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{{a|devil|[[File:Stakeholder.png|450px|thumb|center|A stakeholder yesterday. Well, it was this or a picture of Peter Cushing, folks.]]}}Once upon a time, not terribly long ago, the [[shareholder]] was an opaque yet sacred being, somewhat divine, to whose improving ends everyone engaged in the company’s operation twitched their every fibre.
{{a|devil|{{image|Stakeholder capitalism|png|}} }}=== Adam Smith’s Dangerous Idea ===


This ''[[Shareholder capitalism|will to shareholder return]]'' sprang from the brow of {{author|Adam Smith}} and his [[invisible hand]]:
Once upon a time, not long ago, [[shareholder]]s were opaque, sacred beings. Ineffable, invisible, immortal and divine: to their improving ends the company’s mortal [[agent|stewards]] twitched their every fibre.


{{quote|“...Though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements...They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, ''and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species''”<ref> ''The Theory of Moral Sentiments'' (1759) Part IV, Chapter 1.</ref>}}  
This ''[[Shareholder capitalism|will to shareholder return]]'' sprang from [[Adam Smith]]’s [[invisible hand]]:
{{quote|“...Though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements...They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, ''and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species''”<ref>''The Theory of Moral Sentiments'' (1759) Part IV, Chapter 1.</ref>}}


This is, by the way, a ''breathtaking'' insight; no less [[Darwin’s Dangerous Idea|dangerous]] or revolutionary than [[Charles Darwin]]’s: from collected, unfettered, selfish actions [[emerges]] optimised community welfare.
This was, a ''breathtaking'' insight; no less [[Darwin’s Dangerous Idea|dangerous]] than [[Darwin’s Dangerous Idea|Charles Darwin]]’s: from collected, disorganised, unfettered, selfish actions [[emerges]] optimised community welfare.


The modern corporation is, philosophically, the embodiment of that idea. ''Look after the [[shareholder]]<nowiki/>s, and society will look after itself.''
It is, in fact, the same idea: a recurring, algorithmic process can ''reduce'' the [[entropy]] in a system. Creation comes from chaos. This is is as “dangerous” to Newton as it was to God. Anyway, I digress.


By pursuing only its shareholders’ enrichment the corporation, so the theory had it, was more nimble, more responsive to society’s demands, and able to magically allocate capital wherever the community most needed it at any time. “Compare this,” declared gleeful proselytes, “with the disasters of central planning, five-year plans, great leaps forward and so on.
The [[Limited liability company|limited liability corporation]] is the philosophical embodiment of that idea. ''Look after the [[shareholder]]s, and society will look after itself.''


[[Shareholder capitalism]] had its advantages, to be sure: not least of which was easy performance measurement: one could evaluate every impulse, every decision, every project, every transaction against a single yardstick: wa''s this in the [[shareholder]]s’ best interest?''  
[[Shareholder capitalism]] has the advantage of easy performance measurement: you can evaluate every impulse, every decision, every project, every transaction against a single, simple yardstick: ''was it in the [[Shareholder|shareholders]]best interest?''


Shareholders’ interest, in turn, could be measured along a single dimension, too: ''profit''. Nothing else mattered. The [[professional-managerial class]], and their endemic [[agency problem]], were hemmed in: you can’t hide from after-tax profit.
Shareholders’ interest, in turn, can also be measured along a single, simple dimension: ''profit''. Nothing else matters. The [[professional-managerial class]], and their endemic [[agency problem]], are hemmed in: you can’t hide from after-tax profit.


That was then. The narrative has changed to fit our millennial world. Unalloyed selfishness has become, to the modern conscience, intolerable. As long ago as 2003, Joel Bakan put the argument<ref>[https://www.amazon.com/Corporation-Pathological-Pursuit-Profit-Power/dp/0743247469 ''The Corporation: The Pathological Pursuit of Profit and Power''] It is a fun book, but it is nutty.</ref> that a legal [[Legal person|person]] whose sole motive is the short-term enrichment of its investors has the clinical characteristics of a ''psychopath''. Things have only got worse for Adam Smith’s conviction in the [[Emergence|emergent]] goodness of shareholder profit. 
Pursuing only its shareholders’ enrichment, therefore, would make a corporation preternaturally nimble, responsive to society’s demands: best incentivised, so the theory had it, to allocate capital where the community most needed it. This is a ''practical'' philosophy: here, actions speak louder than words.


We are cancelling and redrawing the world: let us cancel and redraw our corporate aspirations too. Shareholder capitalism is, by design, venal, selfish and riven with [[unconscious bias|bias]]. Its unseemly stampede for profit demonstrates an abject want of care for unseen victims.  
“Compare this,” declared followers of the Chicago School, “with the disasters of central planning, five-year plans, great leaps forward and so on.” These are ''theoretical'' philosophies: robust in concept but flimsy upon contact with the grim realities of human behaviour.


And so it has come to pass: “[[stakeholder capitalism]]” has displaced [[shareholder capitalism]]. [[Wall Street|Gordon Gekko]] is out. {{plainlink|https://en.wikipedia.org/wiki/Arif_Naqvi|Arif Naqvi}} is in.<ref>Until his arrest.</ref> We, the planet, ask corporations to orient themselves toward ''all'' their “stakeholders” — customers, [[creditor]]<nowiki/>s, suppliers, [[employee]]<nowiki/>s, the community, the [[Environmental, social and corporate governance|environment]], the marginalised multitude that suffers invisibly under the awful [[Externality|externalities]] of industry ''and'' — last, but not least! — shareholders. ''Corporations must not profit at the expense of the wider world''.
=== Stakeholder capitalism ===
Well, that was then.  


