Capitalism is not a program of action designed to facilitate economic activity, but a model used to describe it. It depicts the consequences of the freedom to pursue economic self-interest. These include everything from markets to anonymous shareholder-owned companies, their interactions, and the individual and collective results of them.
Many celebrate the accomplishments of this system, and others condemn the presumed costs entailed in achieving them. But it is worth pointing out that the model does not advocate the pursuit of self-interest; it merely identifies it as the primary economic instinct of individuals, and observes that, when given proper free rein in free markets, it works to the benefit of humankind.
That would suggest that companies are in the business of creating value for their owners. But Wally Bock, of Three Star Leadership, pointed out in a comment to “Creating businesses” that this is “true as far as it goes, but it’s also important for companies to consider other stakeholders such as employees, communities and customers.”
There is a relationship between ends and means that demands mutual respect. If you are dismissive of your means, you will find your purpose harder to achieve. On the other hand, if you allow too much of your attention to stray from your ends to a perhaps undue solicitation for your means, you will often bring harm to both.
The central point is to retain your central focus on your purpose, but to expand your perspective sufficiently to allow you to capture everything that helps you achieve it, and to understand the relationship of those things with your pursuit of it. This most assuredly includes your customers and employees, and almost certainly your community, as well.
But what is the nature of the importance these stakeholders carry, and what should be the extent of your managerial attention to them? The very use of the term “stakeholder” is intended to imply some degree of inherent right on the part of those who claim it, and of inherent obligation on you. It may, therefore, be an expression to avoid.
But at the very least, it should be examined. Please see this post for more about that. For our purposes here, let’s just look at the subject this way:
Consider the commonly used expression “corporate citizen.” This is a great expansion of the stakeholder concept. It is used to justify approaching CEOs to have them sign on to everything from charitable giving and contributing to disaster relief drives, to subscribing to popular international social and scientific movements arranged under the rubric of “sustainability” – environmentalism, animal rights, global weather concerns, and the like.
That may sound like something only reasonable to be expected from large, profitable, faceless corporations. But what if you were a shareholder, building your retirement or other goals for financial security on that ownership? How would you feel on discovering that the managers of the company had decided to pour profits into one of these movements, rather than into your dividends or, at least, to reinvest them in the company?
If that doesn’t make the point, try this: suppose you are an entrepreneur, and your business has grown to the stage that called for you to bring in professional management. Suppose you stopped in to the office one day to find that management had, of its own accord, given a large donation to a local museum, volunteered material and manpower to a charity drive, or undertaken a strategic shift in corporate operating philosophy and identity in order to conform with popular ideas about the environment? Would you not find that an unexpected development, perhaps even an outrageous usurpation of your rights, and an unconscionable overstepping of their bounds?
If you find the thought upsetting, how do you reconcile that with contemporary calls on public company CEOs to engage in just such behaviors? Is it not possible that such calls for “corporate ethics” contain a hidden blow to the heart of corporate fiduciary duty – the responsibility of managers to owners?
How can you be sure, when you consider such activities yourself, that you are advancing, rather than degrading, the creation of value for your owners? What criteria do you use to evaluate such requests and pressures?
This post is a part of a series. You can learn about and link to the other articles here: Conceptualizing capitalism
Today’s tips: Speaking of who value should be created for, please see this WSJ piece about European triumphalism over their brand of – as opposed to US-style – capitalism.
And speaking of good corporate citizenship, please also see this Pasadena Star-News item about the consequences of its being mandated by government. This is an example of why some larger corporations may encourage such regulation, since they can bear its weight, whereas compliance with it drives smaller rivals out of the market.
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