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2014

Abstract

t important, or even more important than any other?</p><p id="4f5d">The stakeholder model tries to bend society to answer the question of who’s more important, and <b>stakeholders are selfish</b>. See <a href="https://readmedium.com/the-simple-reason-utopian-societies-always-fail-bc12e9a58f71">The Simple Reason Utopian Societies Always Fail</a>.</p><p id="f363">Stakeholders have no trouble telling you which interest is more important:</p><ul><li>Employees will tell you “Pay me more and improve my benefits. Go ahead and squeeze suppliers a bit and milk customers more.”</li><li>Customers will say, “I want better products and lower prices even if you have to squeeze employees and suppliers.”</li><li>And so it goes, all down the stakeholder list, on every stakeholder issue you can imagine.</li></ul><h2 id="21ba">Stakeholder conflicts are common</h2><p id="acec">Not only is it hard to rank stakeholder interests, but sometimes there are clear <b>conflicts among stakeholders</b> that simply cannot be resolved:</p><h2 id="f535">Short sellers vs. Shareholders</h2><p id="67b9">Shareholders want to see the share price of a company rise, and short sellers want to see it fall. If one wins, the other loses. This one is truly a zero-sum game.</p><h2 id="68ff">Government taxers vs. Individuals</h2><p id="d101">Governments want to raise revenue to fund their priorities, but individuals legitimately seek to minimize their own taxes, and no one pays more taxes than they are obligated to.</p><h2 id="57a6">Unions vs. Companies</h2><p id="615a">Unions may seek pay raises regardless of long-term competitive harm to companies, sometimes driving their companies into bankruptcy. U.S. car companies provide a good example, as do strikes in Europe against any changes to labor laws and pension rules, even ones that rational society would agree make sense.</p><h2 id="01b7">Competitors vs. Companies</h2><p id="ff72">Competitors care about and are affected by what companies do, and so are stakeholders too, but c

Options

ompanies owe no duty to accommodate their competitors’ interests. We have a societal interest not to compete unfairly, but also a host of specific laws to prevent self-interest: antitrust, anti-fraud laws, etc.</p><h2 id="6032">Regulators enforcing laws</h2><p id="6f07">Regulators want to send a signal about their enforcement priorities, and sometimes look to make an example with tough enforcement against politically unpopular or visible companies. These days oil companies are narrowly beating out big tech for public disapproval. Society may benefit, but the targeted company (and its stakeholders) all suffer.</p><p id="bb61">Companies facing this cacophony of competing demands focus on those complaining loudest or those who have the potential to cause the greatest harm.</p><p id="79d4">Hence the squeaky wheel method of prioritization. I’ll focus on who is making the most noise, not necessarily where society gets the biggest benefit.</p><p id="704f">Stakeholder chaos is the utterly predictable result. But it’s no way to set societal priorities.</p><p id="39f4">Be well.</p><div id="1269"><pre>James Bellerjeau, JD, MBA, ran the <span class="hljs-keyword">global</span> sustainability <span class="hljs-keyword">program</span> of <span class="hljs-keyword">an</span> S&P 500 company. <span class="hljs-keyword">He</span> also served <span class="hljs-keyword">as</span> General Counsel <span class="hljs-keyword">for</span> twenty years.</pre></div><p id="ede9"><a href="https://medium.com/@james.bellerjeau/about">About James Bellerjeau</a>. More of <a href="https://medium.com/@james.bellerjeau">my articles</a>. Let’s connect on <a href="https://www.linkedin.com/in/jamesbellerjeau/?source=about_page-------------------------------------">LinkedIn</a>!</p><p id="1727">Get the inside scoop and access all writers on Medium. Join with <a href="https://medium.com/@james.bellerjeau/membership">my referral link</a> and you’ll help ensure that authors get paid for their work.</p></article></body>

Let’s Make a Sustainably Better Future

Why Stakeholder Capitalism Creates Chaos

Competing priorities lead to “squeaky wheel” decisions.

What happens when you put a company’s stakeholders in a room together? Do they calmly and quietly agree on how to allocate a company’s limited resources?

In this series, I explore the current best hope of the ESG movement, stakeholder capitalism. Its advocates want stakeholder capitalism to replace shareholder capitalism as the driving factor behind corporate actions.

But are we pinning our hopes on a doomed strategy? Doomed why? Read on to find out. This is the Stakeholder Capitalism series, Part 2.

What is stakeholder capitalism and what are its flaws?

Stakeholder capitalism refers to the idea that companies should pay attention to all their stakeholders, i.e., those affected by their decisions. Stakeholders include employees, suppliers, customers, society, and of course, shareholders.

Stakeholder capitalism suffers from a fundamental flaw, however:

Stakeholder capitalism lacks an objective mechanism for setting priorities among different stakeholder groups. And this means each stakeholder feels it necessary to pursue its interests at the expense of all others.

As a matter of principle, we can all agree that fair pay for employees is necessary and good, as is being a good partner with suppliers, offering good value to customers, taking care of the environment, promoting diversity, and so on.

Who wants to say as a general principle, however, which of these is the most important, or even more important than any other?

The stakeholder model tries to bend society to answer the question of who’s more important, and stakeholders are selfish. See The Simple Reason Utopian Societies Always Fail.

Stakeholders have no trouble telling you which interest is more important:

Employees will tell you “Pay me more and improve my benefits. Go ahead and squeeze suppliers a bit and milk customers more.”
Customers will say, “I want better products and lower prices even if you have to squeeze employees and suppliers.”
And so it goes, all down the stakeholder list, on every stakeholder issue you can imagine.

Stakeholder conflicts are common

Not only is it hard to rank stakeholder interests, but sometimes there are clear conflicts among stakeholders that simply cannot be resolved:

Short sellers vs. Shareholders

Shareholders want to see the share price of a company rise, and short sellers want to see it fall. If one wins, the other loses. This one is truly a zero-sum game.

Government taxers vs. Individuals

Governments want to raise revenue to fund their priorities, but individuals legitimately seek to minimize their own taxes, and no one pays more taxes than they are obligated to.

Unions vs. Companies

Unions may seek pay raises regardless of long-term competitive harm to companies, sometimes driving their companies into bankruptcy. U.S. car companies provide a good example, as do strikes in Europe against any changes to labor laws and pension rules, even ones that rational society would agree make sense.

Competitors vs. Companies

Competitors care about and are affected by what companies do, and so are stakeholders too, but companies owe no duty to accommodate their competitors’ interests. We have a societal interest not to compete unfairly, but also a host of specific laws to prevent self-interest: antitrust, anti-fraud laws, etc.

Regulators enforcing laws

Regulators want to send a signal about their enforcement priorities, and sometimes look to make an example with tough enforcement against politically unpopular or visible companies. These days oil companies are narrowly beating out big tech for public disapproval. Society may benefit, but the targeted company (and its stakeholders) all suffer.

Companies facing this cacophony of competing demands focus on those complaining loudest or those who have the potential to cause the greatest harm.

Hence the squeaky wheel method of prioritization. I’ll focus on who is making the most noise, not necessarily where society gets the biggest benefit.

Stakeholder chaos is the utterly predictable result. But it’s no way to set societal priorities.

Be well.

James Bellerjeau, JD, MBA, ran the global sustainability program of an S&P 500 company. He also served as General Counsel for twenty years.

About James Bellerjeau. More of my articles. Let’s connect on LinkedIn!

Get the inside scoop and access all writers on Medium. Join with my referral link and you’ll help ensure that authors get paid for their work.