Stakeholder Capitalism as It Should Be

Stakeholder Capitalism as It Should Be

Stakeholder Capitalism as It Should Be - –


A couple of years ago the Business Roundtable upped the stakes regarding stakeholder capitalism. Their support for what was heralded by some media outlets as reinventing ‘failed’ capitalism was popular. Pundits argued if Milton Friedman was wrong, or if he had been misunderstood.  What was there to disagree with? Profit maximization is the goal of every private organization and excess capital should be returned to all stakeholders, including society, the environment, and employees, not just the fat cats who invested the capital in the first place.

It all made sense. Or did it? Serious analysis of how firms operate suggests that capitalism, devoid of hype and pomp, very much takes account of the interest of all stakeholders they serve. A firm that does not tends not to last for long.  But which stakeholders to satisfy depends on the time-frame over which firms seek to maximize profits. If long enough and specifically targeted, the activists would be happy. But that is the real problem: how firms are incented to behave, and that speaks more to public policy and market dynamics, and opportunity, and less to the failure (or not) of capitalism.
Positive Incentives versus Negative Controls
Firms are simple things, really. Tax incentives and rewards are much more effective in encouraging change than regulation. Regulation tends to create increased investments to meet the regulation while at the same time achieve the firms original goals.  In other words, firms would tend to get round regulation, not change behavior.  If public policy could be set that aligns public goals to the private goals a firm seeks, perhaps over the same timeframe, then firms would adjust behavior. Alas that is not how many governments operate.

To prove the point, look at Shareholders Still Reign Supreme Despite CEOs’ Promise to Society, published in the WSJ on Saturday February 12. The article looks at firms being acquired. It seems the acquired firms rarely obtain compensation or job protection for those employees impacted by the acquisition. But at the same time shareholder returns to those of the acquired firms are handily improved.  Is that a failure of capitalisms or a misaligned of goals to to those who pay or paid the bills?
Where the Money Goes
Bottom line: Despite the platitudes of stakeholder capitalism, shareholders remain the primary beneficiary.  And of course this is right. It’s all about reward for investment, not some mischievous evil plan to be selfish – its all quite predictable. If CEOs saw a greater return in job protection as a result keeping acquired firms in business, maybe public policy protecting jobs would not be needed: investment is what CEOs would do. The problem is that the basic premise of investment and return is ignored by those who set public policy.

Look at Larry Fink, chief executive of Blackrock, an investment firm. He is on CNBC regularly extolling how firms should invest in the environment and other policies he said are good and right. And he is right up to a point. But he oversteps that point given his organization has invested millions in such businesses, and so his advice is self serving. If firms didn’t follow his lead his investments would pay out as planned, and they would not make their profits he has promised his investors. In other words he is playing capitalism by the book, but also playing to the gallery.

What is that old adage? Follow the money? It’s never been truer.