🔋High Stakes
Are companies responsible for more than just profits?
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There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits, so long as it…engages in open and free competition without deception or fraud. - Milton Friedman
Back in 2016 in college, I took a philosophy class called Markets, Ethics, and Law. In it, we learned about the tragedy of the commons and how various philosophers may have handled it given their views. I argued Hume’s utilitarianism was a better strategy for solving the tragedy of the commons (that people acting in their self-interest would eventually deplete scarce public resources) than Marx or Paine. Hume’s solution would be closer to the free market solution, Marx's socialism, and Paine was somewhat in between. The next paper topic was the idea of stockholder vs stakeholder theory. As I pondered why I got a bad grade on the first paper and realized that I could not drastically improve my writing in time, I needed another solution. So I did what most “self-preservation-minded” college students would do at the time. I formulated what my argument would be and then wrote my paper in the exact opposite view which catered to the expected biases of the teaching assistant.
I promise you I didn’t write a spectacular essay, but I got a MUCH better grade that time around which certainly helped my GPA that semester. Sure you can attack my integrity, but the past is the past. Milton Friedman from the Chicago School of Economics first introduced the stockholder theory in the New York Times in 1970, outlining his view on the social responsibility of corporations. The view was largely the backbone behind corporate America, but times are changing…
Stockholder (Shareholder) Theory - the only responsibility of managers is to serve in the best possible way the interests of shareholders, using the resources of the corporation to increase the wealth of the latter by seeking profits. According to this theory, such behavior, done within the constraints of law and without deception or fraud, would be beneficial for society as a whole. Springer
Stakeholder theory found its roots in some economic texts in the early 80s, with Ed Freeman as the most cited founder. While not going over the event horizon to socialism, shareholder theory argues for a more holistic framework for corporations within the bounds of a capitalist system.
Stakeholder theory - Stakeholder Theory is a view of capitalism that stresses the interconnected relationships between a business, its customers, suppliers, employees, investors, communities and others who have a stake in the organization. Stakeholder Theory
In this framework, the corporation has a duty to every party with whom it interacts (those with a “stake”) as seen above. People point to the need for stakeholder theory because of globalization hurting local suppliers, poor labor relations, greedy executives enriching themselves, financial instability, price gouging/anti-consumer behavior, poor relationships with the community, environmental damage, and more. The theory also argues that it has a better strategy for bringing long-term value from the corporation concerning all stakeholders.
If a company makes a product more profitable by dumping sludge into the river making homes inhabitable and destroying the ecosystem, this hurts the community and the environment. If a company rushes a product to market knowing that there is a safety flaw and people get hurt, this hurts the consumer and community. Everyone can agree these are bad, but each theory has a different explanation as to why. Stakeholder theory argues that the corporation has a duty to all those with a stake including the community and environment, and as such should be held accountable explicitly through laws and regulations to steer the company in the right direction to the benefit of all stakeholders. Further, it is the company’s responsibility to proactively cater to the safety and well-being of its consumers because without such foresight consumers may not use the products anymore. Stockholder theory argues that while these may have been legal, they were deceitful/immoral and still wrong. That doesn’t mean that the purpose of the company is anything other than generating profit. Friedman, while generally considered a free market advocate, still argued that taxes are the reasonable government response in times where a 3rd party may be involuntarily involved like pollution.
Today
This of course brings us to today, where the ideals of shareholder theory are inhabiting the minds of many. With complex topics like diversity in the workplace, climate change, and wealth inequality surfacing as contentious political concerns, it’s reasonable to argue the need for a more complex version of capitalism to meet the issues of the times.
Powerful corporate leaders like Blackrock CEO Larry Fink and others like Bill Gates have been vocal in support of stakeholder capitalism. Blackrock owns a significant portion of major companies in the US which certainly yields it some influence. If corporations were built on stockholder theory, stakeholder theory is taking over the mainstream view which has been evident over the last few years now.
Stakeholder theory’s prevalence now has become a topic of political tension with things like equity and diversity, but there’s no better example of how it manifests than the topic of climate change. The common narrative now is that companies are responsible for their climate and emissions impact. A system of carbon credits, carbon taxes, regulations, ESG scores, and more are proposed to monitor the emissions of corporations. With companies spending millions on ESG issues each year with the numbers increasing, the natural question of whether these companies could provide better long-term value had they focused on investing in making their products better arises.
It is hard to deny that this is the trend, but the system is currently far from perfect. There may growing pains, but I am skeptical of its ability to get more efficient. There may be no better example than some of the absurdities that have arisen with ESG investing. For example, Exxon, the largest oil/gas company has a better ESG score than the top electric vehicle maker Tesla. I understand there is more than the environment in ESG, but this inevitably leads us down the road of more centralization. Who determines which governance structure is the best and how does this better serve the world rather than the experts in the particular fields who work at each company?
While this piece is not to rant on or disparage ESG, it is a topic of great significance in society today. Based on what we have seen with corporations and their motivations to cater to certain narratives there has been some backlash. Many questions arise once we start assuming the role of stakeholder theory in our corporate landscape today.
Is protecting labor important when the economy may need that labor to work elsewhere or lead to unemployment?
Should a company not be able to search for a cheaper raw materials supplier because it might hurt that business? Are businesses in the business of protecting everyone or selling the best products?
Do we want the government intertwined with corporations more than they are? The corporatism and political donations fed by large corporations are already suspect and this would seemingly bring more corruption, not less.
Should a company focus on bringing in the best/most qualified employees above all else?
Is the customer not smart enough to take responsibility for himself and the products he uses? The company is obligated to protect him as well as sell him the product?
Is Exxon investing in better and more efficient/new technology or using its expertise to invest in other developing energy companies/projects not better than them using that money to offset their calculated carbon emissions with credits and filling their board with folks that want to end fossil fuels?
These are just some of the issues that arise with stakeholder capitalism. Many proposed fixes to the issues of the world only add second and third-order consequences. Who is to decide whether the change was worth it in the long run? Ultimately, the arbiter of these decisions is the master of the game.
Stakeholder theory sounds good on paper because most people can agree that environmental consideration, safety measures for consumers, and supplier/labor relations are noble and virtuous pursuits. I am skeptical that this philosophy is the capitalist utopia that it is made out to be, especially for those it claims to protect.
There is no doubt that much of the US has turned its back on stockholder theory and fully embraced stakeholder theory. Corporations are feeling the pressure to bring “value” to not only their shareholders but also things like their board’s political motivations, government guidelines, labor/supplier safety, as well as consumer protection. I hope I made this societal shift clear and raised some interesting thinking points for you to hypothesize the merits of this system.
I will explain precisely why I believe this is not the most productive form of capitalism at providing the coveted “long-term value” for all those concerned next week. Until then,
-Grayson
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