This view seems so modern, so compassionate and so ''right'' — so ''fit for [[Twitter]]'' — that it is hard to see how anyone can ever have thought otherwise. Yet they did, consistently, from the publication of Smith’s ''The Theory of Moral Sentiments'' down the centuries, through the titans of American commerce, Chicago economics and Hollywood villainy.  
Enlightenment orthodoxy has fallen from grace. John Milton Friedman has been cast from paradise<ref>I ''know'' he wasn’t called John. </ref>. The narrative has changed. In a time which venerates the [[lived experience]] above all else, unalloyed selfishness has become oddly intolerable.


However intuitive this new approach seems, it is still a striking reversal. It has passed with barely a shot fired. Even that trade union for unreconciled boomer gammons, the {{plainlink|https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans|Business Roundtable}} has joined in: last year, it “redefined the purpose of a corporation” away from ''the outright pursuit of profit'' towards ''promoting an economy that serves all Americans''. “It affirms the essential role corporations can play in improving our society,” said Alex Gorsky,<ref>No relation to ''that'' [[Good luck, Mr. Gorsky|Mr. Gorsky]], as far as we know.</ref> Chairman and CEO of Johnson & Johnson and Chair of the Roundtable’s Corporate Governance Committee,<ref>Now I don’t want to intrude here, but is being Chairman ''and'' CEO really the best example for the chair of a corporate governance committee to set? [https://hbr.org/2020/03/why-the-ceo-shouldnt-also-be-the-board-chair Here] is the Harvard Business Review on the subject.</ref> “when [[CEO]]s are truly committed to meeting the needs of all [[stakeholder]]<nowiki/>s.
''Dangerous'', even.  


We are not sure who asked the Business Roundtable, but in any case we find ourselves taking a different view.
In 2003, legal academic [[Joel Bakan]] put the argument that, since a [[Legal person|corporation]]’s sole statutory motive is the short-term enrichment of its owners, it has the clinical characteristics of a ''psychopath''.<ref>Joel Bakan, ''[[The Corporation: The Pathological Pursuit of Profit and Power]]'' (2003)</ref>


This not an “a[[woke]]ning” so much as ''a collective concussion of the sort occasioned by a stout blow on the head''. These people are either outrageously talking their own book, or we have all gone mad.  
Since then, things have only got worse for Adam Smith’s conviction. We are cancelling and redrawing the world: let us cancel and redraw our corporate aspirations too. The profit motive is, by design, venal, selfish and riven with [[Unconscious bias|bias]]. Its stampede for profit demonstrates an abject want of care for everyone, and everything, else. And so it has come to pass: “''stakeholder'' capitalism” has displaced [[shareholder capitalism]]. The wider world is the constituency. Greed is not good.


Skeptics of the mass-delusion conspiracy theories can relax: it is almost certainly the former. For stakeholder capitalism ''codifies'' the [[agency problem]]. It diffuses the executive’s accountability for anything the corporation does, putting the [[professional-managerial class]] beyond the reproach of the one constituent stakeholder group with the necessary means, justification and consensus to call it out: their [[Shareholder|shareholders]].  
We, the planet, demand that corporations to orient themselves towards ''all'' their “stakeholders” — customers, [[creditor]]s, suppliers, [[employee]]s, the community, the [[Environmental, social and corporate governance|environment]], the marginalised multitudes that suffer invisibly under the [[Externality|externalities]] of industry ''and'' last — but not least! — shareholders. ''Corporations must not profit at the expense of the wider world''.


Stakeholder capitalism, folks, is a ''swizz''.
This view seems so modern, so [[empathetic]] and so ''right'' that it is hard to see how anyone can ever have thought otherwise. But still, this is a striking reversal for the free market fundamentalists. Even the Business Roundtable is getting in on the act: in 2019, it “redefined the purpose of a corporation” away from ''the outright pursuit of profit'' towards ''promoting an economy that serves all Americans''.
===About those shareholders===
Under Joel Bakan’s theory, remember, it is not the ''shareholders'' who are psychopaths,<ref>Shareholders ''who themselves are corporations'' probably count as psychopaths, come to think of it, but the point remains valid. Shareholders are not necessarily corporates, and at some point all shareholdings must (right? ''Right''?) resolve back to some living, breathing individual.</ref> but the [[corporation]] as a distinct [[legal personality|legal person]] ''itself''. The shareholders are only ''motivation'' for its pathology.  


But in a well-balanced polity, shareholders will come from all walks of life. The pervasiveness of [[pension fund]]s in the equity markets means that, as far as makes any difference, they do.
{{Quote|“It affirms the essential role corporations can play in improving our society,” said Alex Gorsky, Chairman and CEO of Johnson & Johnson and Chair of the Roundtable’s Corporate Governance Committee,<ref>Is being Chairman ''and'' CEO really the best example for a chair of a corporate governance committee to set?</ref> “when [[CEO|CEOs]] are truly committed to meeting the needs of all [[stakeholder]]s.”}}


Shareholders are [[diverse]] in every conceivable dimension, bar one: they can be young or old; rich or poor; left-leaning or right; tall or short; male or female; gay or straight; black or white or, in each case, any gradation in between. They don’t have to know each other, like each other or care less about each other. On any other topic, their aspirations and priorities will jar, clatter and conflict. If you put them in a room to discuss anything ''but'' their shareholding, you would not be surprised if a fight were to break out.  
But, first principles. There is ''theory'' and there is ''practice''. Practical systems do not always make for good theory. Theoretical philosophies do not always yield practical systems.


