In the current world of economic thought, starting in earnest about 5-7 years ago, there has been discussion/debate about whether a company should be more focused on their “Stakeholder” or their “Shareholder.” On this pending 4th of July weekend, which itself honors fighting for what we believe in as a country, it would be worthwhile to explore the dichotomy of Stakeholder versus Shareholder and let you form your own conclusions on it.
Defining Stakeholders and Shareholders
First, some context of definitions to frame the conversation.
Companies, certainly all publicly traded companies, have shareholders. A shareholder owns a part of the company, and that means sharing not just a part of the value of the office copy machine, but more substantially sharing the current and future profits/losses of the company. If the company makes money (a profit) that profit is literally allocated on a “per share” basis to the owners of the company. That’s the singular reason you see annual profits of companies commonly reported not simply as “$222 million dollars,” but also as “$2 earnings per share” (or EPS, presuming the company had 111,000,000 shareholders). On average, the preponderant determination of whether stock share prices rise, or fall is the EPS of a company.
A stakeholder, however, is a broader definition than shareholder. That term refers to anyone who has “a stake” in the company, which more generally means anyone impacted by the company or who could be tangentially impacted by the company. This segment would naturally include shareholders, but also customers, employees, vendors, the community where the company operates, and the land (environment) where the company operates or has influence into (rivers that float nearby, homes downstream from its smokestacks, etc.).
Who Should Companies Prioritize?
Given those definitions, the essential economic question it poses is: Should the managers of the company (executive leadership team and the company Board of Directors) focus on maximizing the shareholder’s best interests or maximizing the interests of the stakeholders? How should we (as direct owners in the company who get to vote as shareholders through the mutual funds you own) judge whether we keep the executive leadership team in place as doing their job correctly or whether instead we should bounce the bums for not doing their job?
Profits and Ethics
The rub, to be realistic but concrete about it with an example, is — should the only focus be on profits (such as the steel producer maximizing profits by operating efficiently and dumping waste into the nearby river) or should it be on maximizing profits BUT DOING SO WITHIN AN ETHICAL REALM (maximize profits, but simultaneously don’t forget to ALSO, for instance, hire disadvantaged workers, treat them well, and NOT TO throw waste into a community asset such as the river that runs through the town)?
The answer to the above question is not easy as some like to have made it. At any point in time, a company can make decisions to maximize profits. Why? The answer is because they are independent organizations who truly only report to their shareholders. People who own shares want their stock to go up and maximizing profits is the primary means to achieve that end.
Nonetheless, I am personally a community-minded person. I want my community to be better off. So, it would be my hope that companies do things for the community I live in too. But, what if one company offers a high level of employee benefits and makes charitable contributions to the community, and the other company provides minimal employee benefits and makes no contributions. Which corporation will have more money (profits) to invest in R&D and see its share price go up? The answer is the second less-ethically-minded one. All things being equal — the first company will possibly cease to exist because fewer new products will come out of it, people will naturally buy less from it so its sales will decline, and people will eventually abandon its shares. Also, as soon as your company makes a charity contribution to one cause that you as a shareholder don’t favor, then you might judge they are mis-spending your money and you might raise a stink. This later case is looming more problematic in our current increasingly polarized political world.
Now, to be fair, more-ethically-minded companies theoretically have offsetting advantages, such as by their culture they are able to attract better employees and the “goodwill brand” they represent to the market. Yet still, we live in a capitalist world and consumers / customers acting in their own best interests are what provide the essential revenues to companies that allow them to continue.
The Role Of Competition and the Government
What to do?? Do we lean more toward shareholders (and profits), or should we instead lean equally into the company stakeholders? The famous economist and Nobel Prize in Economics awardee Milton Friedman certainly weighed in on the need to focus on profits and why it was the more intellectually honest thing to do. You can find Professor Friedman’s highly acclaimed 10-part series here.
My sense of the right answer is certainly more nuanced than Milton’s, but companies staying profitable is the most important metric. I’m not saying maximizing profits is the key, but then again executives can’t get out-foxed in the marketplace, or your employees will lose their jobs and communities lose their corporate partners to other entities who have no loyalty to their neighbors.
Nonetheless, corporate competition is terribly fierce, so the government has a vital role as well in the setting of minimum standards. I think rules to protect workers (anti-discrimination (age, race, gender, etc.)) and protect communities (pollution) are necessary or profit-at-any-cost will rule. Our government (local, State, Federal) IS our most logical common stakeholder because we elect them (“hire” them) and they must set laws and enforce them.
Notwithstanding that comment, I think the government should not dictate more than it needs because government entities simply don’t experience the mind-focusing profit-tension that keeps them focused. There is also no history in the world of the government being able to pick the right industries to win, much less the individual companies that compose that industry. Thus, unfortunately, and stated here for the public record, I do predict that we will have vast fraud and waste reported in the $2 Trillion being spent in the last three big federal spending bills (Infrastructure, CHIPS, IRA) because we’re asking government employees to do what they have never been trained to do.
You Can’t Legislate Ethics
In summary, the answer to the essential question of shareholder versus stakeholder is complicated by one underlying reality; you can’t legislate ethics. You can absolutely tax profits, you can set minimum rules for companies to follow, but you can’t legislate ethics. Great companies will take care of their stakeholders because it’s in their blood, but it is impossible for those ethics to get fully reduced to public laws and internal policy manuals. Still, it is my hope that as what was once said about another great debate this country had on an entirely different ethics issue, “we will know it when we see it.”
It remains my distinct privilege and deep honor to serve you.
Patrick Zumbusch
Founder and CEO
