Streetwise Professor

June 7, 2023

Drive a Stake Through the Heart of Stakeholder “Capitalism” Before It Is Too Late

Filed under: Economics,Politics — cpirrong @ 6:10 pm

The recent controversies embroiling many corporations, notably Target, Disney, and Imbev (the owner of Anheuser-Busch) has brought the issue of stakeholder “capitalism”* to the center of American political discourse. These controversies demonstrate clearly why corporations and their executives should not indulge their own preferences or preferences of “stakeholders” other than shareholders, but should instead limit their efforts to what is already a very demanding task–maximizing shareholder value.

At its root, stakeholder capitalism represents a rejection–and usually an explicit one–of shareholder wealth maximization as the sole objective and duty of a corporation’s management. Instead, managers are empowered and encouraged to pursue a variety of agendas that do not promote and are usually inimical to maximizing value to shareholders. These agendas are usually broadly social in nature intended to benefit various non-shareholder groups, some of which may be very narrow (transsexuals) or others which may be all encompassing (all inhabitants of planet earth, human and non-human).

This system, such as it is, founders on two very fundamental problems: the Knowledge Problem and agency problems.

The Knowledge Problem is that no single agent possesses the information required to achieve any goal–even if universally accepted. For example, even if reducing the risk of global temperature increases was broadly agreed upon as a goal, the information required to determine how to do so efficiently is vast as to be unknowable. What are the benefits of a reduction in global temperature by X degrees? The whole panic about global warming stems from its alleged impact on every aspect of life on earth–who can possibly understand anything so complex? And there are trade-offs: reducing temperature involves cost. The cost varies by the mix of measures adopted–the number of components of the mix is also vast, and evaluating costs is again beyond the capabilities of any human, no matter how smart, how informed, and how lavishly equipped with computational power. (Daron Acemoğlu, take heed).

So what do climate-concerned executives do? Adopt simplistic goals–Net zero! Adopt simplistic solutions–deprive fossil fuel companies of capital!

Maximizing shareholder value is informationally taxing enough as it is. Pursuing “social justice” and saving the planet is vastly, vastly more so.

Meaning that even if corporate executives were benevolent–a dubious proposition, but put that aside for now–they would no more possess the information necessary to pursue their benevolence that does a benevolent social planner.

Instead, executives pursuing non-shareholder wealth objectives are almost certain to be Sorcerer’s Apprentices, believing they are doing right but creating havoc instead.

Agency problems exist when due to information asymmetries or other considerations, agents may act in their own interests and to the detriment of the interests of their principals. In a simple example, the owner of a QuickieMart may not be able to monitor whether his late-shift employee is sufficiently diligent in preventing shoplifting, or exerts appropriate effort in cleaning the restrooms and so on. In the corporate world, the agency problem is one of incentives. The executives of a corporation with myriad shareholders may have considerable freedom to pursue their own interests using the shareholders’ money because any individual shareholder has little incentive to monitor and police the manager: other shareholders benefit from, and thus can free ride on, any individual’s efforts. So managers can, and often do, get away with extravagant waste of the resources owned by others placed in their control.

This agency problem is one of the costs of public corporations with diffuse ownership: this form of organization survives because the benefits of diversification (i.e., better allocation of risk) outweigh these costs. But agency costs exist, and increasing the scope of managerial discretion to, say, saving the world or achieving social justice inevitably increases these costs: with such increased scope, executives have more ways to waste shareholder wealth–and may even get rewarded for it through, say, glowing publicity and other non-pecuniary rewards (like ego gratification–“Look! I’m saving the world! Aren’t I wonderful?”)

Indeed, we now have a highly leveraged agency problem, due to the ability of asset managers like Black Rock to vote the shares of their customers, thereby allowing the likes of Larry Fink to force not just one corporation to indulge his preferences, but hundreds if not thousands. Larry Fink and his ilk can influence the direction of sums of capital dwarfing anything in history to pursue their agendas.

