Shareholders vs Stakeholders: Who should companies focus on enriching?

When a company has a record year in its stock price, who wins? Frequently it is only a limited number of individuals as opposed to the greater society in which we all live. For public shareholders, a bump in stock price is a good thing but what history shows is that more often than not, the short-term jolts come at the expense of a more sustainable strategy towards success (VW, HSBC and other recent corporate scandals come to mind).

At Ethical Systems, in addition to taking a systems approach to corporate culture and ethics, we advocate for a stakeholder perspective towards business and profits. In contrast to a shareholder focus, which prioritizes the stock price over other factors, concentrating on stakeholders, i.e. those outside of the investor pool, yields a more ethically focused organization where leaders consider actions in the long term. While the latter strategy may forego the highs of the market, it can inoculate against the lows and downturns which can be more debilitating than heights reached at peak economic times.

In a recent PBS Newshour editorial “When capitalism only rewards shareholders, it’s time for reform,” author and professor Bruce R. Scott of the Harvard Extension Program challenges the distinctly Anglo-American form of capitalism in which businesses and government are often at odds and, in the wake of Brexit, why we need to rethink how our current system of economics serves to increase income disparity and hold back social progress. From the piece:

Today’s version of capitalism largely ignores the fact that corporations owe their powers to society, their employees, their customers, suppliers, taxpayers and other stakeholders, and not just to shareholders and executives.

Shareholder capitalism has become a means of extracting value from companies, not adding value to companies. High rates of executive pay and, even more so, the use of aggressive stock buybacks do not create value for a firm’s stakeholders. Instead, they provide a rationale or intellectual cover to allow a limited number of people to extract value to the disadvantage of everyone else.

Both Britain and the U.S. need to get back into the game of establishing and enforcing realistic and appropriate rules for how our societies want capitalism to operate. They need to reaffirm that the charter for a firm comes from society and not just from shareholders.

By focusing on the limited benefits that a focus on solely shareholder value all but guarantees, Scott artfully lays out why there should be more intervention from governments in the form of stock buy-back regulation, for example, and more rigorous monitoring. Yet, what Scott fails to mention is the method by which companies can affect positive change on their own.

One proven strategy for a company to transition from shareholder to stakeholder primacy is through an overarching focus on ethics. When leaders are incentivized to ensure increasing stock prices on a quarterly basis, cutting corners and potential ethical lapses are sure to follow (this concept is outlined in Joseph Weiss’ Business Ethics: A Stakeholder and Issues Management Approach). Further, when companies provide golden parachutes and outsized compensation for c-suite executives, even when their performance is not up to par, there is little incentive for them to do the right thing, or stay in the position long enough to make truly impactful changes.

For capitalism to work for all people, it has to take into consideration all people who work for the system and are impacted by it. The key driver of that change will be the companies that operate, and succeed, within that system when they realize how far ethics can grow the organization and profits simultaneously. Only then will both companies and society be able to act not as adversaries but as complementary cogs within a machine that both drives revenue and empowers and uplifts all instead of a few at the expense of everyone else.

Further Reading: