A Stake in the Heart of Capitalism

Lenin reportedly said, “When it comes time to hang the capitalists, they will vie to sell us the rope we will use to hang them.” This reference to greed as the essence of the motivation of capitalist actors might seem to stand in sharp contrast to the latest pronouncement of the Business Roundtable. According to them, the obligations of management are no longer primarily to the shareholders and the maximization of profits, but rather to what are called “stakeholders.” The Roundtable, composed of CEOs of nearly 200 major corporations, stated that they “share a fundamental commitment to all of our stakeholders”—each of whom “is essential”—while pledging “to deliver value to all of them, for the future success of our companies, our communities, and our country.”

Stakeholders are various groups in the public, including shareholders, that may be impacted by the actions of a business. These groups include employees, suppliers, advisors, and customers, but could conceivably include any social grouping one might imagine as being affected in any way by a business. Unlike the limited group of shareholders that once claimed priority—even exclusivity—over those who manage a corporation because of their investment in it, the members of the Business Roundtable now see their obligation to be essentially to the public at large. Investors are no more compelling to the attentions of management than any other stakeholder.

The greedy capitalists of the old shareholder model of corporate responsibility had one thing in common with their shareholders, namely, both were largely motivated in the same way. Management was incentivized to maximize profits, and investors invested so that those managers would do so. Under the new stakeholder dispensation, presumably management is to be concerned with the public good. Greed and self-interest are replaced by concern for public well being. Of course there might still be a way to interpret the actions of management under this new dispensation as self-interested. They can now avoid having to answer solely to the group most likely to monitor their activities—their investors—in favor of a concern for their stakeholder pool in general. This might be another way of saying they don’t have to answer to anybody while pretending to care about everybody. 

But let us not descend into such cynical speculations. Let us suppose that corporate executives are genuinely moved by public spiritedness towards all their stakeholders. We need to be clear, however, about one thing before moving on: the shareholder model did not say to either ignore or treat badly one’s “stakeholders.” It simply said that one’s actions in this regard should always keep in mind the primary obligation to the shareholder in the form of return on investment. Good practices towards “stakeholders,” were often sensible and good business. But once that “bottom line” measure is removed as the primary standard and motivation, it’s not at all clear what is to replace it, since “stakeholders” are an amorphous body with amorphous, and potentially conflicting claims and desires. Although the so called “separation between ownership and control” (shareholders and management), does pose some issues—not the least of which is opening the door to the very claims of the Business Roundtable—it still retains the traditional structure of obligation. Return on investment is a clear and measurable standard when compared to what it means to “provide value” to one’s stakeholders.

Assuming the best of intentions also does not touch the problem of fiduciary responsibility. Under the shareholder model, executives had a fiduciary responsibility to the shareholders. In effect, the shareholders “hired” them. Under the stakeholder model, by contrast, it is not only not clear to whom exactly managers owe their responsibility, but more importantly who will be deciding those lines of responsibility? It’s a good bet that it will not be the managers themselves. Most likely it will be the state through various sorts of public “committees.” The reverse side of this issue of responsibility is equally troubling: who exactly has the liability when things go wrong and what is to keep a corporation from being liable for just about everything? In the first case, since managers now work for the public at large perhaps “the public” is liable when things go wrong. But if managers think that by this move they can foist responsibility off of the corporation on to the general public they might need to think again. When the lines of responsibility are fuzzy, it is more likely that liability payments by the corporation will increase, not decrease. Accompanying this probability of having to pay out more is the growing opportunity for more liability claims to be made in the first place. After all, now that the corporation is a thoroughly public entity with ambiguous lines of responsibility, virtually any claim can be foisted upon them.

Ambiguity, however, is not the central problem here. The problem is one of identity. However well-intentioned we might want to imagine corporate executives to be, they still presumably manage a private and partial dimension of society. What kept corporations private and partial was their limited scope of services and limited obligation to their investors. To now make their realm of obligation to stakeholders as wide as “the nation” is to effectively make them equivalent to the state itself. The logic of this is such that it is now even unclear what exactly is the nature of the product the corporation is to provide? Since maximizing profits is no longer the central measure, perhaps what is “good” for people should define our product choices or perhaps need should determine the price paid for a product. And when one firm wants to merge with or acquire another, removing the bottom line simply means that other “social” criteria will be used instead of looking strictly to financial benefit. 

Elizabeth Warren calls this economic patriotism, but another name for all this might be socialism, since the call here is for corporations to become thoroughly socialized. This goes well beyond “crony capitalism,” where corporations buddy up with the state for benefits that arguably might also return financial gains to the shareholders. This is corporations saying, “L’etat c’est moi.

It might be objected that the stakeholders are different from one corporation to another, thereby allowing corporations to retain their private character. But apart from the impossibility of sorting out where exactly the lines are being drawn between businesses when “community” and “nation” are the standard, such a claim simply highlights the identity issue by trying to be at once both private and public. The pull here, however, can only be towards ever more socialization, since any disaffected stakeholder group can always appeal to the corporation’s general obligation to society at large. However badly the state may often be at general impartiality, such impartiality towards all is nonetheless the government’s function. The capitalist, by contrast, is a private “person” pursuing private ends. To conflate or merge the two can only result in the obliteration of the private portion and thus of the essence of capitalism. 

The capitalists are thus not competing to sell the rope to the state; they are simply handing it over. They may think they’ll have a role to play as business persons in this new world order. Lenin was wiser.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on September 09, 2019 at 09:41:22 am

[…] of the Business Roundtable now see their obligation to be essentially to the public at large. A Stake in the Heart of Capitalism syndicated from […]

read full comment
Image of A Stake in the Heart of Capitalism | Best Legal Services
A Stake in the Heart of Capitalism | Best Legal Services
on September 09, 2019 at 10:45:38 am

If the owners of the companies, including stockholders, are also politically correct, they will support this new direction. The whole elite class seems to be tending this way.

read full comment
Image of RAM
on September 09, 2019 at 12:58:49 pm

Perhaps the fact that corporate managements have long since found out that stock prices do not correlate with any rational pattern, and that even when they perform poorly they will still receive high compensation and even obscene severance when they are pressured to resign, has led them to rationally conclude that it is not the shareholder community to whom they must genuflect but the social media politburo. "Brand" seems to be the primary asset category these days. True, many private equity funds appear to be afflicted with this same disease, and also the compensation of fund managers seems increasingly removed from actual fund performance. I attribute this to too much liquid wealth seeking too few sound investment opportunities, and so "impact investing" and all this "stakeholder" nonsense is just the latest new fad into which liquid assets can be poured and by which proliferating new funds can differentiate themselves.

Then there is the fact that corporations are not truly private concerns any longer. They have been effectively nationalized by regulation. The sheer quantity of regulations covering all aspects of corporations' operations has converted them into quasi-public agencies, whose principal mission is to serve as vectors transmitting federal (and state) policies. It is dirigisme in the US in all but name.

read full comment
Image of QET
on September 09, 2019 at 13:02:22 pm

“The capitalists are thus not competing to sell the rope to the state; they are simply handing it over.”

But then, one could argue that any economic system that denies God, will always end in atheistic materialism.

Slavery, abortion, and the reordering of man according to sexual desire/ inclination/ orientation, in order to justify the engaging in or condoning of acts that regardless of the actors, by denying the inherent Dignity of the human person as a beloved son or daughter, are physically, psychologically, emotionally, and spiritually harmful, have been declared to be “ State Right’s Issues”, by those who view man to be a means to an end, a mere commodity. which can only lead to atheistic materialism, regardless if “the capitalist is a private person, pursuing private ends”.

In order for capitalism or any economic system to serve for The Common Good, it must first and foremost recognize that God, The Most Holy And Undivided Blessed Trinity, Through The Unity Of The Holy Ghost, Is The Author Of Love, Of Life, And Of Marriage. Apart from God, The State cannot declare that which affirms the inherent Dignity of the human person beloved by God, for “God Declares what is Good”.

“When God Is denied, human dignity disappears.” - Pope Benedict XVI

read full comment
Image of Nancy D.
Nancy D.
on September 09, 2019 at 18:16:59 pm

And now for a contrarian view:

The real subject matter in the issues that SOME "managers" are putting forth have **nothing** to do with "Capitalism" (a term used as a label for those variant conditions that result from the degrees to which individuals are free to choose their own objectives and the means of attaining them).

The more essential substance of those issues is the relationships that have come to exist, the changes in their nature, development and current effects - on the participants and on the productive, distributive, consumptive and surplus generating results. Of course, those elements (factors) do affect the choices reflected in the variant condition of "capitalism" cited above.

Large-scale business enterprises ["LSEs"], whether organized in the corporate or limited partnership format, are, nonetheless, "facilities of social aggregation" generated for particular objectives (initially) but like all such facilities involve and operate through personal relationships of the people engaged.