The agency problem pervades stakeholder capitalism even when you dispense with the idea that the shareholders are the principals, and expand the set of principals to include non-shareholder interests (which is inherently what “stakeholder” capitalism means). And as discussed above, in stakeholder capitalism these interests conceivably encompass all life on earth.

The problem is that just as shareholders are diffuse and cannot prevent managers from acting in their interest, stakeholders are often diffuse too. And in the case of climate, All Life On Earth is about as diffuse as you can get. Furthermore, whereas at least in principle shareholders can largely agree that the firm should maximize their wealth, when one expands the set of interests, these interests will inevitably conflict.

So what happens? Just as in politics and regulation, small, cohesive minority groups who can organize at low cost will exert vastly disproportionate influence. It is not surprising, therefore, that companies like Target (to name just one) have responded to the interests of transsexuals–a decidedly narrow minority group–and given the finger to others who should be “stakeholders” as well, namely customers. Customers being a diffuse, dispersed, heterogeneous group that is costly to organize–precisely for the same reasons that it is costly for shareholders to organize.

(The Target and Bud Light episodes suggest that social media has reduced the costs of organizing diffuse groups, but even so, it is far costlier to do that than to organize ideological minorities.)

In other words, stakeholder capitalism inevitably creates a tyranny of minorities, and especially highly ideological minorities (because a shared ideology reduces the cost of organizing). Minority stakeholders will succeed in expropriating majority ones.

Minority tyranny is the big problem with democratic politics. Extending it to vast swathes of economic life is a nightmare.

So what is stakeholder capitalism, when you get down to it? A world of Sorcerer’s Apprentice executives (the Knowledge Problem) with bad incentives (the agency problem).

Other than that, it’s great!

Some libertarians have a peculiar take on this phenomenon. They view stakeholder capitalism as benign, because it is undertaken by private actors, rather than the government.

This take is gravely mistaken. It ignores fundamental principle, and commits at least two category errors.

The forgotten principle is that a liberal society should aim to minimize coercion.

The first category error is to believe that private actors cannot coerce–only governments can. In fact, private actors–including corporations and their managements–can clearly coerce. Come and see the violence inherent in the stakeholder capitalism system straight from the mouth of its primary exponent:

“We are forcing behaviors.” Coercive enough for you? Help, help, I’m being repressed:

That bit, by the way, concisely expresses the stakeholder capitalism movement, right down to the “shut up!” and “you bloody peasant!”

The second category error is to believe that there is some sort of clear boundary between private entities (corporations especially) and governments. In fact, the true picture is like the Escher Hands:

Corporations influence government. Government influences corporations (cf., Twitter Files, etc.–the examples are almost endless). Governments often outsource coercion to corporations. Corporations induce the government to coerce for their benefit–and to the detriment of alleged “stakeholders” like customers, labor, and competitors.

Furthermore, as the Arrow Impossibility Theorem teaches, any coherent social welfare function (i.e., any theory of social justice) is inherently dictatorial, and thus inherently coercive. Thus, to the extent that stakeholder capitalism is intended to implement any particular vision of social justice, it is necessarily dictatorial, and hence coercive. It is antithetical to a liberal system like that envisioned by Hayek, that is, one in which a set of general rules is established under which people can pursue their own, inevitably conflicting, aspirations. (Less formally than Arrow, Hayek also argued that any system of social justice is inherently coercive and dictatorial.)

Stakeholder capitalism is therefore a truly malign movement, and an anathema to liberal principles. We need to drive a stake through its heart, before it stakes us to the ant hill.

*I put “capitalism” in quotes because stakeholder capitalism is an oxymoron. Recall that capitalism is an epithet devised by Marx to describe a system ruled in the interests of capital, i.e., shareholders. Stakeholder capitalism is a system intended to be ruled in the interest of everyone but capital. Hence the oxymoron.

