“Stakeholder Capitalism”: When Big Business Curries Favor from Big Government

August 25, 2020 by Dan Mitchell @ International Liberty

 Milton Friedman was one of the the 20th century’s greatest defenders of capitalism and individual freedom.  He had marvelous insights on issues such as fiscal policy, Sweden, tax competition, and other people’s money, but one of my favorite Friedman quotes is about the role of business.

This should be non-controversial, but we need to remember that big companies are not necessarily strong proponents of free enterprise.  Yes, they like lower tax rates and a few other market-oriented policies, but many large firms are more than happy to climb into bed with big government so they can gain special advantage from subsidies, handouts, bailouts, and protectionism.  So we shouldn’t be surprised to learn that the trade association for corporate CEOs of has disavowed Friedman.

Business Roundtable is modernizing its principles on the role of a corporation. Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance that include language on the purpose of a corporation. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders. …We therefore provide the following Statement on the Purpose of a Corporation, which supersedes previous Business Roundtable statements and more accurately reflects our commitment… This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity.

You can read the new language here. There’s only one pages of text and you’ll notice that it’s a lot of vapid jargon without any measurable commitments.  Indeed, the letter is so vague that some observers think it’s irrelevant.  In a column for the Washington Post, James Copland of the Manhattan Institute points out that profit-maximizing companies already consider the interests of so-called stakeholders.

Critics and supporters of business alike have characterized the statement as a major shift away from “shareholder” capitalism toward an alternative “stakeholder” model pushed by some progressive academics and policymakers. It isn’t.

The Business Roundtable’s statement unequivocally states that “the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”

To be sure, it proclaims that each of the chief executives signing on shares “a fundamental commitment to all of our stakeholders” — including customers, suppliers, employees and the broader community. But that’s a truism. No business can long survive without meeting such stakeholders’ needs. …The corporate signatories do not suggest in any way weakening the fiduciary duties of the boards and managers of ordinary for-profit shareholder corporations to manage such companies’ affairs for shareholders’ benefit.

…there is a big difference between saying that a for-profit shareholder corporation should be sensitive to varying constituencies’ concerns and saying that its principal purpose is something different from the traditional view. One needn’t be an expert in public-choice economics or corporate governance to understand that politicizing corporate decision-making would be inefficient.

Lucian Bebchuk and Roberto Tallarita of Harvard Law School, in a column for the Wall Street Journal, share some real-world evidence that the CEOs are engaging in empty posturing.

Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relations move. …

We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. …The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. …

a review of the board-approved corporate governance guidelines of the companies whose CEOs joined the statement…mostly reflect a clear “shareholder primacy” approach. …The evidence is clear: Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value.

I think these two columns are accurate.  The vast majority of the CEOs who signed the Business Roundtable’s letter presumably have no intention of making unprofitable decisions solely to curry favor with the broader community.  That being said, the letter is still bad news because it basically acquiesces to the left’s misguided view that profits are somehow bad for society.  The Wall Street Journal made this point in an editorial in defense of the Friedman position.

The mucky-mucks of the Business Roundtable are tweeting in unison how “proud” they are to have abandoned the corporate purpose of serving shareholders for the more politically au courant “stakeholder” model. …media cheerleaders seem especially pleased that the CEOs have thrown the late, great economist Milton Friedman over the side. …The attempt to smear Friedman’s counsel as amoral is false. His point was that profitable businesses serve the common good better than executives who spend money on “social responsibility” but preside over business failure. The second point is Friedman’s warning that CEOs who put social responsibility above shareholders will find it redounds to their detriment. They feed the public belief that free markets and business are “wicked and immoral” and must be curbed by “external forces,” which typically means politicians.

In a column for National Review, Andrew Stuttaford also fears that the letter gives a green light to those who want more regulation by government.

The executives who retool a company’s mission to suit a particular conception of “social responsibility” are spending shareholders’ money on a moral agenda… Often repackaged as a demand that corporations be measured by the extent to which they match arbitrary and ever-tightening E (environmental), S (social), and G (governance) standards, it is now a way of corralling private enterprise without the bother of legislation. …

the flourishing (and profitable) ecosystem that ESG investing has created…encompasses consultancies, advocacy organizations, “chief sustainability officers,” and many, many more rent-seekers besides. ESG is bad news for investors, but it is not a bad way of filling the wallets of those that feed off it. …

In effect, therefore, many companies…will be forced to change the way they do business as they try to keep up with ever-more-stringent rules set not by democratically elected legislators but by the unaccountable, the ambitious, the greedy, and the fanatical.

