Burned at the Stake: Stakeholder Theory and Shareholder Interests Don’t Line Up
Persons have a natural right to go into business together, and they may do so either as a partnership or a corporation. In the latter type of organization, the persons setting it up limit their civil liability (I won’t be concerned in this article with the vast and complex issues raised by this). The people who set up a corporation are the owners, and they hold stock in it. Modern corporations normally consist also of managers, including the CEO, and a board of directors, but all of these are agents of the shareholders and act in their interest. I have spoken so far of people’s moral rights, but until recently, at least, the legal system in the Anglo-American world corresponded in general to the scheme I have set out. A school of thought called “stakeholder theory” challenges this, claiming variously that the managers and board of directors should not be restricted to acting as the agents of the owners but should take into account also others who have a “stake” in the corporation. In this week’s article, I’d like to consider some objections to this view and also to hold up to ridicule some of the weak arguments advanced in its support.
An obvious criticism of stakeholder theory is that the key notion of the theory is undefined. Who counts as a “stakeholder”? If the term means anyone whose activities are affected by the corporation, this includes a vast array of people. Competitors of the corporation will be adversely affected by its success; do they have a “stake” in preventing this? Are labor unions that sponsor crippling strikes against it also stakeholders? What about environmental activists who aim to put the company out of business?
In her book Corporate Governance (Institute of Economic Affairs, 1998), Elaine Sternberg expresses this criticism with great clarity:
Given the divergent interests of the different stakeholder groups, that which benefits one group will often harm another. Higher wages for employees can mean higher prices for customers and/or lower returns for shareholders, cleaner emissions into the environment may mean harder
Article from Mises Wire