How to Bureaucratize the Corporate World
This stakeholder theory of corporate social responsibility is in direct opposition to the primacy of the interests of shareholders as owners of the corporation. Instead of working for the profit of shareholders, corporate managers are instead directed by this doctrine to act in the interests of a diverse group of "stakeholders," with the shareholder considered to be merely one of these stakeholders. The groups to whom shareholder profits are to be sacrificed include employees, customers, business partners, suppliers, competitors, government regulators, the general community and even "pressure groups" and "influencers." FULL ARTICLE BY BEN O'NEILL
Comments (28)
I spent my entire career working for corporations. Corporations have been at least as bureaucratic as governments for as long as I have worked. Most corporations are thoroughly bloated with bureaucracy -- not because governments have forced it, but because that is the way organizations function. Corporations are not and have not been designed to serve shareholders, only to serve the interests of corporate management. Shareholders often fare well because they have interests equivalent to management's. However, all corporations could serve shareholders better by shedding inherent bureaucracy -- bureaucracy that exists solely to make the boss feel grander, not to serve the shareholders.
Published: January 23, 2008 10:42 AM
"Stakeholders". This collectivist euphemism populates documents and discussion involving Leviathan's school improvement agendas (NCLB etc) too. The more any economic endeavor like schooling, not to be confused with education, is removed from the profit motive, the more non-market symptoms develop. Tragedy of the Commons, misallocation of resources and rent-seeking could start what is becoming a very long list...
Published: January 23, 2008 11:15 AM
"...corporate social responsibility is "the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life."
I couldn't agree more. But as the late great Peter Drucker like to say, none of the above can be accomplished without first guaranteeing the future of the corporation through profits. Sustainable development requires profits, or corporations fail. Without profits, corporations have no employees to please. Without employment, families suffer and communities have no tax base.
Profits must come first. No one understands that better than cities like Tulsa where we watched businesses fail or leave after the collapse in oil prices in '86. Since then, we have struggled with tax revenue to repair water, sewer and streets and hire police. Downtown is a ghost town. If only our businesses had a little more of those evil profits.
Published: January 23, 2008 12:24 PM
Steve Osborne points out that corporations are often bureacratic and do not serve the interests of shareholders. But then Mr Osborne that this is nothing to do with government interventions.
Of course, without these interventions corporate managers who did not serve the interests of shareholds would either get fired - or the whole corporation would eventually go bankrupt.
There ar many interventions, from the such things a inheritiance tax and capital gains tax (which undermine individual shareholders and shift the balance to instititutional shareholders) to the Williams Act and other measures to protect corporate managers from take overs.
Understanding and reversing the government interventions is the key to restoring a free market.
Published: January 23, 2008 12:31 PM
Before anyone makes the "corporations are the creation of government" point, the concept of limited liability is an ancient one that goes back a very long time before the limited liability statutes of the 19th century.
There is nothing unlibertarian about it - as long as someone who chooses to do business with a corporation knows IN ADVANCE what they are doing business with.
Yes there is a risk that the business will go bankrupt and one will not get paid for the supplies that one sold to a corporation - and have to watch still rich shareholders go past in big cars to their nice homes. For only the money (and the assets it has bought) those shareholders have put into the pot called the corporation is available to pay creditors.
But that is a risk one CHOOSES to take if one does business with an organization that has "inc" after its name (in the United States) or "Ltd" (in the United Kingdom).
Published: January 23, 2008 12:41 PM
I agree, Paul. Thanks for saying that right away, though I doubt it will fend off the usual banter.
Published: January 23, 2008 1:06 PM
I agree with Steve that, in general, corporations are bloated with bureaucracy, although I don't think there is anything wrong with corporations per se. Maybe if government would quit propping up inefficient bureaucratic corporations and providing protective barriers to entry, we could get the problem to take care of itself through natural profit-maximizing competition.
Nevermind, "unfettered free market" is a bad word in Washington.
Published: January 23, 2008 4:41 PM
Re: Limited liability of corporations
There is a 'horse before the cart' nature to this business arrangement. As far as defining a business with certain types of limited liability (corporation) we have now institutionalized violations of property rights.