Still, on that one subject, they are totally, magically, ''necessarily'' aligned: each will say, “whatever else I care about in my life, members of the board, know this: ''I expect you to maximise my return''.
Shareholder capitalism has little to say about [[Externality|externalities]], sure. But ''stake''holder capitalism codifies the [[agency problem]]. It diffuses accountability for anything the corporation does, putting the [[professional-managerial class]] who run the company beyond the reproach of the one stakeholder group with the necessary means, justification, incentive and consensus to call it out: their [[Shareholder|shareholders]].
===About that “return”===
Now you might argue that, since we are all shareholders in one way or another, stakeholder capitalism is really no more than “paying attention to shareholders’ ''wider'' interests, not just their pecuniary ones.” This way, polar bears get a look in if and only if their welfare is in the shareholders’ wider interest.


But that isn’t ''stakeholder'' capitalism: that’s just a stupider version of ''shareholder'' capitalism. It simply replaces shareholders’ monetary interests for their moral ones. That is stupid because it displaces the shareholders’ moral judgment with the [[CEO]]’s.
===Stakeholder capitalism as disguised ''shareholder'' capitalism===


''That is not the deal'', readers. The [[CEO]] is the shareholders’ ''servant''. The CEO doesn’t get to moralise on their dime. And anyway — see below — if you had the pick the ''last'' bunch of humans on Earth to whom you would delegate the exercise of your personal moral imperative, it would surely be the [[professional managerial class|professional-managerial class]].
Maybe that’s what the Business Roundtable meant; maybe not. Maybe they’ve changed their minds. Here’s current chair, Jamie Dimon, quoted in the FT:


Besides, to substitute the shareholders’ wider interests for their narrow financial one is to miss the single clinching insight. ''As long as it is all about return, there can be no arguments.''
{{Quote|“All we’re saying is when we wake up in the morning, what we give a shit about is serving customers, earning their respect, earning their repeat business.”<ref>[https://www.ft.com/content/14fcf2be-067d-49e3-ae6d-814dd6a35abf Stakeholder capitalism is ‘not woke’, says JPMorgan’s Jamie Dimon], ''Financial Times'', 2 June 2022</ref>}}


==== The abstraction of value ====
But that is no reimagining of the fundamental purpose of a corporation: it is just a better view of the old one.


How one values a bushel of sorghum depends on one’s circumstances, needs and predilections. Some may value it highly, others not at all. Its value, even at a single moment in time, is relative. Value was locked into the physical commodity. What you didn’t want you could sell, but with significant frictional costs. Long ago, our forebears<ref>No, not enlightened, white, male, cis-gendered, colonial oppressors: ancient Mesopotamians.</ref> invented a way to distil pure, abstract, immaterial ''[[value]]'' from the relativising commodities or perishable [[substrate]]s in which it is usually embedded:<ref>Granted, it is imperfect: until recently much cash did have a substrate (paper send coins), and its value is still coloured by the credit consensus of its issuing central bank, which can control its supply and demand, but the [[substrate]] issues are largely resolved, and consensus in the ''bona fides'' of the [[Federal Reserve]], [[ECB]] and [[Bank of England]] has proven a lot more robust than that of whatever anonymous collective coded the crypto currency do jour. Don’t @ me, [[bitcoin|Satoshi]] freaks.</ref> they called that abstracted value “[[cash|''money'']]”.  Cash does not go off, cannot be eaten, and does not depend for its value on anything else.<ref>Okay, okay, other than “the full faith and credit of the issuing central bank”, in whom everyone in the market had a common interest. See previous footnote.</ref> Cash ''is'' abstract value.[[File:CEO compensation.png|thumb|CEO compensation, in thousands (blue) mapped against worker compensation, in thousands (orange: it’s the flat line hugging the ''x'' axis) and performance of the S&P500 (grey). For some reason there seems to be an elephant in the room, too.]]Hence its value as a yardstick for corporate performance. In discharging their sacred duty, [[Chief executive officer|those stewarding the affairs of corporation]] could not have clearer instructions: should the return they generate, ''valued in [[Cash|folding green stuff]]'', not pass muster, ''there will be no excuses''.  
If your customers happen not to be, or care about, polar bears, then no need to lose any sleep about polar bears, and no need to give shit about them when you wake up if you do. Your only decision is “whether me caring about polar bears will make more people buy my stuff, and thereby increase my bottom line”.  


There is no dog who can eat a [[Chief executive officer|chief executive]]’s homework, no looking on the bright side because employee engagement numbers are up, no consolation to be taken in the popularity of the company’s float in the May Day parade: if the annual return disappoints, members of the executive board, ''expect to get shot''.
This is just ''shareholder'' capitalism.


Now moral imperatives can certainly be part of that calculation, but only as a [[second-order derivative]]: it may be that [[Virtue signalling|virtue-signalling]] about the environment or putting a float into the May Day parade is a good marketing tactic and generates greater revenues: if so, fill your boots. But you must still measure its success by that single monetary measure.  
=== About those shareholders===
Under Professor Bakan’s theory, remember, it is not the ''shareholders'' who are psychopaths, but the [[corporation]]s they own: distinct [[Legal personality|legal person]]s. The shareholders themselves are only a ''motivation'' for the pathology. This is just as well, because shareholders come from all walks of life: through mutual funds, retirement plans, 401(k)s and ISAs, ''we'' are the ultimate shareholders.  


