When he was the governor of Indiana, Mitch Daniels reported that he would frequently be asked the well-intentioned question by various business leaders around the state of how they should help their communities as corporate citizens. Implicit in the question was that their work running successful companies wasn’t enough, that something more was required of them. Gov. Daniels responded with the straightforward answer that they should offer goods and services that people wanted to buy and thus become profitable businesses. If they did that one needful thing, they would provide one of the most necessary ingredients to the ongoing health and moral ecology of their communities by making these communities possible in the first place. Unfortunately, this is not the pedagogy our culture receives regarding business, profit, work, and value creation. We should admire the corporations, partnerships, small businesses, and various ongoing concerns that produce a profit, but we are told everywhere that we are being duped and preyed upon by a business class that wins at everyone else’s expense.
If we lack a moral grounding for capitalism, we also lack an understanding of its basic components that have produced an economy and near-constant improvements to productivity and wealth that did not exist anywhere before 1800. Such ignorance, misunderstanding, and what is more, ideological distortion, inform the current push for stakeholder capitalism and Environmental, Social, and Corporate Governance (ESG) schemes. The entire progressive activist class unhesitatingly states that stakeholder capitalism is a superior form of capitalism, but on entirely inarticulate premises, redolent of a collectivist mindset, and masquerading as a higher form of justice. Is stakeholder capitalism a viable replacement for shareholder capitalism? Before we can answer that question, we need to know what stakeholder capitalism is.
David McLean’s The Case for Shareholder Capitalism makes plain why shareholder capitalism is built on the fundamental principles of profit/loss, innovation, and exchange. He compares these principles to the assumptions of stakeholder capitalism and what it would mean for this version of capitalism to govern how corporations are organized and held legally and financially accountable. Stakeholder capitalism, he argues, at its best, assumes it can incorporate the elements of shareholder capitalism but in a kinder, more equitable manner, legally privileging employees, activists, the community, and the state in a manner equal to if not greater than shareholders. Stakeholder capitalism is just collectivism that, in dismissing shareholders as the highest priority, makes managers accountable to everyone, which means they are accountable to no one. In the place of serving shareholders as the company’s singular priority, what will increasingly occur is that state officials will regulate companies for collectivist means to achieve social justice ends. These are the stakes of this debate, a resolution in favor of stakeholderism is a long road to immiseration.
What is shareholder profit? It’s what’s left over after employees, suppliers, and the government have been paid. Few companies generate it reliably and over the long haul. McLean wonders why we speak of it with an inherent accusatory tone. Relatedly, advocates of stakeholder capitalism overlook voluntary exchange among shareholders, managers, labor, and consumers, insisting that shareholders intimidate and coerce other parties to do business with them. Only if the various “stakeholders” are legally privileged will a fairer capitalism be possible, they maintain. McLean asks why these different people in these different capacities continue to cooperate with each other and exchange their productivity for other things that they value more? Along the way, he focuses on why attempts to subdue or circumvent these features of capitalism with “social responsibility” and “sustainability” are doomed to produce a stagnant economy, with fewer opportunities for workers, investors, and consumers. Too many assume the “winners” of the economy (i.e., owners) can trick, dominate, and cajole everyone else to do their bidding. However, while the prospect of booming commerce dims under these activist approaches, an abundance of zero-sum regulatory endeavors for government bureaucrats will certainly emerge.
McLean writes to fend off this dismal outcome, best seen in the ongoing push by politicians, leading financial houses, federal and state bureaucrats, and government pension investors, among many more, to implement ESG criteria as the guiding regulatory and business philosophy for corporations. ESG aims to anchor capitalism in the West with intense environmental, racial and gender, and labor strictures that, ultimately, reduce businesses to social justice appendages of the state. ESG capitalism is built on several misguided notions about capitalism that have loomed since the mid-nineteenth century. None of them have proven true, but, as McLean notes, as soon as one collectivist theory is proven false, another one rises to take its place, often by the same people and institutions whose credibility should have been destroyed.
The entire progressive activist class unhesitatingly states that stakeholder capitalism is a superior form of capitalism, but on entirely inarticulate premises, redolent of a collectivist mindset, and masquerading as a higher form of justice.
Our immoveable difficulty, McLean observes, is the condition of scarcity of goods and resources. How do we account for this fact? What should we do with the resources we’re given? Who should make these decisions? Crucially, how do we take the resources we’re given and create things, create more and different things, and/or create things using fewer resources to do so? These are the questions that a market economy and accompanying property rights answer in a manner that no other system has proved capable of doing.
“Capitalism,” McLean reminds us, is “a pejorative invented by nineteenth-century socialists.” It assumes that voluntary trade is possible, and, by extension, a system “in which people trade freely and respect property rights.” The role of government is enforcing these rights, “which encourages even more trade.” Shareholder capitalism enlarges our thinking by applying “mutually beneficial trading” and property rights to business owners of corporations, partnerships, limited liability companies, sole proprietorships, and other business forms. The essence of shareholder capitalism is how it “speaks to the responsibilities of the persons who manage a corporation on behalf of the shareholders.” Shareholders prefer more wealth to less. The corporate manager’s first duty is to increase that wealth, not diminish it. Such thinking must guide every transaction the manager makes on behalf of the company. The shareholders must benefit from it. None of the company’s assets should be used “for purposes that do not benefit the shareholders.”