In an unhampered free market property rights are defined and continually refined and not superceded by institutions designed without full appreciation of property rights.
Published: January 23, 2008 4:55 PM
The idea of "stakeholders" requires the idea of "the commons" and the idea that companies "externalize costs". The idea that if a company that pollutes, they are not polluting someone's property (who then has a claim against the polluter), but that a company pollutes "the commons". The idea being that the are externalizing the cost of production, by using a cheaper method of production (one that creates or doesn't clean up pollutants) which then get transferred on to everyone in the form of dirtier air and water.
The failure to protect individual private property requires that corporate private property must also be infringed. That's the basic premise.
Published: January 24, 2008 12:29 AM
what i find particularly galling about the double or triple-bottom-line nonsense is the alacrity with which extremely well-paid public company directors write out cheques to charity on the shareholders chequebook.
how easy it is to be generous with other-people's-money, they usually cloak this behind the fig-leaf of good corporate citizenry.
Published: January 24, 2008 3:07 AM
A wise fellow once said that the best client is the one who is spending someone else's money...
Anyway, Paul Marks's comment notwithstanding, corporations are creatures of the state...and hence should be looked at as we look at the state: an interesting sort of enterprise with all sorts of democratic and authoritarian impulses that sometimes does something nominally "good" but mostly does things wrong, and in any case constitutes by its very nature a violation of natural law. Oi!
Published: January 24, 2008 11:44 AM
The irony is that some of your own bloggers (e.g. Stephan Kinsella) have been forced to retreat from the myth of the shareholders as "owners," and toward some version of the Berle-Means thesis, in order to defend limited liability and the entity status.
And shareholder ownership is just that--a myth. In practice, corporations' dependence on outside finance, whether loans or new share issues, is extremely limited. Management usually limits capital investment to priorities that can be financed internally from retained revenues. Hostile takeover is significant only in special circumstances, like those following the introduction of junk bond financing in the '80s, and quickly subsides as management uses its insider power to game the rules so as to deflect attack. In practice, the shareholder is just another class of contractual claimant, with nominal voting rights over the board of directors (usually in fact controlled by management and engaged in mutual log-rolling with the CEO), and with less claim on the revenue stream than even bondholders. The corporation is an agglomeration of unowned capital controlled by a self-perpetuating managerial oligarchy.
You're also ignoring the whole issue of the rising importance of human and organizational capital relative to physical capital, and discussed in the work of Luigi Zingales. Even stipulating for the moment the de jure status of shareholders as residual claimants: when a major portion of equity reflects the value created by human capital, but is not represented in firm governance, some very perverse agency problems are created.
This is essentially a puff piece written by the numbers based on dogma, with little regard to anything that's actually happened in recent years.
Published: January 25, 2008 2:23 AM
Hi Kevin,
It seems you are a advocating for a form of employee takeover to remedy what you are claiming (empirically) is the orchestrated destruction of property right by the collusion of government and corporate management. Yes?
OK. But there are limits to empirical observations. One has to ask, without knowing the specifics of any particular corporate situation: is this or that particular entity beholden to the profit motive in a market or not?
The particular organization of production should be subservient to the establishment of competition.
Published: January 25, 2008 5:03 AM
Ben O'Neill has written an excellent article illustrating the trend from capitalism to corporate bureaucratic socialism (facism). However, as with every writer that I have ever seen on Mises.org, in the greater society his article will still fall on mainly deaf ears because he avoids the hard questions from those who are not fully converted to the Austrian economics approach because they see fundamental conflicts of interests in the actions of individuals.