Shareholder return is, in this way, not a device to systematically gouge the environment on behalf of an anonymous capitalist class. It is a device to stop ''executives'' systematically gouging ''[[Shareholder|the people whose investments they are managing]]''.
And “we the shareholders” are [[diverse]] in every conceivable dimension, bar one. Shareholders don’t have to know each other, like each other or care less about each other. On any other topic, their aspirations and priorities will jar, clatter and conflict: if you put a group of them in a room to discuss anything ''but'' their shareholding, do not be surprised if a fight breaks out.


Now, before you cry, “but surely, shareholders need no protection from chief executive officers! It is the disenfranchised underclass at the margins of society who must be protected!” consider the chart to the right, taken from data published by the Economic Policy Institute in 2018,<ref>https://www.epi.org/publication/ceo-compensation-2018/</ref> which maps CEO compensation against worker compensation and the performance of the S&P500 since 1965. 
But on that one subject — their company’s performance — they are necessarily aligned: each will say, “whatever else I care about in life, members of the executive board, know this: ''I expect you to maximise my return''.


It gives a pretty good picture of how shareholders, workers and executives are doing relative to each other. It’s hard to see, but the line hugging the ''x'' axis is worker compensation, and it has improved, at an annualised rate of 2.5%. Those rapacious shareholders gained at 8.5% per annum. But “Chief Executiving” is the line of work to be in, folks: not even counting the heady days of 2000, the overall return since 1965 shows a growth rate of ''thirty five percent per annum''.  
=== About that return===
Now you might argue that, since we are all shareholders in one way or another, stakeholder capitalism is no more than paying attention to shareholders’ ''wider'' interests and not just their monetary ones. This way, polar bears get a look in, assuming shareholders generally care about polar bears.  


So before we cast the poor shareholders’ interests to the wind, ask this: by switching to stakeholder capitalism, ''[[Cui bono|who benefits]]''?
But that isn’t ''stakeholder'' capitalism: that’s just a debased version of ''shareholder'' capitalism. It replaces shareholders’ ''monetary'' interests for their ''ethical'' ''values'', but then substitutes the individual shareholders’ values  — which, to repeat, are bound to conflict — with the Board’s.
===[[Stakeholder capitalism]] means never having to say you’re sorry ===
When shareholders hold the whip hand, an executive’s goal is simple. ''Make [[money]]''. That clarity of purpose evaporates the moment that remit expands. Multiple stakeholders means multiple interests, which ''must'' [[Conflict of interest|conflict]]. How do you arbitrate between ''creditors'' and ''the local community''? Between ''the environment'' and ''customers''? Between penguins and polar bears?


That is before the key question even presents itself: ''who are these stakeholders'' of whose wellbeing I am suddenly guardian? There is no ranked list. Unlike shareholders, whose names and stakes are set out on a register, the constituents, interest groups, factions, priorities, narratives and moral imperatives of “the world at large” are utterly indeterminate.<ref>Those railing at this idea are invited to familiarise themselves with the works of Kant, Mill, Hobbes, Hume, Smith, Nietzsche, Nozick, Wollstonecraft, Warnock, Butler, Rawls, hooks and Marx and return with a concise summary. </ref>
''That is not the deal''. The Board are the shareholders’ ''servants'' and don’t — ''shouldn’t'' — get to moralise on their behalf. Besides, to ditch this narrow financial interest is to miss Adam Smith’s single clinching insight. Shareholders may disagree about polar bears. They probably do. They ''won’t'' differ about the value of [[cash]].


How do you even know what your stakeholders’ interests — beyond having as much of your soda pop as you can make, as cheap as you can sell it — ''are''?<ref>There is a hand-wavy argument that executives should have in mind the “best interests of the community” and not anyone’s selfish needs and wants. But who knows what that is? How does a moral agenda determined by the corporate executive class — mainly white, ageing, cis-gendered, post colonial men, in case it at slipped anyone’s attention — improve on no moral agenda at all?
''As long as it is all about return, there can be no arguments.''
</ref>


Whose interests have priority? Why? Now a failure to generate a decent cash return can be blamed on — well, ''anything'' — your success in reducing the number of smokers in the accounts department, or your community outreach team spent all your excess cash on beautifying a local park, or you chose a buildings manager who was twice the going rate but had a better anti-modern slavery policy.
=== The abstraction of value and the important of cash===
Long ago, our forebears in ancient Mesopotamia hit upon a way to abstract pure, disembodied ''[[value]]'' from the perishable commodities and depreciating plant, machinery and miscellaneous [[Substrate|substrates]] in which it is usually embedded: they called that abstracted value “''[[Cash|money]]''”.


[[Stakeholder capitalism]] means the executive class always has an excuse. ''Always''. For ''everything''. To run a company ''for the world at large'' is to run it ''for no-one''. And when a [[professional-managerial class]] of agents can’t work out who ''else’s'' interests to put first, what do we expect them to do?
Cash does not go off,  does not rust, cannot be eaten, and does not depend for its value on anything else. Cash ''is'' abstract value.


Rhetorical question.
Hence its value as a yardstick for corporate performance. In discharging their sacred duty, [[Chief executive officer|those stewarding the affairs of corporation]] could not have clearer instructions: should the return they generate, ''valued in [[Cash|folding green stuff]]'', not pass muster, ''there will be no excuses''.
 
There is no dog who can eat a [[Chief executive officer|chief executive]]’s homework, no looking on the bright side because employee engagement is up, no consolation in the popularity of the company’s float in the May Day parade: if the annual return disappoints, members of the executive board, ''expect to get shot''.
 
