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 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”

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

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

Performance measurement is simple: the shareholders’ collective interest propels and motivates the machine in all its manifold intricacy. Every impulse, every decision, every project, every transaction is gauged and evaluated against a single yardstick: is this in the shareholders’ best financial interest?

That interest, in turn, can also be measured in 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 really hard to hide from after-tax profit.

Enter stakeholder capitalism

But we live in a post-millennial world. Given this founding ethos, it is hard to deny that corporations are venal, selfish things, riven with biases, discrimination and an abject want of care for unseen victims.

Selfishness as a deliberate strategy is intolerable. We are redrawing the world: let us redraw our corporate aspirations too. Gordon Gecko is out. Arif Naqvi is in.

Thus, shareholder capitalism, is being rapidly displaced by “stakeholder capitalism”. This asks corporations to orient themselves not just toward their shareholders, but to consider the interests of all their “stakeholders”, being groups who are impacted by the corporation’s operation: its customers, creditors, suppliers, employees, the surrounding community, the environment, the distantly marginalised who suffer invisibly under the awful externalities of the company’s industry and — last but not least! — its shareholders.

Under this new, enlightened purpose a corporation is duty-bound to increase long-term value for all, and must not maximise shareholder profits at the expense of the interests 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.

It is a striking reversal, all the same. Suddenly, environmental, social, and corporate governance is the constant refrain. Even that trade union for boomer gammons, the business roundtable is joining 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”.

A blow on the head

We find ourselves 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 codifies the agency problem. It beautifully diffuses the executive’s accountability for anything the corporation does, puts it beyond the reproach of its shareholders.

About those shareholders

Shareholders, as a class, are 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.

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

In all other walks of life, their respective interests, aspirations and priorities might 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 utterly, magically, necessarily aligned: “whatever else I care about in my life, members of the board, know this. I expect you to maximise my return.”

A standard measure of 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 their sacred quest, a corporation’s agents could not have clearer instructions. Should return, valued in folding green stuff, 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, no defence that 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, and corporate objectives, beyond that single monetary goal.

You have multiple goals, multiple stakeholders, and their interests — which are utterly indeterminate, by the way — profoundly conflict. How do you arbitrate between the interests of creditors and the local community? Between the environment and customers? His do you even know what the customer’s interests — beyond access to as much of your soda pop as it can get, as cheap as it can buy it — are?

Which goal has 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.

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