For example, O'Neill's following good example:
"If a corporation decides to open a store in my neighborhood then this affects my life. I may find it convenient to have a source of useful goods and services nearby. I may find it annoying to have more people visit my neighborhood to purchase these goods and services. I may even find the products or services offered by this store to be repugnant. My views are certainly relevant to corporate managers insofar as they affect the profitability of such a store — they will be rightly interested in whether or not I would choose to shop there. However, my "interest" in their decision does not give me any legitimate moral claim to a say in whether or not they should purchase property and open such a store. And it certainly should not allow me to impose my will over the preferences of the shareholders of this company."
will be immediately labeled as impractical by vast numbers of people who ask the simple and reasonable questions:
1) By what current non-government mechanism do I prevent the opening of a store in my neighborhood which promotes "more people visit my neighborhood" or offers "products or services" that I find "to be repugnant"? When I decide to live in certain area and raise my family there, is it to be merely a matter of chance, whether or not the area will change, from the reasons that I chose it, into an area where my purposes for being there can no longer be satisfied? By what non-government methods can I ensure that the physical environment of my property purchase will not deteriorate in this manner?
2) If there have been no mechanisms in place to prevent such negative occurrences at the time that I decide to live in a neighborhood, by what current organized non-government methods can I influence the reduction/elimination of such negative occurrences after they have started to appear?
Mises' (and the standard Austrian economics) argument that:
"The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality."
is good as far as it goes, but again does not address the neighborhood problem of the example above for the simple fact that the consumers of the goods and services of the store are generally a very different group than the neighbors and/or or other people affected by the presence and operation of the store.
These are the questions which free market proselytizers continually fail to address and thus, continually fail to sufficiently convince most people that their philosophical approach is a complete solution. In summary, the problem with the Austrian economics approach as currently constituted and presented is that, while it is certainly necessary for both market freedom and personal liberty, it is clearly not sufficient to solve all the practical problems of society. It is my conviction that the philosophical basis that I have termed Social Meta-Needs does provide such complete and consistent solution to all practical problems of society.
In his article O'Neill quotes the following passage from Mises _Human Action_ which are an important insight, but also illustrates the crux of Mises' failure to address and provide the required complete solution to which I refer above.
"Bureaucratic conduct of affairs is conduct bound to comply with detailed rules and regulations fixed by the authority of a superior body. It is the only alternative to profit management. Profit management is inapplicable in the pursuit of affairs which have no cash value on the market and in the non-profit conduct of affairs which could also be operated on a profit basis. … Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules."
Although elsewhere in _Human Action_
"For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the "economic side" of human endeavors and of man's striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology."
Mises clearly states that praxeology is applicable to all human action, in the above passage (and in all economic examples in his works) he limits the concept of "profit" and its "management" only to "the pursuit of affairs which have ... cash value on the market". Presumably, although Mises clearly understood that there are values exchanged between humans which are not normally nor easily measurable by "cash", he did not include these in his economics because he could find no way to do calculations with them. Nevertheless in the reality of human interactions, there must exist such a calculus relating to values of all types (not merely cash and standard equivalents) - the fundamental tenets of praxeology imply its existence. Furthermore, praxeology (and its money-economics implications and methods) will not prevail unless and until such an extended complete and consistent theory and practice is provided to a society that is desperately in need of it.
With respect to the current article, the entire reason why the practice of "the corporate manager [being given] given wide scope to determine the identity and importance of the stakeholders who he will work for" has arisen is precisely because there are no organized methods to implement a fully complete profit motive instead of one that deals merely with money and consumers. I am convinced that my Theory of Social Meta-Needs and its full implications/practical methods, which are illustrated on my web-site SelfSIP.org, are that theory and practice, providing the basis for such necessary organized methods.
Published: January 25, 2008 3:53 PM
kevin carson:
"And shareholder ownership is just that--a myth. In practice, corporations' dependence on outside finance, whether loans or new share issues, is extremely limited."
i find this hard to square with the fact that the debt-to-equity ratio on the sp500 averaged at about one over 2007. the tax deductibility of interest makes debt financing particularly attractive vis-a-vis equity. look at the numbers on equity buy-backs in the past years. management certainly have had an interest in raising share prices, and maintaining eps in order to maximize their option-rich remuneration packages.
Published: January 25, 2008 10:30 PM
following up on kevin carson's comment - what about the power of the institutional shareholders? the individual stockholders are marginal players, but i would argue that the management largely follows what the institutional stockholders dictate. management that doesn't deliver on wall st's dictates is out of the executive suite quicksmart. if wall st is happy, then management enjoys quite a degree of leeway, but is constrained by objective limits set down in the loan covenants.
