The role of business

Jan. 8, 2007
Fad words come and go in business, usually without hurting anything but communication.

Fad words come and go in business, usually without hurting anything but communication. A specimen now in circulation, however, is more insidious than most.

The culprit is “stakeholder,” of which corporations now have many, which is as precise as anyone can be where stakeholders are concerned. The word encompasses all people who might be affected by a corporation’s actions: employees, neighbors, customers, contractors, suppliers, breathers of air and drinkers of water downstream of its waste outlets, environmental activists, human rights advocates, and anyone else willing to claim a “stake,” loosely defined. Some corporate managers seem to adore the word, which implies social relevance. They send out “Dear stakeholder” letters.

Blurring boundaries

With one exception, emergence of a stakeholder class does no particular harm. It upholds healthy egalitarianism and provides useful affirmation that corporate deeds have consequences, some potentially malign. The exception is how much “stakeholder” sounds like “shareholder” and thus blurs critical boundaries.

Shareholders own corporations; stakeholders own nothing unless they also hold shares. Shareholders assume risks, enjoy profits in good times, sustain losses in bad times, and take responsibility-some direct, some indirect-at all times; stakeholders embody concern about how corporations perform in specific areas, mostly nonfinancial, but assume no responsibility. Shareholders and the managers they employ can make occasional mistakes but cannot be wrong consistently and remain in business; stakeholders can ride the cycles of fashionable opinion and lose nothing when they’re wrong. Shareholders and stakeholders play legitimate roles in business. But the roles are distinct and need to be kept that way.

A reminder of the importance of this distinction came in November with the death of eminent economist Milton Friedman. In 1970, when the social role of business became a popular issue, Friedman wrote an essay published in the New York Times Magazine with a message encapsulated in its title: “The Social Responsibility of Business is to Increase its Profits.”

Friedman argued that the exercise of “social responsibility” by a business executive can amount to the imposition of taxes and to decision-making by an unelected agent of how to spend the proceeds. This occurs, he reasoned, when the executive’s actions reduce returns, raise prices, or lower wages on behalf of social goals that stockholders, customers, or employees could pursue on their own but on which they would spend their own money differently. Friedman, a champion of market freedom, considered such activity by business people ineffective and politically unacceptable. “The doctrine of ‘social responsibility,’” he wrote, “involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.”

Although the word “stakeholder” didn’t in 1970 enjoy the popularity that it does now, Friedman’s essay addressed the familiar fusion of stakeholding with shareholding for the purpose of advancing political agendas. The oil and gas industry has had a full share of this as activists buy stock and try to influence corporate policies on public issues such as global warming.

“In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to ‘social’ causes favored by the activists,” Friedman wrote. “Insofar as they succeed, they are again imposing taxes and spending the proceeds.”

Profits, prosperity

Friedman wrote his essay at a time when business people, to his expressed dismay, were supporting the imposition by a Republican administration of wage and price controls aimed at combating inflation. It was a time when socialism had more support, at least in the US, than it does now. It was a time before events had demonstrated the perils of overregulation and market intrusions by governments. It was a time when profits tended to be disparaged as manifestations of greed.

Countries and populations have prospered since then to the extent governments and corporations followed Friedman’s guidance on the role of business. Yet calls persist for businesses to assume social responsibilities best left with people. In the prevention of any such retrogression, everyone has a stake.