The Mises Institute monthly, free with membership
Volume 16, Number 9
Stakes versus Stocks
by Jeff Scott
"Good corporate citizenship" is a familiar song that has topped the charts for far too long. Every
decades, it comes back with a slight variation, finding wild popularity. The new version arrived
the mid-eighties with suggestive lines about corporate behavior. The traditional corporate
it sings, should modify its goals not only because it affects other people, but because it touches
everything: animal, vegetable, and mineral.
Recent mergers and acquisitions reach out and touch everyone. In turn, everyone wants to
in the wave of executive soul-searching. It's true that parties affected by large transactions
occasionally assist in refining corporate values. But make no mistake about the dynamics of
almost anyone would claim a seat at the bargaining table for a chance of lucrative reward. These
are in fork's range of shares of the pie.
One unscrupulous way to wiggle into a seat is to claim, by right, a stake in the outcome. That
the bargaining debate on a false premise, namely that CEOs should balance "stakeholder"
rather than serve the owners (stockholders), acting as diplomats in a political rivalry rather than
executives in an economic contest. From that starting point, the stakeholders' fight for benefits is
intrusive and unprincipled.
As CEO Al Dunlap warns in Dunlapping the Corporation
: "If you see an annual
report with the term
'stakeholders,' put it down and run, don't walk, away from the company. It means the corporation
its priorities upside down." Dunlap is famous for his turnaround of Scott Paper with its highly
publicized layoffs. His media-made moniker, "Chainsaw Al," is the opposite of the truth:
wield chainsaws on corporate value.
Indeed, "stakeholders" are conceptually flaccid and politically muscular. Stakeholder advocacy is
a principled ideology. Rather, it's a jumble of policies forged out of resistance to the growing
powers of free markets. But put these competitively disadvantaged groups together and they
more trouble than the sum of their parts:
The political left calls for corporate responsibility as a means of instilling business
social agenda they cannot pass legislatively. For example, Senator Tim Wirth, a post-Watergate
Democrat, said he was leaving Washington because he was frustrated that no one could put new
in place anymore.
Labor unions endorse virtually any platform they believe offers protection from plant relocations
competition. When Senator Jeff Bingaman introduced the idea of the R-Corp (R for Responsible)
alternate corporate charter, a key feature was the requirement of the adoption of a "community
responsibility agreement" which would "temper" relocation decisions and layoffs.
State and local legislators seek to protect established business interests in their districts,
especially those of corporate managers who are campaign donors and who sense that their jobs
threatened by layoffs during hostile takeovers. Consider Greyhound of Arizona, once a target of
takeover. One Arizona legislator said to a reporter that when Greyhound says "jump" the
ask, "how high?"
Anticapitalists, especially former Labor Secretary Robert Reich, decry the alleged
executive salaries that often accompany worker layoffs. Reich belittles the demands of
investors on corporate management, dismissing the "shareholder model" as "a narrow view of
Liberal academics claim that corporate acquisitions are artificial transfers of wealth from
to shareholders. They argue that corporate profitability in the past implied steady employment:
workers "earned" secure employment, sharing the gains of rising productivity. Now, there are
of workers for profit, exemplifying the redistributing of income from employees to
Piling on corporations at lower levels are community activists, environmental radicals, and
occasionally benign but misguided parties, such as archaeologists and old-building
Of course, not everyone who claims a stake is out to destroy corporate profit-initiatives, but all
seem to want a piece of the action.
For a wide range of motives, from the chance to dip into the kitty to the general anti-corporate
sentiment, stakeholder laws are a solution. The coalition has succeeded in passing laws, known
constituency statutes, that fulfill the stakeholder ideal. In effect, they suspend the fidelity owed
by executives to owners and transfer wealth from shareholders to other groups.
The main beneficiaries are labor and management, who are far more culpable for eroding the
the enterprise than are the archaeologists and preservationists. It's not that Ralph Nader-types are
bashing corporations and winning on their own; it's that internal management and organized
with anti-corporate activists when they wish to preserve their interests against shareholder
Together with media sympathy for established and parochial business interests, this coalition
wins. Thus, constituency statutes are a little-understood form of protection from competition for
professional managers and the employees they supervise.
The chief power that manager-diplomats receive is wider discretion over the potential payout to
shareholders. But to get that power they must surreptitiously promise to grant favors to local
politicians, environmentalists or regulators. To have the means of granting favors to the
executives must exercise wide control over the use of the company's earnings.
Take the current wave of mergers and acquisitions involving banks and other financial
Banks leapfrogged one another to promise huge expenditures on low-income, minority,
state-partnered lending. Banks, which are heavily subsidized and regulated, cannot fail to make
faddish promises. Indeed the more "public" the character of a business charter, in this case, the
charter, the more likely you will find management directing business goals with political
Ludwig von Mises noted that the pre-war emergence of the bureaucratic managerial class was an
outgrowth of socialist-leaning European governments that aimed specifically to eliminate the
of the shareholders. The expropriation of shareholder values was the first step in shifting power
free markets to state bureaucracy. The shift back to the financial markets in the eighties was an
overdue correction, due to implicit recognition that, as Mises said, "A successful corporation is
ultimately never controlled by hired managers."
Since a corporation is an entity with a purpose, managers must set goals in accordance with a
hierarchy--not a grab bag of values--in order to survive. Shareholders properly belong at the top
that hierarchy to whom management owes a fundamental responsibility. The owners, acting
representative directors, sanction the executive managers and bear the decisive risk: Will the firm
have access to my capital? All legitimate interests in a company must be aligned with an
purpose that rewards capital. The shareholder model provides such a purpose: profitability
Corporations work because shareholders expect exclusive loyalty from the directors. The web of
interests between the corporation and other stakeholders (banks, workers, customers) are
under different forms of law, contract and civil. Advocates of stakeholder laws, by contrast,
the harmony of value. They threaten corporate survival when they demand that everyone
connected to or
affected by a corporation--suppliers, customers, managers, community neighbors--should be
given an equal
say in corporate decision making.
Under a stakeholder model of responsibility, there is no clear, unambiguous standard of
success. The interests of these diverse groups could never be harmonized under nebulous "public
interest" goals. And they never are. They have shown in practice that they vote to benefit
and subvert the will to pursue profits and create wealth. Customers and shareholders suffer most,
since they are the two most widely dispersed "stakes" in the enterprise. They are the hardest to
organize for the collective action required to run a stakeholder corporation.
A corporation is not a democracy. CEOs who choose to balance diverse interests will squander
and they will squander it on friends of management. Nor is a corporation autocratic. The alleged
golden days before mergers and takeovers, when CEOs made deals between workers and
shareholder expense, are indefensible. Economic democracy and autocracy are, at root,
The reasons for corporate acquisitions and restructuring, for the most part, are not artificial.
transactions are motivated by the goals appropriate to a system of representative governance.
Turnaround CEOs like Dunlap increase shareholder wealth and preserve jobs that would
otherwise be lost
by offering no-nonsense values to customers. The artifice arises in Robert Reich's world, when
corporations violate shareholder trust, juggling corporate assets for political interests, sacrificing
the values of producers and consumers.
Jeff Scott is a financial analyst at Wells Fargo Bank in San Francisco.
READING: Margaret M. Blair, "Wealth Creation and
Wealth Sharing: A Colloquium on Corporate Governance and Investment in Human Capital"
(Washington, D.C.: The Brookings Institution,
1996); Harper's, "Does America Still Work?" (May 1996); Stephen M. Bainbridge,
"Participatory Management Within a Theory of the Firm,"
The Journal of Corporation Law 21, no. 4 (Summer 1996).