Published: January 25, 2008 11:29 PM
Yes, Kevin is right that major public companies are really run by an oligopolistic management looking out for their own interests, at the expense of weak shareholders. And yes, government plays a big part in that - Sarbanes-Oxley is the latest example.
The CSR movement might have the effect of giving managment greater discretion, but I suspect that part of it is simply good PR that recognizes that when corporations become big they become more susceptible, not merely to the whims of governments around the world, but also to coordinated pressure from perfectly legitimate groups of consumers. By smoothing relations with other actors in its environment, CSR can HELP a firm to maintain or improve profitability.
We should not forget that corporations are also associations of PEOPLE whose views and aspirations it behooves management to acknowledge and foster or assuage. CSR may serve to help keep employees happy and in accord.
Finally, while Abel notes that large corporations have external effects, CSR is not so much being forced on them from the outside as a reaction to the violation of property rights of others as it is being VOLUNTARILY adopted, not merely to forestall litigation or regulation (which is a possible factor) but also as a collective action by industry to control externalities that management (like other employees) are concerned about. Management are people too.
Such collective action across firms in the face of externalities may indeed be preferable to waiting for governments around the world to pass laws (with concomitant rent-seeking and -gate-keeping). Why bemoan that firms self-regulate? And there are certainly are real problems with externalities, especially in developing countries that lack clear property rights and rule of law, and in the oceans, atmospher and trans-boundary resources.
Published: January 25, 2008 11:33 PM
to mises.org:
now i've fallen into the "comments" echo-chamber. when i post i get an error message. resubmit, same thing.
the key-slapping slippard doesn't only strike in solla sollew. i'm off to the city boola boo ball, where they never have troubles! no troubles at all!
Published: January 25, 2008 11:43 PM
says tokyo tom:
"By smoothing relations with other actors in its environment, CSR can HELP a firm to maintain or improve profitability."
this is just your personal opinion, i happen to disagree and think it's a very slippery slope. the self-regulation aspect says nothing about whether csr is harmful or otherwise. i think it advertises moral uncertainty on the part of the management, and invites further shake-downs (either by new "stakeholders", or the government which has a fine nose for this). throwing meat to the wolves, as peter found out, doesn't send them packing.
charity is only genuine if the money comes directly from the giver's pocket.
Published: January 26, 2008 1:22 AM
Kevin: "The irony is that some of your own bloggers (e.g. Stephan Kinsella) have been forced to retreat from the myth of the shareholders as "owners,"..."
It's not a myth. It's a unique form of ownership. The holder of a share of stock owns that share without a doubt, and he owns certain rights attached to that share. But the ownership isn't exactly like full ownership in a sole proprietorship in every way, because the owner in a sole proprietorship has unlimited liability. By purchasing a share of stock, the owner of that share traded some aspects of full ownership, such as direct control over management of the corporation, for limited liability.
There is no other form or ownership like ownership of a corporation, but renting might be a rough analogy. In exchange for the rent money, the owner of the property gives up a few of his rights over the property to the renter.
Carson is right about the way corporations behave and the limited control that shareholders have over how management operates. But the founders of corporations designed them to be exactly that way, ie, to limit control over management by stock holders in exchange for limited liability. What's so strange about that?
TT: "By smoothing relations with other actors in its environment, CSR can HELP a firm to maintain or improve profitability."
As newson pointed out, smoothing relations with stakeholders is just good PR and most companies have always done that. That's not the goal of CSR. Promoters of CSR want to nationalize industry through the back door. They may be socialists or just communitarians who have been duped into think a third way is better, but they all want to use corporations to implement their utopian vision of society. But in the process, they have to trample on the small shred of property rights we have left.
It may seem like a small and harmless thing to force all corporations to do what most corporations do anyway--consider the effects on stakeholders of decisions. But socialists of all kinds are very adept at using incremental victories to achieve their ends. All of the socialist programs the US has today started out the same way. Like social security or the income tax, they were originally designed as very small steps toward alleviating an specific, small problem. But over time, socialists have been able to add to their first small victory many more small victories until we have the behemoth of the socialist state the we endure today. And if you visit the web sites of the socialist parties, you'll find that they have chosen incrementalism as their strategy because they know they can't implement full-blown socialism today.