A major change has occurred in a particular relationship of most LSEs, That change was the subject of a seminal work in this area of concern: "The Modern Corporation and Private Property," by Berle & Means (1932). Only 8 at that time, I did not become familiar with the work for another 20 years, while the series "Corporate Democracy," (DICTA: U,Va. Law Weekly 1952-53) was under discussion. Berle & Means is most often cited for the points made about the "separation of ownership from control" in LSEs. Equally important is the Private Property aspect.

Ownership, as associated with the concept of "property," may be understood as the relationship of a person to something material, like a parcel of land and a house thereon. The relationship of "holders" (owners?) of shares (or units) in an LSE do not find themselves with the **same kind** of property ownership as of land and house. Those holders are now PARTICIPANTS in the enterprise. The nature of those participations vary from individual holders to managers of holdings for the benefit of others.In most LSEs, those who are participants by holding shares or units are seldom (if ever) the sources of capital for an established LSE. Most do not participate to “own;” many not even for shares of earnings, but as objects of trade. So, we should not be shocked that other participants (managers especially) mjght try to determine the objectives of the LSE to conform to objectives of their own personal relationships.

read full comment
Image of R Richard Schweitzer
R Richard Schweitzer
on September 10, 2019 at 07:27:30 am

John Stuart Mill, among many others, suggested that happiness comes indirectly. If you wake up in the morning and say what can I do to be happy today, you will become depressed. If you wake up in the morning and say I'm going to spend time gardening today (presuming you like gardening), you will be happy. There's some evidence that aiming to please the stakeholders rather than the shareholders in LSEs actually increases profits long-term. The reasons for this may be political - political influence in our non-perfect world is probably essential to the long-term success of a large business, and the more stakeholders are pleased, from consumers to workers to local governments to, yes, shareholders, the more political influence you may have. But so what? If pleasing the stakeholders is good politics, and good politics is good for profits, then from a shareholder perspective you ought to please the stakeholders.
Who are the stakeholders? Which stakes are most important to the success of the company? Figuring out the answers to those questions is why the CEOs get paid the big bucks. There are no simple, a priori responses, unlike in shareholder theory, where it is only the 50% + 1 of the shares which count.

read full comment
Image of Alan Kahan
Alan Kahan
on September 10, 2019 at 16:30:47 pm

Elementary economics tells us that firms in competition make a "normal' return on capital and just cover the opportunity costs incurred by not producing something else. In a competitive market, no firm could afford greater-than-market wages or philanthropic gestures toward any community; they would simply go out of business. If a firm can afford such philanthropy and stay in business there must be some "pure" (monopolistic) profits it can dig into. The monopoly may be secured by a firm's development of a brand distinction, perhaps even based on corporate philanthropy, that enables its prices to stay high without drawing in competitors who would otherwise drive down prices and profits. The real issue therefore is a need to double down on enforcing antitrust laws.

read full comment
Image of Antony Dnes
Antony Dnes
on September 11, 2019 at 02:45:38 am

Not necessarily. What if "philanthropic" gestures actually produce a return (public support for your zoning change, for example)? And what f the return is higher for large corporations than for small (not unlikely)? As Doug recognizes but does not emphasize, it may well be the case that stakeholder economics and shareholder economics are two ways of getting to the same end.

read full comment
Image of Alan Kahan
Alan Kahan
on September 11, 2019 at 08:39:36 am

But what i the so-called stakeholders are mere parasites?

read full comment
Image of Wayne Lusvardi
Wayne Lusvardi
on September 11, 2019 at 10:58:49 am

The new policy promulgated by the Bus8ness Roundtable is self-correcting. It will leave those businesses that adhere to the policy weakened and vulnerable to those companies that maximize shareholder returns on investment.

read full comment
Image of Bill Lawless
Bill Lawless
on September 11, 2019 at 14:16:00 pm

This is just virtue signaling noise. The law states that corporate managers have a fiduciary duty to the shareholders, no one else. See, e.g., Del. Gen. Corp. Law sec. 141(a).

read full comment
on September 11, 2019 at 14:56:28 pm

The author is arguing, I think, that businesses have no responsibility to workers who are consumers, consumers who get their money as/from workers, nor responsibility to society which is the land, voters, local economy, because government will ensure the businesses have lots of customers with money from government, directly from government money printing welfare, or government money printing to bailout the high profit payday lenders lending money they will never get back so consumers pay businesses lots of money.

It's government that must give businesses lots of money by putting money in the pockets of lots of consumers, and ensuring any consumers businesses kill are replaced with lots of government provided income to give to businesses.

read full comment
on September 11, 2019 at 15:36:25 pm

Ie, the local busineses in conservative GOP voting America will go bankrupt when the shareholder value maxinizing hedge fund buys the local factory employing 25% of the local population, outsources the production to Asia where government will provide cheap debt to fund building a factory, train all the workers needed, thus eliminating risk to the hedge fund and cut labor costs, but not provide any customers because all the factory output is shipped to the same customers as the closed rual US factory.