This principle is so simple that transgressing it surely requires highly sensitive and emotive moral criteria, baked with ideological misinformation that justifies the experience of how satisfying it can be to do “good things” with other people’s money. And that is precisely what is on offer in the slogans of “corporate social responsibility” and “sustainability.” One manifestation of this fuzzy thinking that McLean illustrates is the constant insistence that shareholder capitalism degrades “stakeholders” by a myopic focus on short-term gains at the expense of the long-term durability of the company. This long-term focus would surely benefit employees, consumers, communities, the middle class, the working class, babies, the disabled, cute furry animals, well-meaning government bureaucrats, and the overall economy.
Short-term rapacious greed comes at the expense of long-term value, a charge made by numerous business academics, leading corporate lawyers, Klaus Schwab (President of the World Economic Forum), and many more. McLean puzzles over why so many elites recur to criticizing what he calls the short-term fallacy as one of the key weaknesses of shareholder capitalism. The European Commission in 2020 held that “the focus of corporate decision-makers on short-term shareholder value maximization rather than on the long-term interests of the company reduces the long-term economic, environmental and social sustainability of European businesses.” The World Economic Forum’s Davos Manifesto 2020 states that “a company … manages near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.” But, McLean reports, this is just false. Near, medium, and long-term value creation are fictitious terms. There is only “the value today, and it reflects the firm’s future profits.”
No less an eminence than Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, the most profitable law firm in the world, asserted at a Harvard Law School conference on shareholder capitalism in 2021 that “maximizing value evolved into a set of short-termist corporate policies and practices, which pressures and incentivizes management to drive up profits, regardless of longer-term costs.” The best retort came from Cliff Asness, founder of AQR Capital Management, who responded directly to Lipton:
If management is trying to maximize short-term profits, those short-term benefits must come at the expense of long-term profits; and in a reasonably efficient stock market, that would have to be bad for the stock price, right? Management would be failing to invest in or build their businesses. So, how would that reflect a focus on shareholder value?
What Asness rebukes is less a sophisticated argument on behalf of stakeholder theory than a lie, albeit a lie backed by enormous political and economic power. Such thinking fails the basics of corporate finance that the author calls “Finance 101.” If the goal of a corporation is to generate profits, then this refers to “all profits over the life of the business.” The value is the “present value of all its expected cash flow.” Short-term profits matter, but they are a part of a firm’s value. Think only of the net present value of firm investments and the calculations managers must make when gauging how valuable an investment in future profits will be, whose cost will involve taking current profits and plowing them into long-term value creation for the company. But investing in the future with current cash flow is what companies must do in the service of generating greater profit margins. Lipton ignores this and needs us to believe that short-term gains come at the expense of cutting valuable longer-term investments. Yet, this would make the company worth less because those investments were, in fact, valuable.
The crisis is not with shareholder capitalism, but with a Western intellectual class that desperately embraces a secular religion of immanentizing moral motives to create an egalitarian world devoid of freedom and the virtues that must accompany it.
The real story is that “long-term profits are more important and constitute a larger part of the pie.” McLean’s examples include comparing the market capitalization of some of the most valuable public companies with actual earnings. Why, he asks, do investors pay $2.39 trillion (market capitalization) for Microsoft when it earns only $72.7 billion per year, making the company’s price 31 times greater than its earnings? “Because Microsoft’s shareholders own all its future profits.” It is precisely the long-term expectations of shareholders in companies like Microsoft, Google, and Apple that create their tremendous value.
The fact that corporate value must include the full horizon of profits means that shareholders and management who wish to turn a profit must deal fairly and decently with customers, employees, suppliers, the government, and the communities they operate in if they want long-run success. Stakeholder theory, McLean concludes, argues only it can equitably provide for these constituencies, ignoring the real evidence. The Stakeholder fallacy stems from those “who would like to use business to promote their own ideological agendas.”
McLean posits to BlackRock CEO Larry Fink, the tireless promoter of ESG and stakeholderism, questions about BlackRock’s vast portfolio: How did the successful corporations that you have holdings in become so successful without benefiting their shareholders? Where did they find their employees if they treated them unfairly? How do they generate their revenue streams if their products aren’t valuable?
McLean notes that those pushing the sustainability agenda are only building on past errors and ideologies that were finally dropped because they were proven false: i.e., overpopulation and depleting natural resources. These ideas in turn led to forced sterilizations of millions by governments all over the world and the extravagant environmentalist movement whose modus operandi is political and social coercion. If we’re running out of the ability to feed ourselves and resources to provide energy, then such coercion, much of it brutal, follows. But it’s innovation that scares the doomsayers the most because we don’t need to sterilize millions of people, nor do we need to live in fear of an environmental apocalypse. In short, we don’t need to accept their dictates. Not only do they violate human dignity, but they are also total misconceptions of how to meet challenges and problems to human well-being.
The sustainability agenda now focuses on using ESG to overcome climate change, the racist and sexist West, and the predations of shareholder capitalism. But no business is sustainable in a capitalist economy, McLean reminds them. And that’s a good thing for all the reasons that Joseph Schumpeter outlines in his work. Capitalism generates constant challenges to existing businesses and sectors. It incentivizes the sheer inventiveness and creativity that makes our economies improve with more new and better goods and services. Existing businesses will fade through competition and be replaced—it’s the price of capitalism.
The crisis is not with shareholder capitalism, but with a Western intellectual class that desperately embraces a secular religion of immanentizing moral motives to create an egalitarian world devoid of freedom and the virtues that must accompany it. They need control of an economy that is beyond their comprehension, much less their direction. Our work to defeat them goes on, and McLean’s sober analysis and defense of shareholder capitalism is of great use in this struggle.