How can lovers of freedom battle socialist incrementalism? We have to follow a similar strategy and take pride in small victories, suffer over small defeats. We can't be like so many who refuse to take a slice of bread if they can't have the whole loaf.
Published: January 26, 2008 8:56 AM
newson: i think [CSR] advertises moral uncertainty on the part of the management, and invites further shake-downs (either by new "stakeholders", or the government which has a fine nose for this). throwing meat to the wolves, as peter found out, doesn't send them packing.
Perhaps, but no one is forcing firms to join the CSR movement, and management, employees, shareholders, consumers and suppliers will bear the consequences. Firms that do so do for varioues reasons. Feel free to disagree with them, and to generate whatever pressure you like. (I think anti-warmer Steve Milloy has an activist group that counters CSR pressure.) But those who generate pressure, and those who cave to it or coopt it for their own purposes, are free to do so, especially given shareholder quiescence.
Let's just not pretend that any of what concerns you violates core Austrian principles. What could be more accpetable than voluntary cooperation to align behavior to shared goals?
Published: January 28, 2008 2:15 AM
Parrotocracy,
I've advocated employee takeover in essentially the same circumstances Rothbard did in "Confiscation and the Homestead Principle," but I agree there are practical problems with its implementation. In practice, by the time the state capitalist system reaches its final crises, I expect the situation will be much closer to the Argentinian situation: workers simply taking over bankrupt and abandoned enterprises to keep them going. The main purpose of Rothbardian homestead rights, in that situation, will be after the fact: in case the former owners try to walk back in once they're operating in black ink (which also happened in Argentina).
Newson,
On the specific issue of debt-equity ratios, my authority was a Martin Hellwig article from back in 2000: "On the Economics and Politics of Corporate Finance and Corporate Control," in Xavier Vives, ed., Corporate Governance: Theoretical and Empirical Perspectives (Cambridge: Cambridge University Press, 2000).
What he actually said, I found on rereading the original quote, was that corporate management minimizes its reliance on outside finance by financing new investment first of all through retained earnings, then through debt, and through new share issues only as a last resort.
I suspect a lot of the discrepancy reflects that Hellwig was writing about bond issues primarily for financing internal capital investments, whereas most of the high debt loads you mention probably come from financing mergers and acquisitions. In any case, the outside influence from debt ownership is considerably less than that from equity ownership.
Regarding institutional shareholders, institutional stock ownership is often nearly as dispersed as ownership by individual shareholders. According to Henry Hansmann (The Ownership of Enterprise, 1996), GM's top five institutional shareholders together own only six percent of stock.
fundamentalist,
Nobody disputes that the shareholder's ownership of that share is real, in and of itself. The question is whether it signifies a share in real ownership of the firm. It's a very "unique form of ownership" indeed, when all the capital assets of a corporation are the property of a separate legal entity, and not controlled severally or collectively by the actual shareholders. Likewise, when the management is not obligated to issue a dividend.
Either shareholders are owners or they are not. If they are, then they are obligated to exercise reasonable diligence in exercising oversight of their managers, and to assume responsibility for the latters' tortious or criminal acts when they do not exercise such oversight. The in-between state of affairs that exists was certainly created on purpose, as you say. The purpose was to create a hybrid legal status with all the benefits of ownership, and none of the responsibilities. To the extent that the threat of shareholder capital flight is real, it means that shareholders are in a position of "plausible deniability": "I'll take my money elsewhere if you don't maximize profit by any means necessary, but I DON'T WANT TO KNOW how you do it." In other words, will no one rid me of this turbulent priest?
Published: January 28, 2008 11:56 AM
Kevin: "Either shareholders are owners or they are not."
Only by insisting on an absolute dichotomy like this can your argument stand, and that's a perfect example of attempting to define the terms of the debate in such a way that your side automatically wins. In reality, stock ownership is a third option, partial ownership and neither of the dichotomies you insist on.