The hedge fund, the shareholder, has no responsibility to workers, the community, the local or national government. After all, the hedgefund lost at most 10,000 potential customers out of a billion globally when they eliminated a third of the income the community spent buying stuff from businesses. And the shareholders should never give a damn about the local shareholders depenndent onn the local customers having incomes to pay for stuff these businesses sell produced in tens of thousands of rural US community factories.

After al, the shareholders live in leftist NYC or LA or SF where they spend millions a year buying stuff from leftist NYC, LA, SF businesses paying leftists to work and consume, who don't care if the imported food or clothing or toilet paper comes from rural America or China.

When business managers took Milton Friedman to heart and destroyed a dozenn towns per year, no big deal, but after 30 years, rural American towns have been destroyed to benefit shareholders. Trump promised government would put money in consumer pockets in those rural US communities, so they elected him president.

Instead Trump is cutting the government income going into rural US community consumer pockets. Kansas has hundreds of ghost towns that neither Brownback tax cuts nor Trump tax cuts or his trade war have brought back to life, nor even reduced their population loss forcing businesses into bankruptcy.

Meanwhile, all the job opportunities are in leftist cities at leftist businesses which don't place shareholders first. Uber is losing all the money shareholders invested. Amazon has not produced a net profit for shareholders over its lifetime, which Founder Bezos promised shareholders at the start. Tesla and SpaceX were businesses Elon Musk told everyone would probably go bankrupt but that he was trying to save humanity.

Meanwhile, companies like Sears, GE, GM, and many others who placed shareholders first are bankrupt, even after massive government bailouts which allowed them to not suffer the losses from lending deadbeats money to spend buying from these businesses. GM was described as a bank making bad loans that included a car or truck as a gift for taking a loan that could never be repaid.

read full comment
on September 11, 2019 at 16:04:35 pm

More importantly, what if calling for higher taxes on businesses to fund better schools to both produce high skill workers who have incomes supporting buying lots more from the business, plus that attract people to the community because of the good schools, increasing the number of customers for the business?

That will apply to calling for higher taxes to pay for roads, water, sewer, schools, and public transport, to vacant land to attract customers with affordable starter home for new families. In a few decades these young families will spend lots more as they gain experience and pay, or start their own businesses, hiring first family, then others in the community.

Millton Friedman clearly made the argument for destroying thousands of small US town economiess because shareholders living in leftist cities should never pay to maintain the consumer sppending levels of the third of US residents living in conservative generally rural America. He argued government should give those people money to spend with his negative income tax that guaranteed a minnimum level of consumer spending even if not working.

read full comment
on September 11, 2019 at 21:32:11 pm

The DGCL provides for public benefit corporations whose boards and managers may consider non-shareholder constituencies. Plus DE's liberal interpretation of the business judgment rule leaves a great deal of discretion in boards to decide that consideration of non-shareholder constituencies is in fact best for shareholders.

read full comment
Image of QET
on September 13, 2019 at 12:07:11 pm

‘…more importantly who will be deciding those lines of responsibility? It’s a good bet that it will not be the managers themselves. Most likely it will be the state through various sorts of public “committees.”’

Or management plays one stakeholder off against the other to live in management's own world, responsible to none.

read full comment
Image of d clar
d clar
on September 13, 2019 at 12:26:21 pm

Isn't it interesting that, as regulations are removed by the present administration, the economy improves, including jobs and wages ?

read full comment
Image of Michael T Kennedy
Michael T Kennedy
on September 13, 2019 at 12:56:16 pm

Reverse Public Private Partnership to Private Public and goodbye stakeholders.

read full comment
Image of Robert Cox
Robert Cox
on October 11, 2019 at 08:41:09 am

[…] its shareholders, as is currently required by law, but to the nebulously and expansively defined “stakeholders”. Corporations, they say, must not merely aim to maximize shareholder profit but must work for […]

read full comment
Image of The Blowback Dividends of Woke Capitalism
The Blowback Dividends of Woke Capitalism
on November 26, 2019 at 06:02:04 am

[…] of the country’s biggest corporations, including Apple, Amazon, Wal-Mart, and Bank of America, signed onto a Business Roundtable statement that attempts to redefine a corporation as something beyond a profit-driven enterprise. Henceforth, […]

read full comment
Image of Where Self-Interest Ends and Social Responsibility Begins
Where Self-Interest Ends and Social Responsibility Begins

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.