Stakeholder capitalism

The Devil’s Advocate™ →Go uptown A stakeholder yesterday. Well, it was this or a picture of Peter Cushing, folks. In which the curmudgeonly old sod puts the world to rights. Index — Click ᐅ to expand: The Devil’s Advocate Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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.

This will to shareholder return sprang from the brow of Adam Smith 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”

This is, by the way, a breathtaking insight; no less dangerous or revolutionary than Charles Darwin’s: from the collected unfettered, venal, selfish actions emerges optimised community welfare.

The modern corporation is an embodiment of just that idea. Everything is predicated upon the enrichment of shareholders.

Therefore, performance measurement is simple: we can evaluate every impulse, every decision, every project, every transaction against a single yardstick: is this in the shareholders’ best interest?

That interest, in turn, can also be measured along a single dimension: profit. Nothing else matters. This puts a tidy gate the agency problem, which otherwise afflicts the company’s directors, officers, servants and agents: it is hard to hide from after-tax profit.

But we live in a post-millennial world. Given their founding ethos, it is hard to deny that corporations are venal, selfish things, riven with biases, whose unseemly stampede for profit demonstrates an abject want of care for unseen victims. As long ago as 2003 it was Joel Bakan’s thrust in The Corporation: a legal personality whose soul motive is the short-term enrichment of its shareholders has the character traits to earn a clinical diagnosis as a psychopath.

To date, Bakan is on the right side of history. Unalloyed selfishness has become, to the modern conscience, intolerable. We are redrawing the world: let us redraw our corporate aspirations too. Gordon Gekko is out. Arif Naqvi is in.

And so it has come to pass: “stakeholder capitalism” has displaced shareholder capitalism. We, the planet, ask our corporations to orient themselves not just toward their shareholders, but all their “stakeholders” — customers, creditors, suppliers, employees, the surrounding community, the environment, the marginalised multitude that suffers invisibly under the awful externalities of industry and — last but not least! — their shareholders.

Under this new, enlightened purpose every corporation is duty-bound to increase long-term value for all who are impacted by its operation. It must not profit at the expense of the wider world.

This view seems so modern, so compassionate and so intuitively right — so fit for Twitter — that it is hard to see how anyone can ever have thought otherwise. Yet, think otherwise they did — consistently — from the publication of Smith’s The Theory of Moral Sentiments onward, down the centuries, through the titans of American commerce, Chicago economics and Hollywood villainy: right down until the collective failure of nerve we face today.

However obvious our enlightened new direction seems, it is still a striking reversal; one that has passed with barely a shot fired. Even that trade union for unreconciled boomer gammons, the Business Roundtable has joined in: last year, it “redefined the purpose of a corporation” away from the outright pursuit of profit to instead promote “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, “when CEOs are truly committed to meeting the needs of all stakeholders.”

We are not sure who asked the Business Roundtable, but in any case we find ourselves taking a different view. This not an “awokening” 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.

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 executive beyond the reproach of the one constituent stakeholder group with the necessary means, justification and consensus to call the executives out: their shareholders.

Stakeholder capitalism, folks, is a swizz.

About those shareholders

Under Joel Bakan’s theory, it is not the shareholders who are psychopaths, but the corporation as a distinct legal personality itself. The shareholders are only the motivation for its pathology. In a well-balanced polity, they will represent all walks of life. The latter-day power and pervasiveness of pension funds in the equity markets means that, as far as makes any difference, they do. Indeed, 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.

Beyond their shareholding, shareholders, as a class, have no common characteristics at all. On any other topic, their respective interests, aspirations and priorities will jar, clatter and conflict. If you put them in a room to discuss any topic but their shareholding, you should not be surprised if a fight breaks out.

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

About that “return”

Now you might argue that, as 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 only get a look in to the extent it is in the collected shareholders’ wider interests that they be protected.

But, that isn’t stakeholder capitalism: that’s just a stupider version of shareholder capitalism. It is stupid because it displaces the shareholders’ moral judgment for that of the CEO. That is not the deal, readers. The CEO is the shareholders’ servant: the steward of their capital. The CEO doesn’t get to moralise on the shareholders’ behalf. And — see below — if you had the pick the last bunch of humans on Earth to whom you would delegate the collected moral imperative, it would surely be the professional managerial class.

In any case, to substitute the shareholders’ putative wider interests — who knows what they are? — for their narrow financial one is to miss the single insight of shareholder capitalism. For, as long as you do not, there can be no dispute about what counts as a shareholder return, or how one should 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: money. How a given person values of a bushel of sorghum depends on the circumstances. Its value, even at a single moment in time, is relative to its consumer. Not so, cash.

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.

So, in discharging their sacred quest, 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 numbers are up, no shelter 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, you should expect to get shot.

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 the people whose money they are in charge of.

Now, before you throw up your hands and cry, “but surely, shareholders need no protection from their 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, which, in mapping CEO compensation against worker compensation and the performance of the S&P500 since 1965, gives a pretty good picture of how shareholders, workers and executives are doing relative to each other. It’s hard to see, but worker compensation has improved, by 50%, from $41,900 in 1965 to $56,200 in 2018 — an annualised rate of 2.5% — while those rapacious shareholders gained 445% an an annualised rate of 8.5%.

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 is 1,859%, an annualised growth of thirty five percent.

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

Stakeholder capitalism means never having to say you’re sorry

Recall that when shareholders hold the whip hand, an executive’s objective is simple. Make money. All that clarity of purpose evaporates the moment a company expands its remit beyond making more money for the aligned group who have given it money.

Multiple stakeholders means multiple interests, and those interests must conflict with each other. How to arbitrate between creditors and the local community? Between the environment and customers?

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, on any given day, are set out on a register, the constituents, interest groups, factions, priorities, narratives and moral imperatives of “the world at large” are utterly indeterminate. Those quailing at this idea are invited to familiarise themselves with the works of Kant, Mill, Hobbes, Hume, Smith, Rawls, Nietzsche, Nozick, and Marx and return with a concise summary.

To run a company for the world at large is to run it for no-one.

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?

Which interests have priority? 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.

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

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

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 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 can look after themselves

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

About that disenfranchised underclass at the margins of society

File:Water Scarcity.jpg

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 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.

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 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 — 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.

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.

See also

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