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?
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This post is a part of a series. You can learn about and link to the other articles here: Conceptualizing capitalism
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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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2 Comments
Nice, provocative post, Jim. You make good points, but I’ll stay with “stakeholder” as a vital concept in today’s world. But just because I think it’s vital, doesn’t mean I subscribe to some of the nonsense that marches under its banner. There are three groups, I think, whose actions and beliefs have poisoned the discussion of corporate responsibility beyond that to shareholders.
The first is the executives who have accepted as normal and rightful levels of compensation hundreds of times more than the average worker in their enterprise. This is poisonous because it violates common ideas of fairness and thereby calls down the wrath of those who see it as an example of what capitalism is, rather than an aberration.
The second group includes the Corporate Social Responsibility (CSR) folks. They see profit itself as immoral
The ;third group is made up of those who would have companies pursue a particular political agenda. They want the auto bailout to include conditions that the automakers produce cars that no one has shown any great willingness to buy if they have an option.
But none of that changes the situation. In a world as interconnected as ours, judging corporations on only one dimension of performance and giving them a pass on everything else makes no sense to me. It’s like judging a person on the way they function as a parent, but ignoring how they are at work and in the community.
Hello Wally,
I agree that the term “stakeholder,” in one sense or another, is here to stay.I also agree with your categorization of the poor senses in which it is used. All three are right on the money.
The second two point to the problematic idea that if you can argue that you are affected by something – have a “stake” in how it behaves – that you then also have a say, even a veto over it. Outside of normal expectations of lawful behavior, there should be no such rights to anyone other than owners.
With that in mind, your first classification seems also to me to result from the usurpation of owners’ rights. Management domination of its own boards in publicly held companies, and collusive presence on each others’ boards, results in the problem you cite, as well as others.
That is also why I am concerned with appeals to management to engage in behaviors that should be reserved to owners. In my view, managers are hired by owners to do what the latter tell them to do. Unless that specifically includes looking after certain stakeholder groups, they should only be attended to to the extent required by law, and that a careful assessment deems helpful to achieving their principle aim: shareholder profit.
But none of this really contests your main argument, I don’t think; it just shifts the motive for making it work in one respect, and m another shifts responsibility for it from managers to owners. That latter item is a problem in anonymously-owned companies. And that is the topic of Monday’s post, written yesterday.
Thanks so much for driving this important aspect of the way capitalism is perceived and expressed!
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