Shareholder Interests And Stakeholder Interests Are Not Mutually Exclusive?

The Business Roundtable, an organization of CEOs of America’s largest companies, quickly garnered a substantial amount of positive press for putting out a statement Monday described as

reframing the purpose of business and corporations as stakeholder value, not solely shareholder value.

Q2 hedge fund letters, conference, scoops etc

It even listed customers, employees, suppliers, and communities as stakeholders before it mentioned shareholders.

A False Dichotomy

The statement quickly attracted praise, particularly from those opposed to viewing advancing the interests of shareholders as the central purpose of corporations. Unfortunately, the praise arises from a false dichotomy. The issue is not really shareholders’ interests versus other stakeholders’ interests because voluntary arrangements that advance legitimate stakeholder interests also advance shareholders’ interests.

It is not a choice between employees, suppliers, customers, and advancing shareholders’ interests. Attention to the former’s well-being, in free markets (as opposed to crony capitalism), is the means to the latter.

Consumer interests are also clearly taken into account since they are the ultimate “enablers” of what is profitable and survivable.

Share prices reflect gains from better utilizing and motivating employees’ skills and abilities, from better developing and serving customers, and from supply chain and product improvements that users value more than they cost. All those stakeholders’ interests, derived from their property rights and the requirement of voluntary, mutually beneficial cooperation, are aligned with those of profit-seeking shareholders. In other words, valid stakeholders’ interests are reflected by shareholders’ interests, not trampled by them.

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Workers have to voluntarily agree to their terms of employment. So firms will consider everything that workers or potential workers care enough about to offer the prospect of a mutually beneficial alteration of employment terms. But neither firms nor workers are allowed to escape the constraint of the need for others’ voluntary cooperation. Suppliers and vendors are considered in a similar way. Any alteration that costs a firm less than it saves suppliers could generate a mutually beneficial agreement. Consumer interests are also clearly taken into account since they are the ultimate “enablers” of what is profitable and survivable. Explicit, enforceable contracts spell out the terms of some of those arrangements, and the present value of future profits from ongoing “good” behavior, put at risk by poor performance, also acts as a powerful incentive.

Managing Shareholder’s Interests

The preferences of those stakeholders about things outside their direct market relationships are also incorporated. If a “socially responsible” action costs $100, but owners, workers, customers, and suppliers jointly value that course of action more than $100, and a corporation can do it more cheaply than can those stakeholders individually (say, because of economies of scale), advancing those interests will also benefit stockholders because it will be profit-enhancing to do so. And that remains true even when firms “play up” their social responsibility as good public relations, even if their behavior is motivated by additions to their bottom line (like reducing packaging for transportation costs savings but advertising the policy as environmentally motivated).

As an illustration, think of how professional sports teams consider fans’ desires. Those teams are certainly interested in making higher profits. So they care about those who go or might go to games and all the things that might swing their decisions. Trying to create added stakeholder rights, ex nihilo, violates the rightfully owned property of shareholders.

They care about those who buy or might buy team hats, jerseys, etc. in a similar way, as well as those who might or might not listen on the radio or watch on television (through ad revenues, subscription services, or broadcast right sales, etc.). They even care about those who do none of those things but talk about the team with their friends and around their water coolers at work, which can influence others’ revenue-generating behavior. Such fans need no direct power over team decisions in order to have their desires reflected in many of those decisions.

It is also important to understand that managing in shareholder interests—that is, in the interests of owners who committed resources to firm managements to act as agents on their behalf—does not mean acting in the interest of everyone who claims to be a stakeholder. Managing in shareholder interests means a firm only needs to reach an agreement with those whose legitimate property rights would otherwise be violated. The consent of other parties who have no authority to say “no” to a firm’s arrangements because that extends beyond the reach of their property rights need not be acquired.

For example, just because I live somewhere in the area of a firm does not mean they have a right as a community stakeholder to have a direct say in every choice. And the fact that

Managers have neither the obligation nor right to spend the stockholders’ money in ways that have not been sanctioned by owners,

Mutually Beneficial Specialization

In the words of Edward Younkin, a professor at Wheeling University, results in far lower transactions costs, which enable far more mutually beneficial specialization and exchange and the massive increases in production and wealth that result. Those huge gains are threatened by elevating supposed stakeholder interests over shareholder interests, a price nowhere mentioned by its proponents.

Corporate management for the interests of shareholders follows from private property rights and the requirement that delegated agents perform their contractual commitments. Firms, as agents for shareholders, also have to live up to their voluntarily agreed-upon contractual obligations to customers, suppliers, and employees, who all benefit from those arrangements. That is how their legitimate stakeholder interests are represented. But those whose property rights are not violated don’t magically receive new rights simply by claiming stakeholder status.

As Walter Block put it, a firm’s sole obligation to others is

the one we all have to each other: to refrain from threatening or engaging in initiatory violence against them and their rightfully owned property.

And trying to create added stakeholder rights, ex nihilo, violates the rightfully owned property of shareholders.

RELATED: “Should Corporations Consider Any ‘Stakeholders’ Other Than Shareholders?“

This article was originally published on FEE.org. Read the original article.