** Jeffrey Tucker has also eloquently and rightly excoriated the response of many libertarians to COVID. Here again, these libertarians forgot that limiting coercion is the bedrock libertarian principle.


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  1. Well said, Prof.

    Mind you, we in Britain were tipped off early that “stakeholder” chat was baloney. Because it was introduced on a large scale by Toni Blair. That’s what you might call conclusive evidence.

    Comment by dearieme — June 8, 2023 @ 4:22 am

  2. You really mean that? Is there only o n e version or meaning of it? WEF Klaus Schwab says he wrote early on about it in his 1971 book ‘Modern Company Management in Mechanical Engineering’ and I would like to point to the book title: Company Management is no ism, Capitalism is an ism; and this makes quite a difference. In the world of isms and ideologies we’re leaving practical ground and go also into the space of governance, party lines: it’s like religion, people stop thinking. Within company management for example the management should take care all security measures etc are taken that no poisons pollute the environment (which may be where the company owners, management and staff lives…), or they will take care that female staff can go on maternity leave and have the possibility to come back afterwards. But in the world of isms and party lines we’ve got ideological substitutes for this, so it’s ‘carbon neutrality’ and ‘trans agenda’ and we’re talking about people that get high posts in companies that are not fit to manage the company. And is capitalism always the same? It hasn’t changed from ‘real economy’ to ‘financial capitalism’ etc.? So, what type of capitalism have we got were incompetent ideologists get top management posts? Maybe we’d need other and more different terms to describe ‘it’. What the WEF now seems to promote as shareholder capitalism isn’t the same as company management taking stakeholders into account and isn’t the same as what Black Rock here stands for. And the oil trade should take care that the tankers are kept secure etc. even though that minimizes the financial value of investor’s money invested, and they may live on that shore of the ocean themselves. I think it is impossible to built and run a company just driven by wanting to produce financial returns to their investors, there are other company purposes, it’s obvious. And how about the wealth distribution? Shareholder value for whom on who’s costs? Well, how does one comment on such a poor article?

    Comment by Mikey — June 8, 2023 @ 1:24 pm

  3. “Capitalism is an ism” Then describe it please.

    Comment by dearieme — June 8, 2023 @ 3:05 pm

  4. @dearieme: what’s so surprising in calling capitalISM an ISM? Did I coin the term? You can go by any or all of the descriptions that you can google, just also google isms, e.g. ‘Isms, ideologies and setting the agenda for public debate’. When you read my comment again you may find that I question narrow definitions and that people do as if such a term would have just one and clearly defined meaning. I’m not a positivist, you see. Like, you may ask five people that identify as catholic, whom they pray to, and one may say to Mary mother of god, one to god the father, one to Jesus god son, one to saints, one not at all, and yet they are in the same movement and think they share the same faith. I mainly contrasted business management with capitalism, it’s on different logical levels.

    Comment by Mikey — June 8, 2023 @ 4:28 pm

  5. “Well, how does one comment on such a poor article?”
    By throwing together a word salad and seeing who bites?

    Comment by Jimmers — June 9, 2023 @ 6:10 am

  6. On a good day(when I’m feeling nice) I have some sympathy for the company directors.
    Get it wrong and you face either the wrath of shareholders (peasants wielding pitchforks) or the wrath of stakeholders (bien pensants wanting to drive said stake through your heart). It’s a tricky balancing act.
    Mind you, there are screw ups that are practically acts of god (Macondo), screw ups that are born of hubris (FTX) and screw ups that are just plain dumb (Bud Light).

    Comment by philip — June 9, 2023 @ 2:40 pm

  7. @Jimmers: eloquent would I call my comment myself. Called the article poor, because leaves so many themes untouched that can’t be left unconsidered, e.g.:

    -Do the companies pay for environmental and social costs they cause, or the public?

