Shareholder, Not Stakeholder
by Karen De Coster
by Karen De Coster
One thing that sticks in my craw is the nonsense exemplified in the use of that newfangled term that is polluting American business jargon: stakeholder. Wikipedia conveys it as capably as I ever could:
In the last decades of the 20th century, the word "stakeholder" has evolved to mean a person or organisation that has a legitimate interest in a project or entity. In discussing the decision-making process for institutions — including large business corporations, government agencies and non-profit organizations — the concept has been broadened to include everyone with an interest (or "stake") in what the entity does. That includes not only its vendors, employees, and customers, but even members of a community where its offices or factory may affect the local economy or environment. In that context, "stakeholder" includes not only the directors or trustees on its governing board (who are stakeholders in the traditional sense of the word) but also all persons who "paid in" the figurative stake and the persons to whom it may be "paid out" (in the sense of a "payoff" in game theory, meaning the outcome of the transaction).
Reason puts up an entertaining roundtable that addresses the issue of corporate responsibility, with three divergent cats providing their take on this fashionable perception: Milton Friedman in a commentator role; John Mackey, CEO of Whole Foods, as the glorifier of stake holding; and T.J. Rodgers, the libertarian CEO of Cypress Semiconductor.
First of all, John Mackey lays claim to being a Misesian and intractable free-market chap. How, then, does he manage to disintegrate into an aura of self-inflicted paroxysm in his unyielding apologia for the case of "the common good?"
Not that we're only concerned with customers. At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment.
There is, of course, no magical formula to calculate how much value each stakeholder should receive from the company. It is a dynamic process that evolves with the competitive marketplace. No stakeholder remains satisfied for long. It is the function of company leadership to develop solutions that continually work for the common good.
Jingles such as "the common good" are sheer rubbish. In this sense, the company leadership owes no fiduciary duty whatsoever to the public sphere, and certainly, not at the expense of stockholders. If "we" (the common good) don't own stock in ABC Corp., then we don't have a stake in ABC, unlike "they" who have purchased a share of ownership through licit means under the rubric of "I." Individuals or voluntary associations/groups purchase shareholder interests, and officers of a corporation have a fiduciary duty to act in the best interests of those shareholders, thereby increasing their wealth. At all times, this would include foremost concern for customers, employees, and vendors. It is not advantageous to the wealth creation process to put communal interest groups on the same plane as shareholders. Adds Mackey:
I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders — for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.
In response to Mackey's roadmap for collective success and other criticisms of the corporation, Rodgers hits back with some first-rate comments:
But Mackey's subordination of his profession as a businessman to altruistic ideals shows up as he attempts to negate the empirically demonstrated social benefit of "self-interest" by defining it narrowly as "increasing short-term profits." Why is it that when Whole Foods gives money to a worthy cause, it serves a high moral objective, while a company that provides a good return to small investors — who simply put their money into their own retirement funds or a children's college fund — is somehow selfish? It's the philosophy that is objectionable here, not the specific actions. If Mackey wants to run a hybrid business/charity whose mission is fully disclosed to his shareholders — and if those shareholder-owners want to support that mission — so be it. But I balk at the proposition that a company's "stakeholders" (a term often used by collectivists to justify unreasonable demands) should be allowed to control the property of the shareholders. It seems Mackey's philosophy is more accurately described by Karl Marx: "From each according to his ability" (the shareholders surrender money and assets); "to each according to his needs" (the charities, social interest groups, and environmentalists get what they want). That's not free market capitalism.
......If one goes beyond the sensationalistic journalism surrounding the Enron-like debacles, one discovers that only about 10 to 20 public corporations have been justifiably accused of serious wrongdoing. That's about 0.1 percent of America's 17,500 public companies. What's the failure rate of the publications that demean business? (Consider the New York Times scandal involving manufactured stories.) What's the percentage of U.S. presidents who have been forced or almost forced from office? (It's 10 times higher than the failure rate of corporations.) What percentage of our congressmen have spent time in jail? The fact is that despite some well-publicized failures, most corporations are run with the highest ethical standards — and the public knows it. Public opinion polls demonstrate that fact by routinely ranking businessmen above journalists and politicians in esteem.
