Stakeholder capitalism

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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 means, justification and necessary consensus to call the executives out: their shareholders.

Stakeholder capitalism is a swizz.

About those shareholders

Under Bakan’s theory, it is not the shareholders who are the psychopaths, but the corporation as a distinct legal personality itself. Its shareholders are only its motivation for its pathology. Shareholders, as a class, have no such common characteristics. Indeed, shareholders are diverse in every conceivable dimension bar one. 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.They don’t have to know each other, like each other or care less about each other. They almost certainly won’t. 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 totally, magically, necessarily aligned: “whatever else I care about in my life, members of the board, know this: I expect you to maximise my return.”

About that return

And nor is there 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.

CEO compensation (in thousands) mapped against worker compensation (in thousands) and performance of the S&P500. For some reason there seems to be an elephant in the room, too.

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, executives, you get shot.

Shareholder return is not a device to systematically gouge the environment on behalf of an anonymous capitalist class. It is a device to stop executives systematically gouging their shareholders.

Now, before you throw up your hands and cry, “but surely, shareholders do not need protection from their chief executive officers!” I invite you to consider the chart to the right, taken from data I found at 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: after a blip in 2000, their compensation settled back a bit after the financial crisis, and is now at a more sombre 1,859%, an annualised growth of thirty five percent.

So before we cast the poor shareholders’ interests to the wind, ask this: if we switch 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 you expand your objectives beyond that single monetary goal.

Multiple stakeholders means multiple interests, and those interests — which are indeterminate, by the way — necessarily conflict. How to arbitrate between creditors and the local community? Between the environment and customers?

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.

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.

If shareholders 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 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