Shareholder

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The holder for the time being of a share in the equity of a company; a part owner of a corporate enterprise. Usually, shares are issued in registered form (as opposed to bearer form), because it is sort of important to know who — you know — owns the goddamn company. Whereas your creditors, on the other hand — could you really give a fig about them? Well, obviously you could, but as a general category, when you have issued that indebtedness in the form of freely transferable debt securities, it is that fact that someone holds them that mainly concerns you, rather than precisely who.

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 last fibre. This will to shareholder return sprang from the brow of Adam Smith himself, and his 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”

Performance measurement was simple: the shareholders’ collective interest propelled and motivated the machine in all its manifold intricacy. Every impulse, ever decision, every project, every transaction could be gauged and evaluated against a single dimension: is this in the shareholders’ best financial interest?

That interest could be measured in a single dimension: cash profit. Nothing else mattered, and this even put a gate on the extent to which the company’s directors, officers, servants and agents could let their conflicting personal interests colour their pursuit of this noble, singular goal. You cannot hide from after-tax profit.

But we live in a post-millennial world. Corporations are venal, selfish things, riven with bias, discrimination; a product of the West’s colonial history of oppression and wanton marginalisation. Adam Smith, though a vigorous opponent of slavery, back in 1763, is in danger of being cancelled.

In place of shareholder capitalism, we see stakeholder capitalism. This asks corporations to oriented themselves to serve not just their shareholders, but all their “stakeholders”: their customers, suppliers, employees, shareholders, the community, the environment, and the distantly marginalised who suffer invisibly under the awful externalities of industry while shareholders bask in the fruits of the pursuit of profit.

A corporation is bound to increase long-term value for all, and must not maximise shareholder profits value at the expense of other stakeholders.

This view seems so modern, compassionate and intuitively right — so fit for Twitter — that it is hard to understand how anyone can have thought otherwise. Yet think otherwise they did — consistently, at times, exclusively — from the publication of Smith’s Theory of Moral Sentiments onward, through the centuries, through the titans of American commerce, the Chicago School, down until the collective failure of nerve we see before us today. Environmental, social, and corporate governance is the constant refrain; the business roundtable has redefined the purpose of a corporation away from the outright pursuit of profit to instead promote “an economy that serves all Americans”.

You might not be surprised to find your correspondent taking a contrarian view. This not an “awokening” so much as a kind of national concussion occasioned by a stout blow on the head. For stakeholder capitalism is to codify the agency problem; to beautifully diffuse accountability for anything the corporation does.

Shareholders, as a class, are, in theory, infinitely diverse in every conceivable dimension bar one. They don’t have to know each other, like each other or care less about each other. They can be young or old, rich or poor, left or right, tall or short, male or female, gay or straight, black or white or, in each case, any gradation in between. In all other walks of life, bar this one, their respective interests, aspirations and expectations might jar, clatter and undermine each other. If you put them in a room to discuss any topic but their shareholding, you might not be surprised if a fight broke out.

The class of a company’s shareholders need have — no, no: will have — nothing whatever in common beyond their shareholding.

But on that one subject, they are utterly, magically aligned: “whatever else I care about in my life, members of the board, know this. I expect you to maximise my return.”

And nor is there dispute about what counts as return, or how you measure it. Long ago, our forebears figured out how to distil pure, abstract, immaterial value from the relativising commodities or perishable substrates in which it is usually embedded: cash.

In discharging that sacred quest, a corporation’s agents could not have clearer instructions. Should return not pass muster, there are no excuses. There is no dog who can eat a chief executive’s homework, no looking on the bright side because employee engagement numbers are up, of the company had a popular float in the annual May Day parade. If the annual return disappoints, you get shot.

Stakeholder capitalism means never having to say you’re sorry

All that clarity of purpose evaporates the moment you expand your list of stakeholders beyond that single class. Now a failure to generate a return can be blamed on 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.

Stakeholder capitalism means the executive has an excuse. Always. For everything.

Customers can look after themselves

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.

Shareholders can’t easily look after themselves

Shareholders are a bit like voters in a representative democracy: their control over the enterprise is a lot less exacting that we like to think. One’s 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.

Employees definitely can look after themselves

Unlike shareholders, employees — especially those in the executive suite — have all the power they need to influence the company.

If shareholders really want to beautify the inner city, they can do it themselves

We assume shareholders are people with disposable income, and they have chosen to this sum into this company for the purpose of generating a return. If they wanted to donate to Oxfam, they could. It is not the company to second guess the moral priorities of its shareholding. As mentioned above, in all respect but the single one of the aspiration for a maximum return, the shareholders interests are entirely opaque, and certainly conflicting. There will be democrats and republicans, vegans and carnivores, wets and dries on the share register. The executive cannot pander to these conflicting proclivities.

See also

• Stakeholder
• Equities
• Equity Derivatives
• Equity Derivatives Anatomy
• Stock Lending