Stakeholder capitalism: Difference between revisions

{{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>}}  

The modern corporation is an embodiment of just that idea. ''Everything is predicated upon the enrichment of [[shareholder]]<nowiki/>s.''

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

That interest, in turn, can also be measured along a single dimension: ''profit''. Nothing else matters. This puts a tidy gate on the [[agency problem]], which otherwise afflicts the company’s directors, officers, servants and agents: you can’t hide from after-tax profit.

But we live in a post-millennial world. Given this founding principle, it is hard to deny that [[corporation]] are, by design, venal, selfish things, riven with [[unconscious bias|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'':<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> a legal [[Legal person|person]] whose sole motive is the short-term enrichment of its investors has the clinical characteristics of a ''psychopath''.  

Unalloyed selfishness has become, to the modern conscience, intolerable. We are cancelling and redrawing the world: let us cancel and redraw our corporate aspirations too. [[Wall Street|Gordon Gekko]] is out. {{plainlink|https://en.wikipedia.org/wiki/Arif_Naqvi|Arif Naqvi}} is in.<ref>Until his arrest.</ref>

And so it has come to pass: “[[stakeholder capitalism]]” has displaced [[shareholder capitalism]]. We, the planet, ask corporations to orient themselves toward ''all'' their “stakeholders” — customers, [[creditor]]<nowiki/>s, suppliers, [[employee]]<nowiki/>s, the surrounding 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.

Under this new, enlightened purpose every corporation is duty-bound to increase long-term value for all who are impacted by its operation. ''Corporations 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'' down the centuries, through the titans of American commerce, Chicago economics and Hollywood villainy.  

However obvious this enlightened new direction seems, it is still a striking reversal, yet 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 stakeholders.”

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

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]].  

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 its ''motivation'' for its pathology. 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. 

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 interests, 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.  

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 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.  

''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 your moral imperative, it would surely be the [[professional managerial class]].

Besides, to substitute the shareholders’ putative wider interests — whoever gets to decide what they may be — 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.''

Long ago, our forebears<ref>No, not enlightened, white, male, cis-gendered, colonial oppressors: ancient Mesopotamians.</ref> figured out how 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'']]”. How a given person values of a bushel of sorghum depends on the circumstances, her needs and predilections. Its value, even at a single moment in time, is relative. Not so, cash.[[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.]]So, 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''.  

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 its success you can still measure by that single monetary measure. This is no change to the conceptual framework.

Now, before you throw up your hands and 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.   

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, by 50%, at an annualised rate of 2.5%. Those rapacious shareholders gained 445% at a rate of 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 is 1,859%, an growth rate of ''thirty five percent per annum''.  

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''. 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?

====Customers can 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.