ideas are better at being popular than others. The concept of pernicious stock market short-termism has three strong qualities that make its narrative power formidable: (1) connotation—the words themselves tell us what is good (reliable long-term commitment) and what is not (unreliable short-termism); (2) category confusion—disparate corporate misbehavior, such as environmental degradation and employee mistreatment, are mislabeled as short-term, when they in fact primarily emanate from other misalignments, thereby making us view short-termism as more rampant and pernicious than it is; and (3) confirmation—the idea is regularly repeated, because it is easy to communicate, and often boosted by powerful agenda-setters and interests that benefit from its repetition.
The Article then highlights the real-world implications of narrative power—powerful narratives can make decisionmakers be more certain than the underlying evidence is, thereby leading policymakers astray. For example, a favorite remedy for stock-market-driven short-termism is to insulate executives from stock market pressure. If lawmakers believe that short-termism is a primary cause of environmental degradation, anemic investment that holds back the economy, employee mistreatment, and financial crises—as many state—then they are likely to support insulating corporate executives further from stock market accountability. Doing so may, however, do little to alleviate the underlying problems, which would be better handled by, say, stronger environmental regulation and more astute financial regulation. Powerful narratives can drive out good policymaking.