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Professor Norman Barry on "Stakeholding" and the Firm

January 8, 2007

Tags Capital and Interest TheoryPhilosophy and Methodology

My article "Shareholder, not Stakeholder," which argued against the collectivist notion of "the stakeholder," brought forth much disagreement, especially from the bohemian business types. Regarding this same topic, there is this magnificent Norman Barry piece on the stakeholder fallacy in the Freeman. He notes:

The business ethicists' current fad is to demand that the traditional profit-seeking corporation be transformed into a curious (and unspontaneous) business enterprise consisting entirely of stakeholders. The shareholders, the people who put up the capital and bear most of the risks, are apparently only one part of this heterogeneous collection.

...It is curious that the antiquated doctrine of stakeholding should have such an appeal at a time of rising stock values, newly emerging companies, a revitalized individualism, and rapid social change. It is little more than a sanitized version of socialism."

In addition, Barry makes the very important point as to the only usefulness for the stakeholder concept, and he points out why the concept itself is not one of ethics, but merely good business sense:

None of the above is meant to imply that the idea of the stakeholder is completely useless. It certainly has some function in business. It is quite likely that long-term owner value will not be advanced if labor is treated as an easily disposable factor of production, to be dismissed as soon as a downturn in business activity occurs......The firm needs a good reputation, and if it is to prosper it will have to attract labor in the future; its prospects will be harmed if it acquires a reputation for cavalier treatment of its staff.

Again, it will not be to a firm's long-term advantage if it dispenses with a reliable supplier just because an alternative turns up with a slightly lower price (offering, perhaps, only a temporary advantage). And of course it will pay a company to establish good relationships with the community in which it is situated. But this has nothing to do with ethics; it is simple prudence.

And finally, Barry completely shatters the romantic image often applied to the stakeholder doctrine by ethicists and left-business types — he places the 'shareholder vs stakeholder' notion into a pure property rights perspective, as any self-described libertarian must do:

But it is not difficult to show that behind the anodyne language of stakeholderism lies a sinister doctrine indeed. It is an idea and practice, the ideologues claim, that is perfectly compatible with capitalism, but in fact it undermines the defining feature of that economic system: the exclusive rights of ownership. What the doctrine amounts to is the democratization, or even worse, politicization, of what is essentially an individualistic economic institution. It is no coincidence that stakeholder groups are frequently called "constituencies" in the new descriptions of the firm.

Also see Barry's superb paper - "Respectable Trade: The Dangerous Delusions of Corporate Social Responsibility and Business Ethics." Also see "Austrian Economics and Business Ethics."

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