Guest Articles

August 17

Peter Tufano / Timothy Flacke

The Case for Stakeholder Dividends: Why It’s Time for the Financial Sector to Put Its Money Where Its Mouth Is

In the months since COVID-19 put our economy into free fall, the United States has seen record unemployment and a volatile stock market. Much like our last financial crisis, the impact is hardest for America’s most vulnerable. But we shouldn’t be surprised; even before the pandemic nearly 40% couldn’t muster $400 to manage an emergency, and up to 78% of people were living paycheck to paycheck. For regular working people, the fall has been fast and painful. A recent J.D. Power Pulse Survey showed that more than 40% of the poorest Americans said that their financial situation, already weak, was “devastated” or “severely hurt” by the pandemic.

While the experience of financial devastation may remind working families of the 2008 crisis, for banks, 2020 is a very different challenge. Twelve years ago financial institutions were seen as the villains of the Great Recession. Today, if they place their responsibility to customers and employees on par with their obligations to shareholders, they can play a new role: the heroes.


An End to Shareholder Primacy?

This scenario may not be as unlikely as it seems. Demands for changes to banks’ shareholder primacy are building: from consumers, from the government – even from many of the largest banks themselves, who pledged in March to suspend share buybacks through the second quarter of the year. Additionally, the Federal Reserve announced in June that it was ordering 34 major U.S. banks to suspend third quarter stock buybacks and cap dividend payments – stopping short of barring individual dividend payments altogether.

These changes – temporary for now – are an opportunity for banks to make a bold break with the past, to lead the way in a financial recovery that puts consumers first, and to send a message that the country’s financial institutions understand the economic reality facing tens of millions of American consumers.

While the Fed’s temporary restrictions on banks are a necessary step in the right direction, banks should embrace this as an opportunity, using some of the funds saved by suspending dividends and share buybacks to attend to stakeholders’  financial well-being. In brief, we should begin to think of shareholder dividends as stakeholder dividends, and thereby consider how they might be divided among the various parties.  Doing so will send a powerful signal that banks can lead the way to a new, more sustainable post-COVID-19 economy.

While this move may have seemed radical just a few months ago, banks currently have an opening to make changes that align with the support that American consumers want from their institutions – including banks.


Consumer Demand for More Ethical Corporate Values

Consumers notice the ethical values of corporations, and often reward those whose values are positive: Companies that treat their workers well are outperforming their peers during the pandemic. And consumers also count on the business community to help address many of the difficulties they’re facing – challenges that have been growing since long before the current crisis. Prior to the COVID-19 pandemic, Commonwealth found that only 30% of Americans blamed a person’s financial fragility primarily on their own choices, such as behaviors like overspending or having a poor work ethic. The overwhelming majority pointed to causes beyond individuals’ control, including systemic issues like the rising cost of living, stagnant wages, and racial and gender pay disparities – and looked to institutions like corporations and financial institutions to take the lead in addressing these issues, along with government.

However, so far banks’ responses in the current environment are getting mixed reviews. In a recent J.D. Power Pulse survey, a third of Americans said that their bank had not shown concern for their personal situation in this crisis. Our research, the actions of large banks and the Fed’s own steps suggest this is the perfect moment for banks to reconsider their near-religious belief in shareholder primacy – i.e.: that shareholders’ interests need to be put ahead of others’ – which resulted in American firms paying nearly $500 billion in dividends in 2019 (to say nothing of some $728 billion in share buybacks).

What would this look like in practice? For starters, the $54 billion that U.S. banks alone were projected to pay out in dividends in 2020 could instead cover the $11.5 billion in overdraft fees Americans pay annually. It could also cover the average banking fees of $372 per year paid by all households with annual incomes under $30,000 – fees that are disproportionately shouldered by people of color. The banks would still have enough left over to forgive more than 75,000 average-sized small business loans, strengthening their balance sheets.


An Historic Opportunity for the Financial Sector

Actions like these can deliver substantive, needed relief for struggling households and small businesses, while generating enormous goodwill. They would allow banks to inject something more than money into the economy: the feeling that they are behind all Americans, not just shareholders.

Momentum towards this moment has been building. Socially conscious investors are increasingly asking how companies treat their employees; prominent business leaders have called for corporations to work for the benefit of all stakeholders, not just shareholders. Indeed, many banks themselves have expressed agreement with this goal: Some of the country’s largest financial institutions signed the Business Roundtable Statement on Corporate Purpose in August, agreeing to put customers, employees and other stakeholders’ interests on par with shareholders.

In this downturn, banks have a clear set of business decisions to make. Faced with a real villain – an invisible virus – they can play it safe or step up. This is an historic opportunity for the financial sector – not just to change its own story, but to help write the next chapter of American capitalism, to literally put their money where their mouths are, and show that pledges to serve all stakeholders are not hollow promises. In heeding their workers’ and customers’ cries for help, they will play a vital role in promoting widespread household financial security and help build greater trust in the financial system. Consciously repurposing shareholder dividends into stakeholder dividends, shared more broadly, would turn banks’ statements about their commitments to all stakeholders into reality.


Peter Tufano is Cofounder and Chair of Commonwealth; and Dean of Saïd Business School at the University of Oxford.

Timothy Flacke is Cofounder and Executive Director of Commonwealth.


Photo courtesy of Vladislav Babienko.



Coronavirus, Finance
corporate social responsibility, corporations, COVID-19, gender equality, poverty alleviation