    -How about products that were developed with public money, e.g. the so called covid vaccines, and where the company waivered the risks, the share holders shall just have the gains?

    -Again the ‘covid vaccines example’: are these normal market operations or is the WEF version of stakeholder capitalism through PPP’s where they also formulsted agendas with think tanks and placed politicians etc. some kind of organized ‘game’ to loot public money and turn it into private shareholder gains (Uschi vdL ordering many times the ‘needed’ (if at all) quantity via SMS and then deleting them).

    -How us the situation when you don’t just look at one single company each where you want to maximize the profit, if like maybe BlackRock you ‘own the voting rights’ for the competitors, clients and eco system also, where the expenses of one company are the proceeds of the other?

    -what about time horizon, short term gains vs longer term value?

    -How do you built up an profitable market or national or regional economy or cluster of companies / ecosystems, really in tryinng to just increase the short term gains per single company including getting out of markets and products where one can’t meer insanely high profi margins? Pls compare Trompenars and Hampton Turner in ‘Mastering the infinite game: how East Asian Values transform business practices’.

    So, that’s why I suggested, let’s go back from the ideological level to the practical level, the concept came out of ‘company management’ considering also the type of business and market (‘Engineering’ e.g.). Because you can’t run a company just by ‘shareholder value’ alone and it has more purposes obviously, the most obvious being the type of product or service and the customers needs it fullfilles and what that takes.

    But this can deteriorate, when a society just thinks about shareholder value, if the employees don’t get paid enough they can’t buy the products in their roles as customers.

    In Germany and Switzerland it’s sometimes hard to find a good bakery or cafe. It’s just bigger almost industrial bakery chains left that bake up industrially pre produced convenience products. And after 40 years of doing so, most people don’t even realize the poor quality anymore, they’ve never eaten something traditional and good, they grew up already wihhout the old culture and craft. So, some now can be shareholders there, contrary to where the baker owns his craft, and get some profits, but aldo no good bred etc anymore and the whole society has lost.

    -Shareholders vs. Business ownership (SME) vs structures like Chinese family businesses and their networks, which structure is better?

    If again a word salad, hope you enjoy a salad from time to time… : – )

    Comment by Mikey — June 10, 2023 @ 3:10 am

  8. What I forgot:
    Dog Eat Dog about Isms:

    And about beer commercials: best line ever for me is ‘Miller Time’.
    Thomas Dolby had the lines in his song Screen Kiss ‘Miller Time at the bar where all the English meet, she used to drink in the hills, only now she drinks in the valleys, where street has a name like Beachwood Avenue or do it seems’…

    Here an original Miller commercial:

    Comment by Mikey — June 11, 2023 @ 10:44 am

  9. You make some excellent points, Mikey, but I think you’re drawing too wide a field for one post.
    My narrow interpretation of the prof’s post is that a person or company should be allowed to go about their lawful business without being harangued harassed and intimidated by a narrow section of single issue fanatics.

    In addition to your concerns I think issues such as regulation of monopolies, emerging monopolies, censorship, funds voting as shareholders, and many other subjects. Perhaps the prof will post about this stuff in future, but in the meantime it’s his blog and he can write any damn thing he likes. If his next post is about residual futures in vegetarian pork belly contangos in China that’s his business.

    Comment by philip — June 11, 2023 @ 3:06 pm

  10. Hi Philip, I agree totally with you that Prof can write on his blog how and about whatever he likes to. Just thought he liked to see his readers to take the same position in their comments. He was also my Prof and that’s why I spent some of my precious time here. And that’s why I was emulating his writing style, but only to some degree, very mildly only. And you may have noticed that my points were all factual and valid. And where things do have a certain ground complexity, you’d need a Prof as it’s not possible to treat the topic below this complexity. On top, he’s calling it streetwise, not just deducted from a few theorems…was just taking this as reference points. But I take it as clarified enough, here are just some like minded fans that want to share their fundamentalist irrational ideologic views about financial markets, Russians and militaria. And I’ll leave you with that and spare you from having to read about that there are more things in heaven and earth, that are dreamed of in your philosophie…

    Comment by Mikey — June 12, 2023 @ 5:14 am

  11. …than are dreamed of in your philosophy.