But surely, the mighty shareholders need no protection from chief executive officers? Well, in 2018 the Economic Policy Institute mapped CEO compensation against worker compensation and the performance of the S&P500 since 1965.<ref>https://www.epi.org/publication/ceo-compensation-2018/</ref>  It gives a pretty good picture of how shareholders, workers and executives are doing relative to each other. 
{|
!Stakeholder
!Annual change
|-
|Employee
| +2.5%
|-
|Shareholder
| +8.5%
|-
|CEO
| +35%
|}
So, before we cast the shareholders’ interests down the well, ask this: by switching to stakeholder capitalism, ''[[Cui bono|who benefits]]''? 
===Stakeholder capitalism means never having to say you’re sorry ===
When shareholders hold the whip hand, an executive’s goal is simple. ''Make [[money]]''. That clarity of purpose evaporates the moment the executive’s remit expands. Multiple stakeholders means multiple interests, which ''must'' [[Conflict of interest|conflict]]. 
 
How do you arbitrate between creditors and the local community? Between the environment and customers? Between penguins and polar bears? On whose say?
 
And who ''are'' these stakeholders for whose wellbeing the corporation is suddenly guardian? Shareholders’ names and interests, after all are set out on a register. There is no corresponding ranked list of constituents, interest groups or benighted factions. The priorities, narratives and moral imperatives of “the world at large” are quite indeterminate. (Those railing at this idea, and not persuaded by a cursory glance at the day’s newspapers, are invited to consider the works of Kant, Mill, Hobbes, Hume, Smith, Nietzsche, Nozick, Wollstonecraft, Warnock, Butler, Rawls, hooks and Marx and return with a concise summary.)
 
Even if you know ''who'' they are, how do you know ''what'' — beyond having as much of your soda as you can make, as cheap as you can sell it — your stakeholders’ interests are? Whose interests have priority? ''Why''?
 
Under this approach, failure to generate a decent cash return can be blamed on — well — ''anything'': your success in reducing the number of smokers in the accounts department, or the cash your community outreach team spent on beautifying a local park, or the facilities manager who was twice the going rate but whom you chose for his exemplary anti-modern slavery policy.
 
Stakeholder capitalism means always having an “alternative narrative” — an ''excuse''. For ''everything''.
 
To run a company ''for the world at large'' is to run it ''for no-one''. And when a [[professional-managerial class]] of agents can’t work out who ''else’s'' interests to put first, whose interests do you think they will naturally choose?


===Are corporations best-placed to look after everyone else’s interests?===
===Are corporations best-placed to look after everyone else’s interests?===
Yes, customers are your stakeholders, and they have an interest how you conduct your business, but — at least in a healthy marketplace — they have a means of controlling that a lot more direct, regular and effective than do shareholders: they can buy something else. You can only maximise shareholder return ''by persuading lots of customers to buy your stuff''.  
Yes, customers are your stakeholders, and yes, they have an interest how you conduct your business, but — at least in a healthy marketplace — they can control that a lot more directly, regularly and effectively than can shareholders: ''they can buy something else''. You can only maximise shareholder return ''by persuading lots of customers to buy your stuff''.  
 
As a ''vox pop'' in Bakan’s film puts it: “If you don’t like Pepsi-Cola, Bank of America, well, if you don’t like what they do, don’t use ’em. That’s the way I see the people’s power is.”


By contrast, shareholders are a bit like voters in a representative democracy: their main weapon is the power of sale; beyond that, there’s the AGM, and unless you’re an institutional money manager, don’t expect anyone in the C suite to be massively bothered how you vote.
By contrast, shareholders are a bit like voters in a representative democracy: their main weapon is their power of sale; beyond that, there’s the AGM, and unless you’re an institutional money manager, don’t expect anyone in the C suite to be massively bothered how you vote.


Employees — especially those in the executive suite — have all the power they need to influence the company. They are there, every day, making every decision.
Employees — especially those in the executive suite — have all the power they need to influence the company. They are there, every day, making every decision.
[[File:Water Scarcity.jpg|300px|thumb|right|Well, if it were up to me I’d spend more time managing the risk in my loan book tbh.]]
Of course the disenfranchised minorities at the margins of our community need a voice. As we argue [[Critical theory|elsewhere]], an optimal society is pluralistic, tolerant, defends those at the margins and, [[all other things being equal]], prefers their interests when they conflict with the majority that is perfectly able to look after itself.


The question before us is not ''whether'' to protect their interests, but ''how''. There are plenty of better ways: representative democracy, for a start.  
=== Externalities ===
Of course the disenfranchised minorities at the margins need a voice. As we argue [[Critical theory|elsewhere]], an optimal society is pluralistic, tolerant, defends those at the margins and, [[all other things being equal]], prefers their interests when they conflict with a majority that is perfectly able to look after itself. But the question is not ''whether'' to protect their interests, but ''how''.
 
There are plenty of better ways than through stakeholder capitalism: representative democracy, for a start.  


But even so, shareholders are not monolithic investing homunculi: they are ordinary people with disposable income. If they want to beautify the inner city, save polar bears or fight water scarcity, they can do that directly. That is a far better way to allocate capital. It puts control in the investors’ hands, where it should be. Investors
[[File:Water scarcity.png|300px|thumb|right|Or you could spend more time managing your loan book? Just a thought]]
do not need to channel their charitable activity through the medium of their equity portfolio.  
But even so, beyond their shareholding, shareholders are not monolithic investing homunculi: they are ordinary people with disposable income. If they want to beautify the inner city, save polar bears or fight water scarcity, they can do that ''directly''. There are charities whose very mandate is to agitate for just that. That is a far better way to allocate capital. It puts control in the investors’ hands, where it should be. Investors do not need to channel their charitable activity through the medium of their equity portfolio.  