The term stakeholder represents the collective pilfering of the few who have earned, by the many who have done diddly squat. It's a verbal redistribution, if you will; a mental conditioning of the sort that defies wealth accumulation and promulgates unabashed egalitarianism. The anti-capitalist, social contriver types — that run business schools across the nation — latched on to this term in the 1970s, and brainwashed an entire generation of businessmen-to-be on the sentiment that rights to the property of others exist outside of absolute property ownership.
The stakeholder concept is embedded in the social revolution against the haves by the have-nots. The fundamental nature of this revolution is such that it pits workers against owners, and social democracy against free enterprise. It denotes an authoritative purity in the expropriation of capital. It hijacks corporate management of its bona fide fiduciary duties in favor of an all-inclusive code of responsibility that must serve preferred interest groups, putting the shareholder behind the communal bread line. Accordingly, the stakeholder model holds up theft as noble and decries earned "excess" as a bad thing. The stakeholder view of the corporation is nothing more than a systematization of claimed entitlements to the wealth of others for the social "benefit" of the politically empowered. This is accepted wisdom to the advocates of absolute democracy, otherwise recognized as the mob alliance.
Thus we have it: a village of idiots that use normative means to assert that the village does indeed have a stake in whatever it is that others have that can benefit them. A travesty it is. Jeff Scott, a financial Austrian, puts it this way
Under a stakeholder model of responsibility, there is no clear, unambiguous standard of corporate success. The interests of these diverse groups could never be harmonized under nebulous "public interest" goals. And they never are. They have shown in practice that they vote to benefit themselves and subvert the will to pursue profits and create wealth. Customers and shareholders suffer most, since they are the two most widely dispersed "stakes" in the enterprise. They are the hardest to organize for the collective action required to run a stakeholder corporation.
In a market economy and within the shareholder model, a corporation is an instrument of its owners, the shareholders. The main mission therein is to maximize profitability. That is, the maximum value shall be obtained for vested owners, and in this manner, society will reap greater wealth via the self-interest of these savvy speculators. A corporation, however, can gain the attention of the speculative community only by way of producing current profits or the promise of future earnings greater than the opportunity costs of speculating elsewhere.
Mackey, nonetheless, takes a fair swipe at Rodgers and his Cypress Semiconductor company, by pointing out that Cypress has a large negative retained earnings balance. To be reasonable, Cypress is a hi-tech company in an extremely volatile industry. Due to its historical growth, it still receives a favorable S&P equity ranking. The semiconductor/electronics market is a tough storm to ride out — much more so than Mackey's organic foods business.
In the end, Mackey comes off as an Ivy-League puff, employing all the right scuttlebutt appropriate for impressing his avant-garde peers. Rodgers, on the other hand, sounds like the vanquisher who will not chalk out or succumb to the politically-correct heave lying in his wake. As compared to Rodgers, Mackey may indeed be earning his shareholders more money at present. However, when times get tough and the organic food market becomes less growth-oriented, who will Mackey put first — the shareholders or the stakeholders?
October 25, 2005
Karen De Coster, CPA, [send her mail] is a part-time libertarian freelance writer; graduate student in Economics and Finance; and a full-time, accounting and finance professional. She is fond of American-made pick-ups, Japanese SUVs, Belgian beer, Polish food, Italian markets, Mexican beaches, West Virginia diners with real corn bread, Harley Davidsons, the Waughs, Murray Rothbard, H.L. Mencken, and photographing small-town Americana. She makes a mean martini, and she orders Windsor Rare California Port by the case. She doesn't have time to recycle, thinks Bill O'Reilly is a Nazi, and she spends her spare time evading the Homeland Security Nazis for kicks and grins. She aspires to disturb the peace of the complacent, content, collectivist masses that would sell their souls — and hers — for a little security, a cushy easy chair, and a big-screen, color TV. See her Mises Institute archive for more online articles, and check out her website, along with her blog.
Copyright © 2005 Karen De Coster