    Comment by Mikey — June 12, 2023 @ 5:19 am

  12. Agreed about the echo chamber risks in blogs, Mikey.
    I should check out whether Kamal Harris or Toni Fauci do them.

    Comment by philip — June 12, 2023 @ 2:12 pm

  13. I’m sure you’ve seen the news, but if not: GG’s attempt at pleasuring himself into the swivel-chair at Treasury has now pissed off people to such an extent that Rep. Warren Davidson, vice chair of the House Financial Services Committee, has introduced a bill to remove him from the SEC and restructure the SEC so that in future it can’t be captured by another monomaniac.

    ‘The wheels of God grind slowly, …’ etc etc.

    Comment by Ex-Global Super-Regulator on Lunch Break — June 12, 2023 @ 5:18 pm

  14. Wiv regard to the agency problem, I may have suggested it before but an interesting piece written ca. 15 years ago by Robert Monks and Allen Sykes, ‘Capitalism without owners will fail’, may be relevant here. I won’t link to it as doing so tends to cause the server to melt down but even today it can be easily found with a search engine.

    Comment by Ex-Global Super-Regulator on Lunch Break — June 12, 2023 @ 5:25 pm

  15. Mind you, there are screw ups that are practically acts of god (Macondo)

    No, that was run-of-the-mill oil company arrogance. I’m surprised we don’t see more of them.

    Comment by Tim Newman — June 13, 2023 @ 11:05 am

  16. Capitalism is a term invented by a Socialist, Louis Blanc, around 1850. It is used as a pejorative to vilify those who do not subscribe to Socialism (collectivism disguised as economics).

    A direct analogy can be made with ‘Atheism,’ — a term invented by religious people as a pejorative to vilify those who do not subscribe to a god-belief (collectivism disguised as theistics).

    Setting aside ‘capitalism’ as a pejorative, the actual struggle is between free enterprise and slave enterprise. Collectivist societies are slave societies. Collectivists yearn for social slavery.

    Free enterprise requires individual initiative — the opposite of collective obedience.

    There’s no such thing as ‘Capitalism (free-enterprise-ism’). Free enterprise is just individual people going about their personal business.

    The ideology is imbued strictly in Socialism, as it is in Theism. Under Socialism, there is no personal business.

    Atheism is not a belief system. It is a label put on free-thinkers by the ideologically committed. Likewise Capitalism — a label put on free-enterprisers by the ideologically committed.

    The ideologically committed need enemies to survive. They therefore consciously generate strife wherever they reside, inventing enemies.

    Religious collectives invented Atheism and went on to persecute, oppress, and eventually to massacre the non-believers whose existence negates their utopian fantasy. Likewise, economic collectives (Socialist states) invented Capitalism and went on to persecute, oppress, and eventually massacre the non-believers whose existence negates their utopian fantasy.

    The consequent emotional turmoil keeps them distracted from the failure of their programs and the corrosive fatuity of their (gruppe-über-alles) beliefs.

    Comment by Pat Frank — June 14, 2023 @ 11:01 pm

  17. I thank Frank for putting the matter so clearly. Presumably the world needs a good term for anti-collectivists. “Individualists” won’t do because plenty of anti-collectivists will presumably evince care for their families, friends, and neighbours, and for the further afield. As the great Maggie said in reply to a question in an interview:

    … they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business …

    Comment by dearieme — June 15, 2023 @ 6:55 am

  18. @Ex-Global Super-Regulator on Lunch Break–Oh, I’ve seen. I hope I get to testify at the hearings!

    Comment by cpirrong — June 18, 2023 @ 1:27 pm

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