We cannot fathom the moral agenda — if there is one<ref>And honestly, is there likely to be a moral dimension to investing in a ''bank'' stock?</ref> — behind an investor’s decision to invest in a bank stock. Who knows if they care about water scarcity, or polar bears? But if the alternatives are “assume they are basically after a capital return” or “let the chief executive decide what the moral priorities of her shareholders are”, then it is not a difficult choice.
It does not seem unconscionable to ask companies just to stick to their knitting. Banks: maintain prudent lending standards and excel in risk management. Corporates: deliver quality goods and services to customers for more than it costs to produce them.  


A bank should prioritise prudent lending standards and timely risk management. It should stick to its knitting. Governments, NGOs, supra-nationals and dedicated charities with resources, expertise and focus can deal with water scarcity. If bank shareholders want to address water scarcity, they can give their disposable resources to water scarcity specialists. That is surely more effective than buying bank stocks.
Let governments, NGOs, supra-nationals and dedicated charities with resources, expertise and focus deal with water scarcity. If your shareholders care about water scarcity, they can give their disposable resources to water scarcity specialists. That is surely a better way of doing it than buying your stock. And how should those charities and NGOs feel about you competing for their direct funding?


===About those executives===
===About those executives===
The proposition that a disembodied pile of papers is intrinsically psychopathic is a bit far-fetched. The proposition that the collected shareholders of all listed companies in the world are all psychopaths is even more far fetched. The idea that, against the average, those who make it to the top of the greasy corporate pole have an element of the sociopath to their personalities? That’s not far-fetched at all.
Professor Bakan’s proposition that a disembodied pile of papers is intrinsically psychopathic is a bit far-fetched. The idea that the collected shareholders of the world’s companies are unusually psychopathic is even more far fetched: if it isn’t we are well and truly doomed, because that is all of us.  
 
But what of that tiny, feral class who elbow their way into the  of the world’s executive suites — might ''they'' be overrepresented by those with psychopathic tendencies? We do not find that especially far-fetched at all.
 
Now — if we allow for a cynical moment that it might be true — ask yourself this: is it wise to delegate responsibility for working out our moral priorities to a small group of entitled people with a plausibly heightened propensity towards psychopathic behaviour? For isn’t that what stakeholder capitalism essentially advocates?
 
[[File:Lulu Lemon.jpg|300px|thumb|right|Lulu Lemon has questions about its customers, apparently.]]
As they have shrunk from their shareholders’ best interests, corporations have become increasingly moralistic in public. No doubt this partly panders to the customers: you can’t fault a costless and oblique attempt to boost shareholder returns by telling customers what you think they want to hear, though the data suggests the customers don’t really care for it.<ref>[https://www.thepullagency.com/blog/is-your-brand-too-woke/ Is Your Brand Too Woke?] Chris Bullick, Pull Agency, 2022.</ref>
 
Corporations are not our moral guardians. We don’t need them to be, we don’t ''want'' them to be and, though many executives seem minded to think otherwise, they are just not any good at it. <ref>The Department of Justice recently launched [https://www.justice.gov/corporate-crime/corporate-crime-case-database the Corporate Crime database]. This should help keep things in perspective.</ref> Wouldn’t it be better to accept them for the flawed, return-generating machines they are, however imperfectly propelling that old invisible hand, and leave the do-gooding to those who are?


{{sa}}
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*[[Stakeholder]]
*[[Rentier]]
*[[Rentier]]
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Latest revision as of 13:29, 28 May 2024

In which the curmudgeonly old sod puts the world to rights.
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Adam Smith’s Dangerous Idea

Once upon a time, not long ago, shareholders were opaque, sacred beings. Ineffable, invisible, immortal and divine: to their improving ends the company’s mortal stewards twitched their every fibre.

This will to shareholder return sprang from Adam Smith’s invisible hand:

“...Though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements...They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species[1]

This was, a breathtaking insight; no less dangerous than Charles Darwin’s: from collected, disorganised, unfettered, selfish actions emerges optimised community welfare.

It is, in fact, the same idea: a recurring, algorithmic process can reduce the entropy in a system. Creation comes from chaos. This is is as “dangerous” to Newton as it was to God. Anyway, I digress.

The limited liability corporation is the philosophical embodiment of that idea. Look after the shareholders, and society will look after itself.

Shareholder capitalism has the advantage of easy performance measurement: you can evaluate every impulse, every decision, every project, every transaction against a single, simple yardstick: was it in the shareholders’ best interest?

Shareholders’ interest, in turn, can also be measured along a single, simple dimension: profit. Nothing else matters. The professional-managerial class, and their endemic agency problem, are hemmed in: you can’t hide from after-tax profit.

Pursuing only its shareholders’ enrichment, therefore, would make a corporation preternaturally nimble, responsive to society’s demands: best incentivised, so the theory had it, to allocate capital where the community most needed it. This is a practical philosophy: here, actions speak louder than words.

“Compare this,” declared followers of the Chicago School, “with the disasters of central planning, five-year plans, great leaps forward and so on.” These are theoretical philosophies: robust in concept but flimsy upon contact with the grim realities of human behaviour.

Stakeholder capitalism

Well, that was then.

Enlightenment orthodoxy has fallen from grace. John Milton Friedman has been cast from paradise[2]. The narrative has changed. In a time which venerates the lived experience above all else, unalloyed selfishness has become oddly intolerable.

