There has been a lot written on this topic recently, particularly in response to the recent announcement by the Business Roundtable of it decision that corporations should seek to serve all stakeholders rather than focusing on shareholders. I don’t propose to add anything new to the discussion in this post but simply to call out a couple of references I have found useful in trying to make sense of the issues.
This post by Aswath Damodaran offers a useful review of the issues associated with choosing what purpose a company should serve, and what might go wrong as the current debate plays out. Damodaran identifies 5 variations on how companies pursue their purpose
- Cut throat corporatism
- Crony corporatism
- Managerial corporatism
- Constrained corporatism
- Confused corporatism
“Confused corporatism” is the label Damodaran applies to the “stakeholder” approach. No surprises that he is not a fan. This extract from his post captures his core arguments.
“I know that this is a trying time to be a corporate CEO, with people demanding that you cure society’s ills and the economy’s problems, with the threat of punitive actions, if you don’t change. That said, I don’t believe that you can win this battle or even recoup some of your lost standing by giving up on the focus on shareholder wealth and replacing it with an ill-thought through and potentially destructive objective of advancing stakeholder interests. In my view, a much healthier discussion would be centered on creating more transparency about how corporations treat different stakeholder groups and linking that information with how they get valued in the market. I think that we are making strides on the first, with better information disclosure from companies and CSR measures, and I hope to help on the second front by connecting these disclosures to intrinsic value. As I noted earlier, if we want companies to behave better in their interactions with society, customers and employees, we have to make it in their financial best interests to do so, buying products and services from companies that treat other stakeholders better and paying higher prices for their shares.”“From Shareholder wealth to Stakeholder interests: CEO Capitulation or Empty Doublespeak?”; Musings on Markets, 28 August 2019
The Economist also offers a perspective on what might go wrong with the “stakeholder” version of corporate purpose. The Economist uses the term “Collective Capitalism” to label this alternative formulation.
I am not convinced the answer proposed by The Economist is going to solve the problem but I still found it worth reading. Firstly, it reminds us that companies have been granted unique rights – in particular “limited liability”. We probably take this for granted but recognising that it is a privilege begs the question what does society get in return.
“Ever since businesses were granted limited liability in Britain and France in the 19th century, there have been arguments about what society can expect in return”
Like Damodaran, The Economist questions the ways in which companies might make the social choices not being addressed now.
“Consider accountability first. It is not clear how CEOs should know what “society” wants from their companies. The chances are that politicians, campaigning groups and the CEOs themselves will decide—and that ordinary people will not have a voice. Over the past 20 years industry and finance have become dominated by large firms, so a small number of unrepresentative business leaders will end up with immense power to set goals for society that range far beyond the immediate interests of their company.”
The Economist also reminds us that it is not clear how this kinder form of capitalism retains the creative destruction that has been part and parcel of the process of economic growth
The second problem is dynamism. Collective capitalism leans away from change. In a dynamic system firms have to forsake at least some stakeholders: a number need to shrink in order to reallocate capital and workers from obsolete industries to new ones. If, say, climate change is to be tackled, oil firms will face huge job cuts. Fans of the corporate giants of the managerial era in the 1960s often forget that AT&T ripped off consumers and that General Motors made out-of-date, unsafe cars. Both firms embodied social values that, even at the time, were uptight. They were sheltered partly because they performed broader social goals, whether jobs-for-life, world-class science or supporting the fabric of Detroit.
Lastly, this opinion piece by Barry Ritholz is also worth reading for a fairly blunt reminder of the parts of the system status quo that fall far short of the free market fairy tale. I have only scratched the surface of this topic but hopefully you will find the articles and blog posts referenced above useful.