Kevin: "The in-between state of affairs that exists was certainly created on purpose, as you say. The purpose was to create a hybrid legal status with all the benefits of ownership, and none of the responsibilities. "
Not quite accurate. The hybrid status does not have "all of the benefits of ownership" chief among which are decision-making authority, including decisions of how much of the profit to distribute among share holders. These benefits were given up in exchange for limited liability. For example, a stock holder might be a far superior manager to the ones in place, but that stock holder can't direct the company as he would see fit. Nor can that stockholder determine how much of profits he will take home and consume; he must submit to management's decisions regarding dividends.
On the other hand, the stock holder suffers from management's poor decisions because they affect the value of his share.
Published: January 28, 2008 12:34 PM
Fundamentalist, Kevin Carson is not denying that a hybrid is there; he is narrowing down what that means. It's not an artificial dichotomy to put complete ownership in one pile and everything else in another - he is sorting things out, and this is just one stage in that sorting out.
To clarify some confusions you just put in:-
- There is no inconsistency between "The purpose was to create a hybrid legal status with all the benefits of ownership, and none of the responsibilities" [emphasis added] and 'The hybrid status does not have "all of the benefits of ownership"' [emphasis added]; they can both be true if it failed in its purpose (in fact it succeeds to a large extent in practical and legal terms, but not completely, and does not affect the moral issues).
- 'The hybrid status does not have "all of the benefits of ownership" chief among which are decision-making authority, including decisions of how much of the profit to distribute among share holders' isn't separating out benefits and costs; the decision making authority is not a benefit in itself, or a cost in itself, but it confers certain benefits and imposes certain costs.
- "These benefits were given up in exchange for limited liability" is asserting what it is sought to prove. Certainly, the legal system says that this is so, but that is no answer if the question is a moral one about abdication of responsibility. Neither does it answer the moral question if you point out accurately that it is physically possible to walk away from responsibility.
- "For example, a stock holder might be a far superior manager to the ones in place, but that stock holder can't direct the company as he would see fit. Nor can that stockholder determine how much of profits he will take home and consume; he must submit to management's decisions regarding dividends.'" This is misleading to the point of false in two respects, that such a stockholder is in a good position to get on the board and do those things; and that retained value that is not released as dividends shows up in the share price, and the stockholder can cash in on that or use it as collateral or whatever - he is not constrained to wait for any actual dividends, provided only that dividends do eventually come out and wind back the capital gains to pay everything off.
As I have mentioned elsewhere, the moral issue does not work for corporate structures because of third parties. When stockholders enable managements and then the latter do harmful things to people who never had the chance to agree to waive any comeback - that is, to people who aren't simply doing transactions with the firm - then the moral (as opposed to legal) blame still sheets home to the stockholders as well. For instance, if someone invests in Halliburton, the contractual stuff morally frees the stockholder from any comeback from the US government - but not from Iraqis. But of course the law says otherwise, and so does brute force - but they don't determine the ethics of this.
Published: January 28, 2008 8:00 PM
Fundamentalist, this is a strawman: "It may seem like a small and harmless thing to force all corporations to do what most corporations do anyway--consider the effects on stakeholders of decisions", as in the CSR movement no one is forcing corporations to do anything. Rather, firms that adopt CSR principles and approaches have a range of motivations for doing so, including quite legitimate pressures from the marketplace, other actors and the real world. Presumably competion and investors serve as a check of firms from going overboard.
You might not like it, but "socialism" it ain't. But if you're interested in a cleaner form of capitalism with less public pressure on individual firms, one way to get there might be pushing for changes to incorporation laws that leaves eliminates the risk-shifting, externality-creating subsidy that is limited liability for shareholders.
Published: January 28, 2008 9:57 PM
Hi guys. Thanks for your comments on this article (those of you who were polite!). There are a few discussion topics that have come up that I would like to reply to.
