Stakeholder capitalism is not working as intended

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Wouldn’t it be nice if corporations cared less about profits and more about social good? It’s popular to think so. Participatory capitalism is in fashion. Shareholder capitalism is not.

Many top business leaders and academics now condemn the idea that Milton Friedman laid out in a famous 1970 New York Times Magazine essay:

a corporate officer is an employee of the owners of the business. He is directly responsible to his employers. This responsibility is to conduct the business in accordance with their wishes, which will generally be to make the most money possible while conforming to the basic rules of society, both those enshrined in law and those embodied in ethical custom. .

If only this perverse idea of ​​maximizing profits had not arisen, some seem to think, we would be living in a progressive utopia of high wages, racial harmony, economic equality and environmental purity.

In 2019, the Business Roundtable repudiated the Friedman Doctrine, changing its “principles of corporate governance” to adopt the goal of managing businesses for the “benefit of all stakeholders – customers, employees, suppliers, communities and shareholders” . He did not specify how the companies would resolve disputes between constituencies.

The usual answer is that conflicts are illusory. Do good and you will do good.

“In today’s globally interconnected world, a company must create value for all of its stakeholders and be valued by them in order to deliver long-term value to its shareholders,” wrote BlackRock’s Larry Fink in his 2022 letter to CEOs, reiterating the message that is making headlines in 2018: “To thrive over time, every company must not only deliver financial performance, but also show how the society.

Of course, if striving to please stakeholders and creating economic value always went hand in hand, stakeholder capitalism and shareholder capitalism would be the same. But life is not that simple.

Contrary to what you may have heard, letting stakeholders take precedence over business objectives is anything but pleasant. Stakeholder capitalism is not just a temptation for managers to pursue their pet interests. It’s a prescription for culture wars, political backlash, managerial paralysis, and HR nightmares.

Any effective business must take into account the interests of employees, suppliers, customers and other stakeholders. But not everyone wants the same thing, and sometimes organizations have to compromise between goals that everyone sees as good. The question is what to do when faced with a conflict. Without an eye to maximizing value, it’s all too easy for leaders to dissipate company resources in pursuit of self-interest.

The great value of the Friedman Doctrine is that it sets a consistent standard for making compromises. Maximizing Economic Value tells you to “spend an extra dollar in any constituency provided that the long-term value added to the business of that spending is a dollar or more,” as the Harvard Business School economist Michael Jensen in a 2010 article.

Stakeholder theory, on the other hand, tells you nothing. It assumes that you make everyone happy. And, as Jensen wrote, “Without the clarity of mission provided by a single-value objective function, companies that embrace stakeholder theory will experience managerial confusion, conflict, inefficiency, and possibly even a competitive failure”. Jensen’s article is the best articulation of why what he calls “enlightened value maximization” is essential.

But neither he nor Friedman fully imagined the chaos that might ensue without it.

Watch the backlash when Walt Disney Co. tried to appease voice workers by opposing Florida legislation banning discussing sexual orientation with young children in schools. The political pushback – like the original protests – reflected a sense of betrayal by a beloved company whose fans see their dreams and values ​​reflected in its characters and stories.

Appeasing one group of stakeholders alienated others. It was not difficult for conservatives to find opposing voices within the company. Disney has nearly 200,000 employees and countless customers. All are stakeholders and represent every viewpoint imaginable.

By focusing on business goals, by contrast, Netflix, despite other challenges, has weathered its own controversies better, from the conservative uproar over the French film “Cuties” to more recent protests over Dave Chappelle’s jokes about women. trans. To clarify expectations, the company revised its cultural guidelines for employees to explicitly say, “As employees, we support the principle that Netflix provides a diversity of stories, even if we find some titles contrary to our own personal values.

Stakeholder capitalism implicitly assumes a cultural consensus identical to what its proponents believe. It dates back to the mid-twentieth century, when big business in America enjoyed little competition, mass media marginalized all but a narrow range of political, religious, and social views, and hierarchy and security dominated workers’ expectations. He claims that social media, Slack channels and “going all out” don’t exist.

For a purer version of what stakeholder-driven management can do, forget about profits and political disagreements. Look at the turmoil rocking all sorts of left-leaning nonprofits. In a report published in The Intercept, Ryan Grim details why Washington D.C.-based groups have spent the past few years engaging in “staggering and protracted fights between competing factions of their organizations, most often collapsing between personnel and management. lines.”

Instead of fueling a wave of public support to reinvigorate the [Democratic] ambitious program of the party, most of the organizations supported by the foundation which constitute the backbone of the ideological infrastructure of the party were still spending their time locked in virtual retreats, slack wars and healing sessions, struggling with tensions about hierarchy, patriarchy, race, gender, and power….

Grim quotes the executive director of one such group anonymously:

“A lot of employees who work for me expect the organization to be everything: a movement, OK, get out the vote, OK, healing, OK, take care of yourself when you’re sick, OK. is all,” said a general manager. “Can you get your love and healing back home, please? But I can’t say that, they would crucify me.

Despite their commitments to making the world a better place – and general agreement on what that means – trying to please every stakeholder is wreaking such widespread organizational havoc that the leader of one group, also quoted anonymously, told Grim “you couldn’t devise a better right-wing plot to cripple progressive leaders.

The problem is not that the groups are on the left. This is because their missions and their decisions are constantly the subject of internal debate. New attitudes and forms of communication have destroyed the legitimacy of their managerial hierarchies.(1)

Compared to mission-driven nonprofits, companies that focus on creating economic value are fortunate to have a clear definition of success. If they want to make the world a better place, they must strive to uphold that standard.

More from Bloomberg Opinion:

• Mickey Mouse is the canary of progressivism in a coal mine: Adrian Wooldridge

• Young Americans aren’t as awake as you think: Adrian Wooldridge

• Disney is the latest victim of the Culture Wars crossfire: Adrian Wooldridge

(1) For a deeper dive into this phenomenon, drawing on the anthropological studies of Mary Douglas, see my Substack essay “Purity, Sorcery, and Cancel Culture”.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Virginia Postrel is a Bloomberg Opinion columnist. She is a visiting scholar at the Smith Institute for Political Economy and Philosophy at Chapman University and author, most recently, of “The Fabric of Civilization: How Textiles Made the World”.

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