Not surprisingly, former Vice President Joe Biden has come out emphatically in favor of ending shareholder capitalism, which would be replaced by stakeholder capitalism.
It has been a trend lately for enlightened CEOs to embrace stakeholder capitalism over shareholder capitalism, which means that earning money for investors is no longer the primary purpose of the corporation.
Indeed the Business Roundtable issued a statement about a year ago that redefined the purpose of a corporation away from shareholders and more in favor of stakeholders:
Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” says the headline over a press release Monday. “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.”
Stakeholders are employees, customers, suppliers—anybody who has a stake in the company. Stakeholders can also be defined as deserving organizations to which corporations might want to contribute money to supposedly make the world a better place.
But what about your retirement? Wasn’t that also a worthy cause? Why would Mr. Biden want to define the purpose of a corporation away from the responsible souls who have bought shares to fund their old age?
In a piece headlined “The Shareholder Fallacy,” the Manhattan Institute’s Allison Schrager explains why shareholder capitalism ends up being better for everybody (including stakeholders). Schrager writes:
Though much criticized, shareholder capitalism offers many benefits—not only to shareholders but also to the stakeholders whom Biden is concerned about.
Maximizing shareholder value simplifies a corporation’s objectives and makes performance easier to assess. Contrary to public perception, it does not create conflicts between different stakeholders, because economic success is not zero-sum.
Shareholder value, when done right, aligns the incentives of corporate managers, a corporation’s owners, and the broader community.
Generally, shareholders care about bigger dividends, which are based on current profits; and on a rising stock price, based on the expectation of future profits.
Maximizing shareholder value requires maximizing profits, both in the short and long term. Such long-term success requires happy and loyal employees, a healthy relationship with the community, and a thriving environment. Companies may make a trade-off between the short and long-term; it’s the job of corporate boards and officers, beholden to their shareholders, to strike the right balance.
Sometimes they get it wrong, which is why “maximizing shareholder value” is often confused with short-termism—the worry that firms don’t innovate enough and create long-term value because they only care about next quarter’s profits.
Adding more stakeholders does not necessarily improve performance, though, in the long or short term. It only muddies accountability. It’s true that profits of some firms have risen since the 1980s while wages did not increase at the same pace. Wage stagnation has many causes, including a changing labor-market structure, superstar companies dominating their markets, globalization, and relative returns to capital. Stakeholder capitalism won’t change any of that.
Employees benefit from a healthy, well-managed company that can still be a going concern in ten or 20 years. Advocates of stakeholder capitalism often point to unions as a necessary protection for workers—but the history of public-sector unions, which have often demanded large, unsustainable pensions and post-retirement health-care benefits, suggests that workers’ advocates can be even more short-term-focused than shareholders are.
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Shareholder value is an objective way to measure success and align incentives to achieve further success. Forcing companies to behave more like governments and acquire more representative constituents will distort business, dampen value, and erode prosperity.
If you are going to work for a company, one of the main things you, as a stakeholder, need is that it will stick around and give you job as long as you must work. It will be more likely to do that if its purpose is defined as making a profit for investors.
It is beneficial if the corporation supports the theater, conservation, or whatever worthy cause you believe in–but it is essential that it also make a profit for those who invest in it.