Stakeholders vs. Stockholders

(Robert E. Wright, American Institute for Economic Research) The notion that stakeholders and stockholders battle for control of major business corporations is an oversimplification of a much more complex reality involving managers, regulators, investors, and social justice warriors (SJW), many of whom seem to have forgotten the reasons that corporations formed in the first place. All the major players need level-headed thinking on the question of corporate control lest the American people lose a major driver of economic growth to the vague vagaries of wokeness.

Corporations have always been concerned with the interests of their major constituents, including stockholders and other securities holders, employees, customers, suppliers, and broader social interests, all of which constitute the economic ecosystem in which corporate profits or losses are made. In 1975, for example, a survey by Harvard Business Review revealed that three in five US managers believed that they served all those interests “as fairly and equitably” as they could (John J. Flynn, “Corporate Democracy: Nice Work If You Can Get It,” Small Business and Society, U.S. Senate Hearings, 1975, p. 406).

That survey sounds a lot like the 2019 Business Roundtable (BRT) resolution that companies should “serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”

Talk about stating the obvious! Companies in competitive markets that do not deliver value to their customers will soon fail, as will those that do not pay taxes to support the communities in which they operate or that regularly break the law. And successful businesses, almost by definition, invest just the right amount in their employees, in just the right way, at just the right time. 

The crux of the BRT’s statement was that corporate managers should “benefit” all stakeholders, not just stockholders. That sentiment could be just as innocuous as it was in 1975 except that unlike many managers today, most managers in the 1970s understood that corporations interact with their sundry stakeholders in fundamentally different ways. Within legal and regulatory constraints, they interact with employees, customers, and suppliers via voluntary markets, i.e., mutually beneficial transactions.

That inherently limits their power because if corporations push too hard, employees, customers, and suppliers will go elsewhere for a better deal. Although some business discretion is involved, e.g. in whether or not to pay “efficiency wages” or to relax the terms of a vendor contract (i.e., “relational contracting”), managers need not, and indeed should not, pay more or accept less simply to appear nice, to gratuitously aid a counterparty, or to serve some political agenda.

Managers interact with securities holders via voluntary markets, too. Securities holders can sell off their holdings for any reason, including the mere suspicion that they will earn a higher risk-adjusted return in an alternative investment. As part owners of the business, however, stockholders also have legal claims on corporate managers and directors, the most important of which is that stockholder interests should come first, even before those of the managers themselves.

For managers to assert that they should or will put their own interests, or those of other stakeholders, before those of stockholders is not just capitalist apostasy, it is illegal and needs to remain so. De facto or de jure rejection of the primacy of stockholder interests would spell economic disaster. As I chronicle in Corporation Nation, “Devolution of the Republican Model of Anglo-American Corporate Governance,” and elsewhere, traditional checks and balances against managerial self-dealing have eroded significantly since Alexander Hamilton, Robert Morris, Thomas Willing and other financial Founding Fathers formed America’s first business corporations in the late eighteenth century. The biggest remaining check is the legal requirement and moral presumption that managers and directors must do their darndest to maximize stockholder value. They might fail, but they have to try.

Without stockholder primacy, the publicly-traded, joint-stock corporate form of business organization would no longer make any sense. Valuation, a difficult proposition even when only economic and political forces are at play, becomes impossible when future cash flows also fall to the whim of managerial bargaining with sundry stakeholders. 

Foremost, managers need to follow actual scientific findings and not the skewed, oversimplified messages that tend to come out of the mass media. Rational investors know that systemic racismCovid-19, and global climate change are not existential threats to the nation and should be able to invest accordingly, taking into account the business risks associated with potential policies like reparations, lockdowns, and environmental regulations.

But if investors fear that they must also calculate the probability that some “woke” corporate manager, entrenched in his or her position by virtue of management control of the corporate proxy apparatus, will expose the corporation to major lawsuits or even give away some of their profits to some outside interest group, especially one currently socially favored due to dismisinfoganda, they will surely divert resources into other asset classes like crypto and real estate.

Consider, for example, the $200 monthly surcharge that Delta Airlines (which is not affiliated with the Delta variant, or the delta blues for that matter) plans to impose on non-vaccinated employees to cover their $50,000 medical bills should they be hospitalized for Covid.

There are several major problems with that policy, one statistical and one legal. Statistically, the Delta employees most vulnerable to Covid infection and hospitalization already have imposed those costs, so the percentage of employees adversely affected by Covid will trend lower regardless of vaccination status. In addition, those employees least likely to suffer vaccine side effects have already received their shots, so the percentage of adverse vaccine reactions among the remaining employees will likely increase. [People are not rubes when it comes to their own care. See John C. Goodman’s New Way to Care: Social Protections that Put Families First (Oakland: Independent Institute, 2020).] 

While employers can charge different types of employees different amounts for healthcare, it is flat out illegal under the Affordable Care Act to charge employees more because they represent a higher risk, except for tobacco use (Goodman, 140-41). It is a dumb provision but clearly the law of the land.

Moreover, it isn’t clear that corporations that force or coerce employees into taking a Covid vaccine won’t be held liable for any damages the vaccine may cause. They will certainly be on the hook for medical, workers’ compensation, and disability claims and possibly for punitive damages, because the mere approval of a substance by the FDA does not mean that it is safe for everyone, even if POTUS implies otherwise. (And now that there is clear evidence that natural immunity is much better than one of the best “vaccines” at preventing infection, symptomatic spread, and hospitalization lots of people have more “splaining” to do than Lucille Ball!)

Moreover, the SCOTUS case upholding the constitutionality of vaccine mandates, Jacobson v. Massachusetts (1905), strictly applies only to smallpox vaccine mandates made by state and municipal governments, not to businesses. Moreover, the decision appears ripe to be overturned. Even on its centennial, long before the Covid-19 scare, public health experts were calling for its demise on the grounds that personal liberty and bodily autonomy are much more important considerations in most instances.

Managers particularly need to be constrained from making corporate donations, cash ones for sure but also the donation of brand power to further social or political causes. As many business leaders are learning to their chagrin, “progressive” causes are not always popular or profitable ones.

By injecting personal views into business decisions, like which spokespeople (if indeed any) to hire to shill their products, corporate managers threaten shareholder value. Until ancient shareholder rights to discipline managers who aggrandize themselves ahead of their bosses are restored, regulators ought to prevent corporations from taking any stand on social, economic, or political issues other than those directly affecting the regulation of the corporation’s core business. Banks, for example, should be fighting costly regulations that add nothing to systemic stability, like deposit insurance and “living wills,” instead of jousting at social justice windmills.

Like the corporations they invest in, stockholders pay taxes. Capital gains taxes might be too high or low or unduly distortionary but stockholders as a group indubitably do their lawful part and deserve the best that managers can do to reward them for the risks they have assumed in this complex world. Most investors don’t want the corporations they own to oppose X or support Y and those who do are free to reinvest dividends or the profits from stock sales in whatever lawful causes they wish. Managers have discretion, and problems, enough already without worrying about what is trending on Twitbook.