Stakeholder capitalism

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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.


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


  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
  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.