The root of the matter


Is there a difference between a “stakeholding” corporation and one focussed on shareholder value? Yes: by treating customers and employees as ends, not means, companies do well by doing good.

What is a stakeholding corporation? The debate is between those who think that Barclays, Glaxo and BT exist to maximise returns to their shareholders: and those who think they have wider, but yet more specific, objectives. They should seek to be outstanding businesses in their field. The corporate objective of Barclays is to be a great bank: Glaxo should aspire to be a fine drug company: and BT’s purpose is to be an effective provider of telecommunications services.

And what do we mean by a good business? A successful bank, pharmaceutical company or telecoms business is one which meets the legitimate, and changing, needs of its many stakeholders. It delivers quality and value to its customers, provides a secure and rewarding environment for its employees, develops productive partnerships with its suppliers, earns high returns for its investors, and deserves and receives the respect of the community within which it operates. The phrase ‘a good business’ is like the phrase ‘a beautiful view’. It is multi-faceted, and not quantifiable, but nobody has much difficulty in recognising it. Almost everyone would agree that Barclays is a better bank than BCCI, Glaxo a better pharmaceutical company than Distillers, and BT a better telephone operator than it was.

Put like this, stakeholding theory seems barely controversial. There are not many people at Barclays who don’t share an aspiration to be a great bank. And if you ask the people at Barclays what they are trying to do, a hundred people will tell you that for everyone who mentions shareholder value. So what is the argument about?

Opponents of the stakeholder approach do not, of course, suggest that firms should ignore the interests of their customers and their employees. They argue that competitive markets require that firms will do these things anyway. A profit maximising firm will deliver good value for its customers, and develop the skills of its employees: not because these things are ends in themselves, but because they will lead to higher profits in the long run.

Now if there is no difference between the theories, there is not much point in going on arguing. But there is a big difference. The shareholder value approach is fundamentally instrumental: meeting customer needs is a means not an end. When the shareholder value maximising firm expresses concern for the welfare of its employees, it does so not because it has genuine concern, and if its managers do they must try to suppress it: it does so because it fears that failure to express such concern will be bad for its long term profitability.

Even if the actions which follow appear to be the same, the difference is profound. We do not need to have read Kant’s moral philosophy to appreciate the difference between the person who proffers his friendship because he likes you, and the person who proffers it because he hopes to sell you double glazing. Both may buy you a drink. But one is admirable, the other repulsive. And, the commercial difference is that the double glazing salesman’s smile is effective only for activities like the purchase of double glazing, which happen only once.

It is in this very fundamental sense that stakeholding economies are long term and shareholder ones are not. What is wrong with instrumental approaches to human relationships is not just that they are immoral. It is also that they rarely work for long. And mostly, we understand that.

Opponents of stakeholding therefore point to undeniably successful businesses, like Marks & Spencer or Matsushita, which make profits at the same time as they provide value for customers and satisfaction to employees, and argue that pursuit of maximum profit inevitably leads companies to fulfil the interests of other stakeholders as well.

But this argument is topsy turvy. One need look no further than Robert Maxwell, Michael Milken, or Asil Nadir to see that it is possible to make very large amounts of money without establishing enduring businesses of substance or value, or meeting any real needs other than your own. In contrast, no-one who reads about Matsushita or M&S can be in any doubt that the primary objective of those who built them was to create good businesses. The essential point is not that profitable businesses are good businesses – they may or may not be – but that good businesses are profitable. And for the straightforward reason that being profitable is one of the things – though not the only thing – that good business is about. So stakeholding does not suggest corporate executives should attempt to advance the public interest. It simply claims that business has more than one responsibility and more than one measure of success.

Now this multiplicity of corporate objectives which this implies causes some people difficulty. And there is something, although not much, in the point. People often perform most effectively when given crude and clear objectives whose achievement can be easily monitored- ‘kill the enemy’, “sell as much life insurance as you can”.

But mostly, and fortunately, life is not like that. Being a good journalist, or a good teacher, or a good economist, or a good parent, involves balancing competing interests and conflicting objectives. We could eliminate this uncertainty by defining simple criteria for judging all these things, – journalists should write short sentences, teachers aim for the maximum GCSE passes – but the gains we would make by clarifying the objective would be more than offset by the losses which result because the objective is grossly over-simplified. Why on earth should anyone have ever thought that business was so much easier, or that the rather well-paid job of corporate executive involved none of the balance of judgement required of a journalist or a teacher?

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