Shareholderism
What does a large company have to work for? For the shareholders or for the community in which it is inserted? Until the first decade of this century the dilemma did not exist. It was Milton Friedman, an economist of the last century second only to Keynes, who gave the theoretical foundation to the mission of companies: to create value for their shareholders and forget about the rest that would come as a result.
After 50 years, Milton's theory of shareholder primacy began to falter with the development of the digital revolution, with the financial crisis of 2007–2008, with the increase in inequality and finally with something less controllable, the climate crisis.
In the corporate world itself, serious doubts have begun to arise about the sustainability of the Miltonian scheme for the very survival of capitalism and its derivatives.
Beyond the possibilities?
A great philosopher of the last century, Martin Heidegger, had already seen that technology pushes the will towards the impossible, if blindly supported. In a writing from the sixties he noted:
“The birch never outgrows its reach. The people of bees live within the ambit of its possibility. Only the will, which organizes itself with technique in every direction, does violence to the earth and drags it into exhaustion, wear and tear and the transformation of the artificial. It obliges the earth to go beyond the circle of possibility that it has naturally developed, towards what is no longer its possible, and therefore is the impossible."
The feeling that Friedman's shareholderism pushes too much in this dimension is also spreading among the capitalist elite and the idea is being advanced that it is necessary to move towards a precise perimeter, in which the interests of multiple subjects are active.
However, reaching stakeholderism, i.e. a theory that is more balanced between the interests of shareholders, stakeholders and communities, will be a complex path, fraught with obstacles and perhaps even dangerous, as the magazine and think-tank shows with its usual lucidity Londoner, "The Economist". We are pleased to offer you his reflections contained in the column "Schumpeter" in Italian translation.
Does Walmart have a conscience?
“Since when did Walmart develop a conscience?” The question, posed in a headline in the Boston Globe last year, would have caused Milton Friedman to turn to his grave. In an essay in the "New York Times Magazine", whose 50th anniversary fell on September 13, 2020, the Nobel Prize-winning economist tried from the very first paragraph to shred the idea that companies should have social responsibilities.
Occupation? Discrimination? Pollution? Mere “buzzwords”, she declared. Businessmen must have responsibilities. But their only responsibility as managers, according to Friedman, is to shareholders, whose wishes "broadly will be to make as much money as possible, while respecting the ground rules of society." It is difficult to find a more explicit opening to an economic essay in the entire economic literature.
It's also hard to find a better example of embodying these principles than Walmart. Listed on the stock market the year Friedman's article was published, it transformed itself from Sam Walton's hometown grocery store into the "beast of Bentonville," with a reputation for squeezing suppliers and bullying staff.
The predatory nature of Walmart's shareholding
Its shareholders acted like pirates. Since the early 2.000s, Walmart's stock price has risen by a factor of more than 31, versus 500 for the S&P XNUMX index of large companies.
Yet in recent years the company has softened. Now he defends the idea of green energy and gay rights. The Globe's accolade came shortly after Doug McMillon, its chief executive, reacted to wild shootings at Walmart stores by ending the sale of some ammunition and lobbying the government for more gun control.
This year McMillon became chairman of the Business Roundtable, a covenant of American business leaders who say they are abandoning Friedman's doctrine of shareholder primacy in favor of customers, employees and the community.
More power to business leaders? We are sure?
In divided America, torn apart by gender, race, and income inequality, this “stakeholderism” is all the rage.
But there is pushback. To mark the half-centennial of Friedman's essay, the University of Chicago, his alma mater, held an online forum at its Booth School of Business in which proponents of Friedman's creed argued that giving business leaders too much leeway can make things worse for the stakeholders themselves, not make them better.
The crux of the problem, they stressed, is the extreme difficulty of balancing the conflicting interests of the various stakeholders without giving excessive and unlimited powers to executives (what Friedman called the all-in-one “legislator, enforcer and jurist”). The Chicago forum organizers provided some hard data to back up their arguments.
Walmart's decision
Let's start with Walmart's ban on ammunition sales: an explosive decision on one of America's most divisive issues. Walmart touted it as a simple safety measure, but the National Rifle Association, a very powerful and widespread lobby, said Walmart pandered to "anti-gun elites" and said customers would boycott Walmart. And indeed some did.
Marcus Painter of Saint Louis University analyzed smartphone data to measure foot traffic before and after restrictions. He found that, on average, monthly visits to Walmart stores in heavily Republican-majority districts were down by up to 10 percent compared to competing stores; in highly democratic areas they increased to 3,4%. Furthermore, the apparent Republican boycott continued for months.
It's possible that Walmart's location helped win new (perhaps wealthier) consumers. It may, in the end, also have benefited the bottom line of Walmart and its shareholders.
The conflicting interests of stakeholders
But it also demonstrated that, amid an increasingly polarized body politic, what is good for one group of stakeholders can be anathema for another. Whether it's Hobby Lobby, a Christian chain of Oklahoma craft stores, denying employees birth control insurance coverage for religious reasons, or Nike backing a football player's decision to protest brutality of policing, some stakeholders will always object to what is being done on behalf of others.
Then there are other issues. A General Motors shareholder, who is also an employee, may want a higher salary rather than working for higher profits; a dollar spent on pollution control could be a dollar less spent on retraining workers. But weighing the costs and benefits for different groups is very difficult.
Some bosses claim they can, eager to win public praise and pander to politicians. But they are dishonest trustees, according to Lucian Bebchuk, Kobi Kastiel and Roberto Tallarita, of Harvard Law School.
Their analysis of so-called constituency statutes in more than 30 states, which give business leaders the right to consider stakeholder interests when considering the sale of their company, is telling.
It found that between 2000 and 2019, business leaders did not negotiate any restrictions on the buyer's freedom to lay off employees in 95% of sales of publicly traded companies to private equity groups. Executives have lined the pockets of shareholders and themselves.
Between saying and doing there is the sea
Aneesh Raghunandan of the London School of Economics and Shiva Rajgopal of Columbia Business School argued earlier this year that many of the 183 companies that signed up to the Business Roundtable's statement on corporate purpose have failed to "apply those principles" in the previous four years. They have carried out more environmental and labor violations than their colleagues and have spent more resources on lobbying activities, for example.
Bebchuk and others argue that the "deluded hope" of stakeholderism could make matters worse for stakeholders by hampering policies, such as tax reform, antitrust regulation and carbon levies, if government is encouraged to give corporate leaders the freedom to regulate their own activities.
Again primacy of the shareholders
Compromises are an inevitable part of equity capitalism: between short-term and long-term investors, for example. But the stakeholders are more numerous than the shareholders, which makes the interests to balance more disparate and difficult to reconcile.
Furthermore, by investing in funds linked to corporate values, or by directly influencing boards of directors, shareholders can demonstrate that their goals go beyond profit maximization and extend to the broader well-being of society.
Shareholders must maintain primacy, as happens, but must be free to push in other directions as well, if they deem it necessary.
From: The Economist, What is stakeholder capitalism?, 19 September 2020
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