Abstract
You are to tie me hand and foot and stand me upright in the mast housing, and fasten the rope ends round the mast itself, and if I beg you to free me, bind me yet more tightly. Odysseus, from The Odyssey
Managing public firms solely for sake of continuously maximizing the returns of those who own shares of their stock is dumb. Doing so has produced a myriad of corporate pathologies that have harmed people and the planet. Yet shareholder value maximization was dogma for decades.
Alas, stakeholder management has largely supplanted this dumb dogma in recent years. Many former acolytes of shareholder value maximization now espouse the merits of stakeholder capitalism. Today, most business leaders and even their conservative organizations openly commit to prioritizing the concerns of a wide range of stakeholders (e.g., Business Roundtable on the purpose of a corporation, 2019). It is now commonly touted not just as socially responsible but also as the smart way to operate, generating the greatest value for the firm over time. Consider the perspective of Blackrock’s CEO, Larry Fink, whose annual letters to CEOs are highly publicized: In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. (Larry Fink, 2022)
Phew! Surely we can all breathe easy now – provided you’re not, say, downwind of the many recurring massive forest fires or chin-deep in frequent flash floods. Firms prioritizing the concerns of a range of stakeholder groups is a vast improvement over their long-standing singular focus on shareholders. Unleashed from the tyranny of shareholder value maximization, managers are now free to be deadly serious about doing good for people and the planet. Right?
Well, let’s not uncork the champagne, unless you’re using it to extinguish any of those ongoing fires or to toast your heroic water rescuers. In managing for stakeholders, firms prove no better at alleviating the many worsening problems that the dogged pursuit of shareholder value maximization exacerbated. Maybe it offers more scenic views along the way, but the stakeholder path leads to the same destination as the shareholder path. And that ain’t good for society.
Meet the New Bosses
Stakeholders hold the resources that firms need to survive and succeed. By keeping stakeholders happy, managers facilitate the free flow of critical resources to their firms. Thus, serving stakeholders is smart strategy (Freeman, 1984). Conversely, it is strategically stupid for a firm to piss off the people who power the pipeline of profitability.
Consider employees. Firms must attract, retain, and motivate them if they are to operate today and have the capacity to innovate and adapt for tomorrow. But highly skilled and even relatively unskilled employees can be difficult to find and keep. Labor shortages are critical in many industries, making employee recruitment and retention a top business priority. In industries requiring scarce talent, employees have commanded significant control over the social and environmental performance of firms. Firms not acquiescing to demands to disengage from controversial business practices or to take on desired social causes have faced troublesome employee turnover.
Communities, too, hold sway over firm behavior. Cities and towns can provide a range of tax and regulatory incentives to entice and retain firms they favor. They can also make life difficult for firms they do not approve of, to include protests and even bans from locating in their communities. For example, unhappy with their business practices, New Yorkers dissuaded Amazon from opening a headquarters campus in their desired location in New York City.
Suppliers have the power to choose which firms to work with and on what terms they will do so. With their lean, just-in-time operating practices squeezed by pandemic supply chain woes, firms have struggled to find critical resources at the level, pace, and price needed to maintain steady and profitable production. Firms that forge and maintain stable and trusting relationships with their suppliers are better able to maintain the supplies needed for timely and efficient production, thereby providing them a competitive advantage.
And, of course, the customer is king. Customers may pay a premium for the products and services of those firms that are in sync with their social and environmental preferences. Conversely, if customers are not pleased, they may boycott a firm’s products and services, denying it the revenues needed to survive.
Same as the Old Bosses
How effectively do stakeholders make use of the power that firms now widely acknowledge they hold? Are stakeholders better than shareholders at using their power to demand firms behave in socially and environmentally responsible ways? Unfortunately, no.