Speaking of unaccountable and greedy, that’s a good description of Elizabeth Warren’s legislation to give Washington greater control of major companies.  Professor Greg Mankiw of Harvard opined about this issue last month for the New York Times.

If you open any standard economics textbook, such as one of mine, you will be told that a firm’s objective is to maximize profit. …Given the vast range of economic and political problems the world faces, this approach is often said to be too narrow....former Vice President Joseph R. Biden Jr.,…joined in the criticism.

“It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders… They have a responsibility to their workers, their community, to their country.” …In forsaking a mandate of narrow self-interest for one of broad social welfare, this approach to corporate management sounds noble, perhaps even obvious. But it is more problematic under closer scrutiny. …this approach to corporate management expects executives to be broadly competent social planners rather than narrowly focused profit maximizers.

It’s unlikely that corporate executives, with their business training and limited experience, have the skills to play this role well. …One lesson of Econ 101 is that the self-interested behavior of consumers and businesses, directed by market forces and constrained by competition, can lead to desirable outcomes.

In an op-ed earlier this year for the Wall Street Journal, Vivek Ramaswamy opined that he and his fellow CEOs should not have a special role in determining economic policy.

‘Stakeholder capitalism” is…the fashionable notion that companies should serve not only their shareholders, but also other interests and society at large. …

My main problem with stakeholder capitalism is that it strengthens the link between democracy and capitalism at a time when we should instead disentangle one from the other. …Managers of corporations gain their positions by maximizing profits and minimizing losses. …But these business leaders have no special standing to decide whether a minimum wage for American workers is more important than full employment, or whether minimizing society’s carbon footprint is more important than raising prices on consumer goods. …

I have no special standing to legislate my morals because I am a CEO. I do, however, make the final decision about our company’s research-and-development budget. …the reason many corporate executives are speaking up in favor of stakeholder capitalism is that they think they will gain popularity at a time when it is unpopular to be perceived as a pure capitalist. …

Some may argue that companies will be more successful in serving shareholders over the long run if they also serve societal interests. If that’s true, then classical capitalism should do the job, since only companies that serve society will ultimately thrive, and “stakeholder capitalism” would be superfluous.

But some CEOs can’t resist the temptation.  The Wall Street Journal opined about the social-justice posturing of one of the the CEOs who signed the Business Roundtable’s letter.

BlackRock CEO Larry Fink…has assumed a role as self-styled conscience of the business world in telling CEOs how to run their companies. …BlackRock is the world’s largest asset manager, with some $7.43 trillion in client assets.

He is now threatening to vote against corporate directors and management if they don’t do what he says, and he is especially exercised about climate change. …Corporations in which BlackRock invests will also have to comply with the rules from a “Sustainability Accounting Standards Board” on issues such as labor practices and workforce diversity.

…Like his friends at the Business Roundtable, Mr. Fink is big on “stakeholder” capitalism. …If he means serving employees, customers, suppliers and communities, he is merely saying what any successful company already does. But our guess is that by stakeholders Mr. Fink really means regulators and politicians. …We can’t help but wonder if Mr. Fink, after a profitable life in business, is auditioning to be Treasury Secretary.

In an article for the Foundation for Economic Education, Professor T. Norman Van Cott makes the all-important point that successful companies automatically generate benefits for people other than shareholders.

The marketplace is an arena where buyers and sellers both win. Do buyers and sellers really care about each other? …I sure am grateful that I don’t have to depend on the good-heartedness of Florida orange producers to send oranges to Indiana.

It’s not that the orange producers and I aren’t well-meaning, just that oranges would not find their way to Indiana if good-heartedness were the motivation for commerce.

…Microsoft provides a wonderful example…the shareholder value of Microsoft, as large as it is, surely pales in comparison to what its customers around the world gain.

…Microsoft has achieved its immense shareholder value not because its customers, workers, suppliers, and communities are poorer. Indeed, nothing could be further from the truth. Its stakeholders have been enriched immeasurably by its pursuit of maximum shareholder value.

Writing for USA Today, Professor Steve Hanke is very critical of the Business Roundtable.

…the Business Roundtable launched a major attack on property rights, the bedrock of capitalism. …the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders.

According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”… The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance. …

The great Austrian economist Joseph Schumpeter concluded in his 1942 classic “Capitalism, Socialism and Democracy” that businessmen would “never put up a fight under the flag of their own ideals and interest.” …Schumpeter concluded that businessmen, through their ignorance and cowardice, would assist those who wished to destroy capitalism.

