The Dangers of ‘Stakeholder Capitalism’

National Review Online, August 25, 2020

 Writing in the Wall Street Journal last week, Andy Puzder took aim at Joe Biden’s embrace of “stakeholder capitalism,” the doctrine now being touted as a replacement for the quaint notion that a company should be run for the benefit of those — the shareholders — who own it.  Stakeholder capitalism is a modish name for what is just another expression of corporatism, an old ideology with a sometimes sinister past that, because of the power it gives to the unelected and the unaccountable, will never fall far out of style. That, in this case, it involves playing around with other people’s money only adds to its sleazy appeal.

Puzder notes that Biden has called for “an end to the era of shareholder capitalism” and that he has rejected the argument that a company’s primary responsibility is to generate returns for shareholders as “untrue and a farce.”

To be fair, Biden has hardly been alone in supporting a proposition that resonates far beyond what is conventionally understood as the Left. In December, Klaus Schwab, the founder and executive chairman of the World Economic Forum (the organization perhaps best known for its annual meeting in Davos, and that hosted China’s Xi, a corporatist of a different stripe, just a year or so back) excitedly wrote that stakeholder capitalism was “gaining momentum.” Why was this?

Well, Schwab wrote, one likely reason is the “Greta Thunberg” effect.

Oh.

The young Swedish climate activist has reminded us that adherence to the current economic system represents a betrayal of future generations, owing to its environmental unsustainability.

Oh.

So far, so Davos.

And “others are finally coming to the ‘stakeholder’ table,” Schwab exulted. “The US Business Roundtable [the BRT], America’s most influential business lobby group, [has] announced . . . that it would formally embrace stakeholder capitalism.”

So it has. In a grandly titled Statement on the Purpose of a Corporation, first issued on August 19 last year, but attracting CEO signatures ever since, the Business Roundtable took the same position as Biden, even if phrased more diplomatically:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.

There was no talk of “farce,” but the underlying conceit was the same. A company’s management no longer owed an overriding duty to its shareholders. Instead, it must serve the interests of a number of “stakeholders.” The last to be mentioned were shareholders, although they were thanked for handing over their money, so there’s that.

Quite who a company’s stakeholders might be is not always clear (neither is their relative importance); ambiguity is ever the ally of the unaccountable. To its credit, the BRT at least gives a list, including customers, suppliers, employees, and “the communities in which we work,” but then adds more layers of obligation, such as, naturally, agreeing to adopt “sustainable practices across our businesses.”

Schwab goes further:

But to uphold the principles of stakeholder capitalism, companies will need new metrics. For starters, a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics.

What those goals may be will depend on whom you ask — that convenient ambiguity again. But requiring companies to comply with ESG, a key benchmark for “socially responsible” investment, involves their accepting environmental and social objectives (the “governance” is fairly uncontroversial) set by . . . well, it varies, but rarely anyone elected. But there is a certain honesty about the way that “shared value creation” includes progress towards “goals” not only unrelated to shareholders’ financial interests, but that may actually operate against them. Never mind that this ought either to discourage investors or lead to them demanding a higher price for their capital in order to compensate for the lower returns that they can now expect.

In the course of his Journal article, Puzder criticizes what he refers to as Biden’s politicized (my emphasis) “stakeholder capitalism,” but “stakeholder capitalism” is by its very nature political, whoever is cheering it on. In effect, its advocates are insisting that corporate money and power should be conscripted to force through a social and political agenda — without the bother of going through the ballot box.

Of course, companies often try to influence politics. K Street would not be what it was if they did not. Nor, for that matter, would numerous political campaign chests. But corporations working in the interest of their shareholders to engage with the democratic process is one thing. Hijacking a company’s resources in a manner designed to bypass it is quite another. Stakeholder capitalism not only trashes the property rights of the shareholder, it is also an attack on democracy.

And it is more insidious than the peril envisaged by Milton Friedman in “The Social Responsibility of Business is to Increase its Profits,” an article he wrote for the (very different) New York Times Magazine of half a century ago. In that piece, Friedman was clearly concentrating on the danger of socialism, a danger that, in one shape or another, has not gone away, but has, at least, the merit of being opposed to free enterprise in a fashion so obvious that even the BRT could not miss it.

