[08/30/19] The Inconvenient Truth About Stakeholders

 

            You must have heard by now that on August 19, 2019, the U.S. Chamber of Commerce announced in double-page ads the death of shareholder value as the main corporate purpose. Endorsed by more than 180 CEOs, many of major companies, the Chamber announced the adoption of the stakeholders concept, by which the business enterprise strives to further the interests of customers and suppliers, cater to its employees, protect the environment, and care for the communities it operates in, along with generating profits for shareholders. In fact, in the Chamber’s list of stakeholders, shareholders came next to last. Almost an afterthought.

The stakeholders concept isn’t new, of course. In fact, it’s at least 35 years old, having been originally advanced (according to Wikipedia) by Ian Mitroff.[1] It ebbs and flows by the political mood. Whenever businesses behave badly (remember Enron?), a focus on corporate profits is blamed, and the stakeholders approach is proposed as an alternative corporate purpose. The concept becomes popular for a few years and then falls by the wayside. Remains to be seen whether the recent popularity of stakeholders has stronger legs than previous versions.

In any case, the conversion of the Chamber of Commerce to the Stakeholders concept generated a heated discussion. Not unexpectedly, the New York Times and its op-ed writers endorsed the move wholeheartedly, whereas The Wall Street Journal criticized it severely in two consecutive editorials as catering to leftist democratic presidential candidates and corporate activists. The Economists (August 24, 2019, p.7) stated emphatically: “However well-meaning, this new form of collective capitalism will end up doing more harm than good. It risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to long-term prosperity, which is the basic condition for capitalism to succeed.”

Absent from the multiple arguments made for and against the stakeholders concept are two important issues which I would like to raise: tradeoffs and responsibility. No serious discussion of the stakeholders concept can ignore these issues.

Tradeoffs:  Who would object to a corporate mission calling for treating fairly customers and suppliers, training employees, and supporting the community, as long as these activities don’t seriously harm long-term profitability and shareholder value? If this is what the stakeholders approach is about, I am all for it. But this is an innocuous, empty concept. You simply cannot run a successful business with disgruntled customers and suppliers, miserable employees, and rebellious communities.

For the stakeholders concept to be meaningful, there must be tradeoffs among stakeholders. For example, a company heavily investing in employees’ general education and capabilities, not necessarily those that directly benefit the company, like enabling them to gain college degrees (not in business). Such general training will prepare employees for future jobs and better retirement. Such a concerted educational effort will surely come at the expense of profits and shareholder value. Are the 180 CEOs endorsing the stakeholders concept willing to undertake such an activity, quantify its costs, and informing shareholder of the consequent loss of profits? I doubt many will. Another example: a company make a substantial and sustained investment in converting coal to renewables in an African or Asian country. This will improve the environment but surely will cut into profits. Are CEOs willing to tell investors that annual earnings were reduced by, say, 10% to finance energy conversion in Bangladesh? And will shareholders go along with this? These are the real and difficult choices of a stakeholders purpose.

So, without meaningful and explicit tradeoffs, the stakeholder’s concept is an empty one. If you can keep everybody happy, why not? Even I would endorse such a corporate mission.

Responsibility: Accountability by multiple performance measures is unaccountability. Measuring the performance of executives by long-term profits and shareholder value created is straightforward and operational. In contrast, the stakeholders approach with its multiple purposes is a recipe for ambiguity and lack of responsibility. Suppose, for example, that the company’s sales and earnings plummeted, but the CEO, in a press conference, declares the year a great success because employee and customer satisfaction increased. Is the CEO right? Should his/her compensation increase? Are the employees’ and customers’ satisfaction increases fully compensating for the sale/earnings’ decreases? These questions are obviously unanswerable, resulting in a complete ambiguity about executives’ performance under the stakeholders approach.

No wonder many CEOs endorse the stakeholders concept. They will always point at certain stakeholders doing better to justify the failure of others. Measuring the welfare of employees, environmental changes, and community well-being are soft, at best, and easy to fudge. Is it productive to include such measures in executive evaluation? Thus, under the stakeholders approach accountability and responsibility break down. Do you still like this concept?

[1] Ian Mitroff, 1983, Stakeholders of the Organizational Mind, San Francisco, Jossey-Bass Publishers.

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