Megan McArdle also is skeptical. Here’s some of what she wrote for the Washington Post.

…business leaders have no right to do charity on someone else’s dime. You might admire plumbers who donate fixtures to needy families, but not if they donated the fixtures you’d purchased for your own bathroom. That is essentially what stakeholder capitalists are demanding of chief executives: Take the money and power that shareholders have entrusted to you and divert those resources to benefit someone else.

…if “stakeholder capitalism” means anything, it must mean companies doing things that make shareholders at least somewhat worse off. …Corporate social responsibility…can be even less accountable than good old-fashioned shareholder capitalism. Money is relatively easy to measure: Shareholders have more of it at the end of the quarter, or they don’t, and either way you know how the boss is doing.

But if the chief executive pours that cash into better-upholstered offices, more-generous fringe benefits and a slew of charitable causes, who’s to say whether the company’s goals are being met? …As Harvard health-care economist Amitabh Chandra noted on Twitter after the Business Roundtable’s announcement, “appealing to an amorphous ‘social mission’ ” has allowed nonprofit hospitals “to foil regulators, acquire their competition, and increase market power.” Beware of any proposal that might make the rest of the economy look more like the health-care sector.

Robert Samuelson’s column in the Washington Post points out that previous episodes of “corporate social responsibility” did not yield good outcomes.

…we’ve already been here. In the first decades after World War II, large U.S. corporations adopted a social and political model very much like the model recommended by the Roundtable.

There was much talk of “stakeholders,” not shareholders. Companies were supposed to attend to their social responsibilities. “Capitalism” as a term went out of style… The corporate responsibility fad of the 1950s and 1960s was premised on the belief that…companies could achieve both their traditional financial goals as well as the less traditional agenda of providing higher living standards and employment security. …

What we know with hindsight is that this confidence was a conceit of a moment in time. …These lessons of history have been either forgotten or ignored. But they have not gone away. Rather than heap endless new responsibilities on companies, we’d be better off having them tend to their traditional tasks — including maximizing profits.

By the way, the problem of big business rejecting capitalism isn’t limited to the CEOs of the Business Roundtable.  Writing for Project Syndicate, Klaus Schwab of the World Economic Forum (the folks who put on the Davos conference for the establishment’s high flyers) argues for a middle ground between free markets and Chinese-style cronyism.

What kind of capitalism do we want? …we have three models to choose from. The first is “shareholder capitalism,” embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximize its profits.

The second model is “state capitalism,” which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China. …the third has the most to recommend it. “Stakeholder capitalism,” a model I first proposed a half-century ago, positions private corporations as trustees of society… We should seize this moment…

To that end, the World Economic Forum is releasing a new “Davos Manifesto,” which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field…a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics. …

Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society.

Given that per-capita living standards are much lower in China than they are in the United States, I’m baffled that Schwab thinks it’s a good idea to move halfway toward the decrepit Chinese model of cronyism and industrial policy.  Does he think that people in North America and Western Europe should only be twice as rich as people in China instead of four-to-six times richer?  Let’s wrap up. The president of the Business Roundtable just wrote a one-year anniversary review of his group’s campaign for so-called stakeholder capitalism.

It’s been a year since 181 CEOs of America’s largest companies overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return. …

Companies have held to their commitments. …many Roundtable companies were making substantial investments in worker training, better wages and benefits, and support for struggling communities. They called for increases in the federal minimum wage and paid family medical leave. …

In recent weeks, CEOs have made new commitments to promote racial equality and diversity in their own companies. …Far from undermining shareholders or capitalism, the many actions major corporations are taking to support all stakeholders will pay dividends… Business Roundtable CEOs reject…quick-hit, short-term capitalism. They agree with many of the nation’s largest investors that the health of both companies and capitalism depends on investments in all stakeholders.

Sounds very noble and caring, at least for the folks who don’t understand economics.  Which is why I almost laughed out loud when I saw this tweet, which is based on this article published by the Atlantic. The Roundtable is trying to curry favor with statists, but some folks on the left are smart enough to see that it’s all empty posturing.

So what’s my contribution to this debate? Most of what I would say is captured in the excerpts above. Simply stated, it’s not a good idea to mix big business with big government. But I will take this opportunity to unveil another one of my theorems.

P.S. Back in 2012, I criticized the Business Roundtable for embracing tax increases on small businesses, so you can see that the Eleventh Theorem of Government is way overdue.

P.P.S. You can peruse the other ten theorems of government by clicking here.