Corporatism is a trickier challenge. It has taken different forms over the years — some more benign than others — but all of these forms are based on the belief that society should be organized by and for its principal interest groups — let’s call them “stakeholders” —  intermediated by, and ultimately subordinate to, the state. The individual doesn’t get a look-in, but to the managements of large corporations (the latter would count as one of those interest groups), it is an opportunity (and thus a temptation) as well as a threat. After all, much of the power that is being taken from shareholders will end up with those to whom they unwisely entrusted their funds.

Commenting on the BRT’s statement, Alex Gorsky, chairman of the board and chief executive officer of Johnson & Johnson, remarked on how “it affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.” And for “corporations” — read corporate managements — self-importantly taking up their duty to “improve” us all.

If stakeholder capitalism is an opportunity for corporate managements, it is even more so for others looking to set the country’s course. However heavy-handed big government may be, in a democracy it is accountable to the electorate, albeit often tenuously. By contrast, “socially responsible” corporations, working in conjunction with mysteriously selected representatives of arbitrarily defined stakeholders, and — if it decides to get involved — the government, can be used to exercise a great deal of power with little in the way of restraint. In the absence of the checks and balances provided by both democratic and constitutional control, such corporations can go where government might fear to tread. And, when they are sufficiently woke (or conformist), they probably will.

A company can, for example, force out employees who say or write the “wrong” thing (whether inside or outside the workplace, and whether relating to their jobs or not) or even those who give to the wrong cause, and, so long as it keeps within the letter of the employment laws, there’s not much that anyone can do about it. It’s a private matter, you see. If it is a social-media company, it can censor anyone it chooses — a private matter, the First Amendment doesn’t apply. And a company can use its commercial muscle to pressure other companies to follow the appropriate ideological line. To believe that, say, Verizon, Ford, or Walgreens pulled their ads from Facebook because of reputational risk requires a  remarkable amount of naivety. What their managements wanted was for Facebook to clamp down on posts of which they either disapproved — or wanted to be seen as disapproving of. Again, a private matter, as is the refusal by certain banks to, say, supply financing for “sensitive” oil projects or weapons manufacturers. And then there’s PayPal’s denial of service to sellers of (legal) content to which its management had objected, yet another private matter. Such decisions have had little or no plausible connection with making a return for shareholders: In fact, they may have done the opposite.

However focused he may have been on his traditional adversaries on the old-school Left, Friedman appreciated how using a corporation to pursue sociopolitical aims unrelated to its shareholders’ interests could, quite legally, make a mockery of both democracy and the constitution.

The starting point of his argument was that the actions of a “socially responsible” management acted as a “tax” on the shareholders (put simply, it cost them money), made all the more aggravating by the fact that this same management would then decide how that tax would be “spent,” either by forgoing profits, or, more literally, by spending them. It’s not hard to guess what Freidman would have thought of J. P. Morgan Chase’s gift of $500,000 to the already controversial Southern Policy Law Center in 2017.

As Friedman observed:

The imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public. . . .We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs. . . .

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants — insofar as their actions in the name of social responsibility are real and not just window-dressing — should be selected as they are now. If they are to be civil servants, then they must be elected through a political process.

That would shake things up at the BRT.

Both the BRT’s statement and some of the comments made by the CEOs who signed it were, implicitly or explicitly, apologetic or defensive and, eventually, will prove counterproductive.  Fifty years ago, Friedman explained why.

Speeches by businessmen on social responsibility . . . may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces.

Puzder showed little sympathy for the supposed wickedness of the pursuit of profits, a notion as prevalent now as it was back then:

In reality, corporations do enormous social good precisely by seeking to generate returns for shareholders. They give investors a way of putting money into promising businesses without risking personal liability for the businesses’ broader obligations, such as debts and lawsuits. By limiting investors’ exposure to the risks of business failure, the corporate structure has been overwhelmingly successful in generating the investment required for economic growth and increasing standards of living.

Indeed.

It would be too easy to dismiss the CEOs who signed the BRT’s statement as another generation of “useful idiots.” Quite a few of them will be shrewder than that, convinced that they can play stakeholder capitalism to their advantage. But even if they are correct, the result will be a country that is poorer and less free than it should be.