Dangerous, even.

In 2003, legal academic Joel Bakan put the argument that, since a corporation’s sole statutory motive is the short-term enrichment of its owners, it has the clinical characteristics of a psychopath.[3]

Since then, things have only got worse for Adam Smith’s conviction. We are cancelling and redrawing the world: let us cancel and redraw our corporate aspirations too. The profit motive is, by design, venal, selfish and riven with bias. Its stampede for profit demonstrates an abject want of care for everyone, and everything, else. And so it has come to pass: “stakeholder capitalism” has displaced shareholder capitalism. The wider world is the constituency. Greed is not good.

We, the planet, demand that corporations to orient themselves towards all their “stakeholders” — customers, creditors, suppliers, employees, the community, the environment, the marginalised multitudes that suffer invisibly under the externalities of industry and last — but not least! — shareholders. Corporations must not profit at the expense of the wider world.

This view seems so modern, so empathetic and so right that it is hard to see how anyone can ever have thought otherwise. But still, this is a striking reversal for the free market fundamentalists. Even the Business Roundtable is getting in on the act: in 2019, it “redefined the purpose of a corporation” away from the outright pursuit of profit towards promoting an economy that serves all Americans.

“It affirms the essential role corporations can play in improving our society,” said Alex Gorsky, Chairman and CEO of Johnson & Johnson and Chair of the Roundtable’s Corporate Governance Committee,[4] “when CEOs are truly committed to meeting the needs of all stakeholders.”

But, first principles. There is theory and there is practice. Practical systems do not always make for good theory. Theoretical philosophies do not always yield practical systems.

Shareholder capitalism has little to say about externalities, sure. But stakeholder capitalism codifies the agency problem. It diffuses accountability for anything the corporation does, putting the professional-managerial class who run the company beyond the reproach of the one stakeholder group with the necessary means, justification, incentive and consensus to call it out: their shareholders.

Stakeholder capitalism as disguised shareholder capitalism

Maybe that’s what the Business Roundtable meant; maybe not. Maybe they’ve changed their minds. Here’s current chair, Jamie Dimon, quoted in the FT:

“All we’re saying is when we wake up in the morning, what we give a shit about is serving customers, earning their respect, earning their repeat business.”[5]

But that is no reimagining of the fundamental purpose of a corporation: it is just a better view of the old one.

If your customers happen not to be, or care about, polar bears, then no need to lose any sleep about polar bears, and no need to give shit about them when you wake up if you do. Your only decision is “whether me caring about polar bears will make more people buy my stuff, and thereby increase my bottom line”.

This is just shareholder capitalism.

About those shareholders

Under Professor Bakan’s theory, remember, it is not the shareholders who are psychopaths, but the corporations they own: distinct legal persons. The shareholders themselves are only a motivation for the pathology. This is just as well, because shareholders come from all walks of life: through mutual funds, retirement plans, 401(k)s and ISAs, we are the ultimate shareholders.

And “we the shareholders” are diverse in every conceivable dimension, bar one. Shareholders don’t have to know each other, like each other or care less about each other. On any other topic, their aspirations and priorities will jar, clatter and conflict: if you put a group of them in a room to discuss anything but their shareholding, do not be surprised if a fight breaks out.

But on that one subject — their company’s performance — they are necessarily aligned: each will say, “whatever else I care about in life, members of the executive board, know this: I expect you to maximise my return.”

About that return

Now you might argue that, since we are all shareholders in one way or another, stakeholder capitalism is no more than paying attention to shareholders’ wider interests and not just their monetary ones. This way, polar bears get a look in, assuming shareholders generally care about polar bears.

But that isn’t stakeholder capitalism: that’s just a debased version of shareholder capitalism. It replaces shareholders’ monetary interests for their ethical values, but then substitutes the individual shareholders’ values — which, to repeat, are bound to conflict — with the Board’s.

That is not the deal. The Board are the shareholders’ servants and don’t — shouldn’t — get to moralise on their behalf. Besides, to ditch this narrow financial interest is to miss Adam Smith’s single clinching insight. Shareholders may disagree about polar bears. They probably do. They won’t differ about the value of cash.

As long as it is all about return, there can be no arguments.

The abstraction of value and the important of cash

Long ago, our forebears in ancient Mesopotamia hit upon a way to abstract pure, disembodied value from the perishable commodities and depreciating plant, machinery and miscellaneous substrates in which it is usually embedded: they called that abstracted value “money”.

Cash does not go off, does not rust, cannot be eaten, and does not depend for its value on anything else. Cash is abstract value.

Hence its value as a yardstick for corporate performance. In discharging their sacred duty, those stewarding the affairs of corporation could not have clearer instructions: should the return they generate, valued in folding green stuff, not pass muster, there will be no excuses.

There is no dog who can eat a chief executive’s homework, no looking on the bright side because employee engagement is up, no consolation in the popularity of the company’s float in the May Day parade: if the annual return disappoints, members of the executive board, expect to get shot.

But surely, the mighty shareholders need no protection from chief executive officers? Well, in 2018 the Economic Policy Institute mapped CEO compensation against worker compensation and the performance of the S&P500 since 1965.[6] It gives a pretty good picture of how shareholders, workers and executives are doing relative to each other.

Stakeholder Annual change
Employee +2.5%
Shareholder +8.5%
CEO +35%

So, before we cast the shareholders’ interests down the well, ask this: by switching to stakeholder capitalism, who benefits?

Stakeholder capitalism means never having to say you’re sorry

When shareholders hold the whip hand, an executive’s goal is simple. Make money. That clarity of purpose evaporates the moment the executive’s remit expands. Multiple stakeholders means multiple interests, which must conflict.

