Thursday, October 27, 2016

Steakholders vs. Stakeholders

As any lawyer will tell you, the managers and directors of an American corporation owe a fiduciary duty – meaning a much higher level of loyalty, priority and commitment – to the shareholders. Not to the general public, only to customers to the extent it generates business for the shareholders, not to employees and most certainly not to any governmental entity. The managers and directors are there to grow the corporation and ultimately to deliver the highest level of sustainable profitability they can to those lucky shareholders. Shareholders come first.
Duties to those “other” non-shareholder players are created either by what makes more money for the shareholders or by law. There is no duty not to pollute, avoid fraudulent consumer practices, pay a fair share of taxes or a duty not to cut corners… except as may imposed by common or statutory law or regulations issued by legally empowered governmental agencies.
Unless you get more customers from that warm and fuzzy feeling of doing the right thing, there is absolutely no business reason to clean up toxic emissions or keep working conditions safe for your employees. If you can pollute and save money on pollution control systems, a prudent corporate CEO would not make his/her company’s price go up to pay for those environmental scrubbers unless (a) forced to by law and (b) knowing that competitors would be forced to pay for the same environmental scrubbers. Keeps the playing field level. That might be good for society, but make shareholders pay for equipment that reduces profits goes squarely against that mandate to make money at all costs. Unless they have no choice.
You can read tons of statutes, regulations and cases that examine what a director or manager of a corporation is legally obligated to do vis-à-vis shareholders. And while there is reasonable discretion as how to get there, within the bounds of law and regulation, this duty to shareholders is the absolute mandate for corporate decision-making. It is precisely how corporate obligations fit into the general schema we call “capitalism.”
It is also why there are guffaws and giggles from the legal community when industries say – loudly – “trust us” to engage in self-regulation. And where trade associations indeed come up with at least some level of standards to be applied by their member companies, the existence of such transcorporate bodies is primarily an effort to preclude much stronger direct governmental regulation.
This driving and seemingly immutable director/manager obligation to shareholders is one of the greatest contributing causes of companies going rogue – from Duke Energy decimating a major North Carolina river from massive pollution flows to unprecedented levels of income inequality to the Great Recession itself from unbridled greed without the slightest concern about society, the world or what is right or moral under any moral code I know – under this misguided and singular focus on shareholder values.
A recent book – Re-Imagining Capitalism (Oxford University Press), a compendium of articles edited by Dominic Barton, Dezso Horvath & Mattias Kipping – presents a possible going-forward “fix” to end a legal structure that not only allows such anti-social values to perpetuate but perhaps even mandates that they continue. Instead of mandating that “holy profit” fiduciary duty to shareholders, the authors argue, with much justification, for a duty instead to all of the relevant “stakeholders.” And trust me, defining who the “stakeholders” should be is anything but simple.
Nevertheless, in a modern and complex society, capitalism based on a blind commitment to shareholders without carefully weighing all relevant interests is decreasingly tenable. Wikipedia summarizes the new theory this way: “In the traditional view of a company, the shareholder view, only the owners or shareholders of the company are important, and the company has a binding fiduciary duty to put their needs first, to increase value for them. Stakeholder theory instead argues that there are other parties involved, including employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, and trade unions. Even competitors are sometimes counted as stakeholders – their status being derived from their capacity to affect the firm and its stakeholders.” We are watching these new stakeholder schemes taking hold in countries like Switzerland and Sweden with growing effectiveness.
Indeed the rather stunning growth of global populism, from the Trump phenomenon (without the sexually explicit recording) here in the US to Brexit across the Atlantic, it is very clear that there are a growing number of people who simply think the existing systems are beyond corrupt and causing many more problems than they solve, accelerating income inequality even faster. “With articles contributed by well-known business leaders, the book is intended to acknowledge and address what the authors call ‘a growing public distrust of capitalism and its ability to improve wealth and well-being for the many.’
“‘Whichever direction capitalism ends up taking, it is increasingly apparent that the narrow shareholder model is being gradually eclipsed by a model that is more closely attuned to the complexity and diversity of the world we live in — a model that is more stakeholder-oriented and more guided by principles of long-term value creation and sustainability,’ says the book in a concluding chapter written by Horvath and Barton…
“As usual with great theoretical analysis, the hard part is making the transition. We can't snap our fingers and turn Canada [or the US] into Switzerland or Sweden. But what the new book's analysis shows is that keeping minimum wages low and letting the rich get very rich is not a necessity for business success. In fact, says Horvath, quite the opposite.”, October 7th.
While Europe and Canada might have an easier time of making this possible change – citizens there trust government far more than private enterprise – the growing distrust of government in the United States might just preclude this rather obvious (and to me, necessary) change here in the United States… even though I feel we need that change far more than do Canada and Europe. But I believe that we need to perform a top-down reformation of our corporate laws anyway – as the revealing Panama Papers strongly suggest – and moving to a new, defined stakeholder legal mandate is one very good place to start.
I’m Peter Dekom, and when an older system stops working in a new and modern world, it’s time to reform, modify and change that system accordingly.

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