Stakeholders are people, my friend. Self-interested and short-sighted people. Just like shareholders, they use their muscle to drive firms to pursue what interests them and are often unaware of much beyond that. Sure, employees can demand that firms seriously tackle the world’s most critical problems, but they often flex their muscle to improve their personal pay and perks. Some communities may keep some irresponsible firms at bay, but many more eagerly engage in “race to the bottom” competitions to woo firms through tax breaks and regulatory allowances that may make all communities worse off. Though some suppliers refuse to sell to questionable firms, others step in to fill most voids. And for most customers, cost and convenience drive purchases to such a degree that the ethical consumer has been described as a myth (Devinney, Auger, & Eckhardt, 2010)
Regardless how pure of heart some may be, stakeholders have limited ability to police firm behavior (Barnett, 2018). Most stakeholders have no idea what is going on at most firms most of the time. Quick: tell me what’s going on at Nike right now! Even where information about firm performance is freely and easily available, competing demands on stakeholder attention limit awareness of the activities of any given firm at any particular point in time. The massive information flows of the digital age have only further overloaded and camouflaged true firm behaviors, providing firms additional ways to buffer themselves from the need to substantively respond to stakeholder demands, while stakeholders are sated on selectively self-curated information that buffers them from opposing ideas.
Let Leviathan Lead
Stakeholders are no less dastardly than shareholders. The Siren call of self-interest still holds sway over social benefaction. As Fink (2022) proclaims: Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.
Even for those earnestly seeking to advance collective welfare, market structures and incentives mitigate against stakeholder-driven solutions to wicked social problems. At the behest of their stakeholders, corporations have released reams of social and environmental reports, yet there is no evidence of substantive impact from these initiatives (Barnett, Henriques, & Husted, 2020). The planet is still warming uncontrollably, and economic inequality is rising, to name a few of the unresolved massive problems that stakeholders have asked firms to address.
Putting stakeholders in the captain’s chair of corporate governance doesn’t change much about how the ship is steered. Effective corporate governance is too heavy a burden to place on the distributed shoulders of stakeholders. Something stronger than stakeholder suasion is needed to push firms toward meaningful changes that lessen harm to society and help to resolve serious social and environmental problems.
One way out of this bind is to get into a bind. For stakeholders to exert favorable social control, they must possess self-control. But we’re not very good at doing what’s good for us in the long run. Even someone as brave as Odysseus had to be tied to the mast to avoid the dangers of the Siren song. We need formal government regulation to tie us to the mast. Pronouncing stakeholder capitalism as a significant advance for society’s salvation is just a delay tactic, and industry self-regulation leaves the ropes far too loose. Don’t decentralize corporate governance and place the burden on stakeholders to hold firms accountable. Give the governance gig to government. Government has the heavy hand that is required. They are specialists in governance – it’s in their name! We need real, professional referees setting and fairly enforcing real rules of corporate conduct, not an undisciplined posse of stakeholders serving as pseudo-sheriff.
Yes, I hear you screaming, “But government is also people, and worse: people with heavy munitions!” Government, too, can be captured and run in the short-sighted self-interest of individuals who may ignore lingering social and environmental problems while lining their pockets. Moreover, one can’t easily switch to another supplier of state governance when unhappy; the state can literally lock you in. Thus, the call here is not to cede absolute power to governments to control corporate behavior; rather, it is a call to balance government with corporate and stakeholder power. In countries such as the United States where decades of de-regulation have tied the hands of regulators, simply freeing and funding government to independently and adequately oversee corporate conduct would be a major step forward. In other countries with stronger regulatory environments, it is time to rethink the corporate form, not to double down on free market solutions. Though it has come to dominate to such a degree that any other form is almost unimaginable, there are many alternative forms, globally and historically, to the corporation (Meyer, Leixnering, & Veldman, 2022).
Conclusion
Pulling shareholders off their perverted pedestals and ceding influence over firms to stakeholders may feel like a win, but it makes little substantive difference in how well firms serve society. It is sold as a sea change, but we are unlikely to see change, even as we suffer the seas swelling. Firms being solicitous to their stakeholders will not substantively change how firms behave toward serious social and environmental issues. In the name of stakeholder capitalism, firms continue to scoop up all the profits they can, while externalizing all the costs they can ignore. Stakeholders stink at self-control and so are ineffective as decentralized agents of social control. We need government to force the self-control that we know we need but can’t bring ourselves to provide. Tie us up already! Thereafter, when we recognize that we are all in the same boat and have successfully sailed past the temptations of the Sirens, then we can untie our hands and work together to restructure the corporate form in ways that help us all to stay afloat.