How do you arbitrate between creditors and the local community? Between the environment and customers? Between penguins and polar bears? On whose say?

And who are these stakeholders for whose wellbeing the corporation is suddenly guardian? Shareholders’ names and interests, after all are set out on a register. There is no corresponding ranked list of constituents, interest groups or benighted factions. The priorities, narratives and moral imperatives of “the world at large” are quite indeterminate. (Those railing at this idea, and not persuaded by a cursory glance at the day’s newspapers, are invited to consider the works of Kant, Mill, Hobbes, Hume, Smith, Nietzsche, Nozick, Wollstonecraft, Warnock, Butler, Rawls, hooks and Marx and return with a concise summary.)

Even if you know who they are, how do you know what — beyond having as much of your soda as you can make, as cheap as you can sell it — your stakeholders’ interests are? Whose interests have priority? Why?

Under this approach, failure to generate a decent cash return can be blamed on — well — anything: your success in reducing the number of smokers in the accounts department, or the cash your community outreach team spent on beautifying a local park, or the facilities manager who was twice the going rate but whom you chose for his exemplary anti-modern slavery policy.

Stakeholder capitalism means always having an “alternative narrative” — an excuse. For everything.

To run a company for the world at large is to run it for no-one. And when a professional-managerial class of agents can’t work out who else’s interests to put first, whose interests do you think they will naturally choose?

Are corporations best-placed to look after everyone else’s interests?

Yes, customers are your stakeholders, and yes, they have an interest how you conduct your business, but — at least in a healthy marketplace — they can control that a lot more directly, regularly and effectively than can shareholders: they can buy something else. You can only maximise shareholder return by persuading lots of customers to buy your stuff.

As a vox pop in Bakan’s film puts it: “If you don’t like Pepsi-Cola, Bank of America, well, if you don’t like what they do, don’t use ’em. That’s the way I see the people’s power is.”

By contrast, shareholders are a bit like voters in a representative democracy: their main weapon is their power of sale; beyond that, there’s the AGM, and unless you’re an institutional money manager, don’t expect anyone in the C suite to be massively bothered how you vote.

Employees — especially those in the executive suite — have all the power they need to influence the company. They are there, every day, making every decision.

Externalities

Of course the disenfranchised minorities at the margins need a voice. As we argue elsewhere, an optimal society is pluralistic, tolerant, defends those at the margins and, all other things being equal, prefers their interests when they conflict with a majority that is perfectly able to look after itself. But the question is not whether to protect their interests, but how.

There are plenty of better ways than through stakeholder capitalism: representative democracy, for a start.

Or you could spend more time managing your loan book? Just a thought

But even so, beyond their shareholding, shareholders are not monolithic investing homunculi: they are ordinary people with disposable income. If they want to beautify the inner city, save polar bears or fight water scarcity, they can do that directly. There are charities whose very mandate is to agitate for just that. That is a far better way to allocate capital. It puts control in the investors’ hands, where it should be. Investors do not need to channel their charitable activity through the medium of their equity portfolio.

It does not seem unconscionable to ask companies just to stick to their knitting. Banks: maintain prudent lending standards and excel in risk management. Corporates: deliver quality goods and services to customers for more than it costs to produce them.

Let governments, NGOs, supra-nationals and dedicated charities with resources, expertise and focus deal with water scarcity. If your shareholders care about water scarcity, they can give their disposable resources to water scarcity specialists. That is surely a better way of doing it than buying your stock. And how should those charities and NGOs feel about you competing for their direct funding?

About those executives

Professor Bakan’s proposition that a disembodied pile of papers is intrinsically psychopathic is a bit far-fetched. The idea that the collected shareholders of the world’s companies are unusually psychopathic is even more far fetched: if it isn’t we are well and truly doomed, because that is all of us.

But what of that tiny, feral class who elbow their way into the of the world’s executive suites — might they be overrepresented by those with psychopathic tendencies? We do not find that especially far-fetched at all.

Now — if we allow for a cynical moment that it might be true — ask yourself this: is it wise to delegate responsibility for working out our moral priorities to a small group of entitled people with a plausibly heightened propensity towards psychopathic behaviour? For isn’t that what stakeholder capitalism essentially advocates?

Lulu Lemon has questions about its customers, apparently.

As they have shrunk from their shareholders’ best interests, corporations have become increasingly moralistic in public. No doubt this partly panders to the customers: you can’t fault a costless and oblique attempt to boost shareholder returns by telling customers what you think they want to hear, though the data suggests the customers don’t really care for it.[7]

Corporations are not our moral guardians. We don’t need them to be, we don’t want them to be and, though many executives seem minded to think otherwise, they are just not any good at it. [8] Wouldn’t it be better to accept them for the flawed, return-generating machines they are, however imperfectly propelling that old invisible hand, and leave the do-gooding to those who are?

See also

References

  1. The Theory of Moral Sentiments (1759) Part IV, Chapter 1.
  2. I know he wasn’t called John.
  3. Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (2003)
  4. Is being Chairman and CEO really the best example for a chair of a corporate governance committee to set?
  5. Stakeholder capitalism is ‘not woke’, says JPMorgan’s Jamie Dimon, Financial Times, 2 June 2022
  6. https://www.epi.org/publication/ceo-compensation-2018/
  7. Is Your Brand Too Woke? Chris Bullick, Pull Agency, 2022.
  8. The Department of Justice recently launched the Corporate Crime database. This should help keep things in perspective.