On stakeholder interests
To be clear, there is nothing wrong with corporate managers considering the interests, desires and actions of employees, suppliers, government agencies, NGOs, community members, etc. Indeed, a business enterprise could not survive if corporate managers had no consideration for these matters. This is perfectly legitimate so long as it is done with a view to satisfying the desires of shareholders as the objective (so long as these desires do not breach the non-aggression principles of course). In the case where the corporation is a commercial business, formed to profit shareholders, consideration of outside interests should be undertaken with a view to maximising profits. The fundamental principle of shareholder primacy is that the interests of shareholders should not be sacrificed to the interests of others.
While shareholder primacy does not necessarily prohibit charitable donations by profit maximising businesses (since this could, in principle, generate more business, or otherwise profit the company) or other benevolent acts, I must say that I am very sceptical of charitable gifts made by corporate managers with company money. In my view these are more often done to make corporate managers feel good, than to improve the profitability of the company.
On limited liability and the corporate form
Much of this discussion appears to be about the legitimacy or non-legitimacy of limited liability, a subject which is an important question but which was beyond the scope of my article. Arguments against limited liability are just that – arguments against limited liability. They are not an argument against the existence of corporations per se and they are not an argument against shareholder ownership of corporations.
The defining characteristic of a corporation is that it is regarded as a separate legal entity under law (i.e. it is treated as having a separate legal personality from its members), unlike other business associations such as partnerships. Since a corporation is not a conscious entity, this is always a legal fiction, and is recognised as such in corporate law. Thus, the doctrine of separate legal personality can only be legitimate if it mimics arrangements that could be legitimately made between individuals. Whether or not this is the case with existing corporate law is an important and interesting question, but again was beyond the scope of the current article.
The doctrine of separate legal personality simplifies the administration of large business entities which would be administratively cumbersome in the form of partnerships or contractual business associations. The corporate form can, in principle, exist with or without limited liability (although under current corporate law, most corporations are indeed regarded as limited liability organisations). Whether or not limited liability should or should not apply to such entities is a subject appropriate for another article.
However, even if one were to grant the argument that the corporate form is an illegitimate creation of the State, or that it is granted illegitimate special privileges such as limited liability to shareholders, this could hardly be an argument in favour of the stakeholder theory of CSR — rather, it would be an argument against the existence of the corporation or against the special privileges. If this is the case, then one should seek to advocate the repeal of this corporate form or of these special privileges. One should not seek to compound one folly with another — if corporations are illegitimate privileged entities per se, then surely they are even worse when under the de facto control of the State, with wide and arbitrary powers granted to corporate managers to entrench their own power.
To Kevin Carson: The level of ‘dependence’ of a corporation on various different means of finance is irrelevant to the question of ownership. Ownership is determined by the rules of property homesteading and transfer, not on the basis of how dependant a corporation is on a person, loan, or whatever. Similarly, the importance to the corporation of human and organizational capital relative to physical capital is irrelevant to the question of ownership. The mere fact that workers or others are important to the corporation does not give them a legitimate claim to ownership.
Your statement that shareholder ownership is a myth and that “[t]he corporation is an agglomeration of unowned capital controlled by a self-perpetuating managerial oligarchy” is a contradiction in terms. Ownership is the prerogative to control (other than control delegated by another owner) and thus, “capital controlled by a self-perpetuating managerial oligarchy” is in reality owned by that managerial oligarchy. If you wish to avoid a “self-perpetuating managerial oligarchy” then it is precisely the prerogatives of shareholder ownership which must be upheld. Whether or not this is done ‘in practice’ is irrelevant as the article is a normative, not a descriptive work. Parrotocracy quite rightly observes that “[i]t seems you are a advocating for a form of employee takeover to remedy what you are claiming (empirically) is the orchestrated destruction of property right by the collusion of government and corporate management.” In my view, this is a bad idea.
To Paul Wakfer: You ask “When I decide to live in certain area and raise my family there, is it to be merely a matter of chance, whether or not the area will change, from the reasons that I chose it, into an area where my purposes for being there can no longer be satisfied?” I would not characterize the market as ‘chance’, but to be clear, there is no such thing as a ‘right’ to have one’s neighbourhood remain satisfactory to your lifestyle.
The free market reacts to the desires of consumers. Thus, fears that a brothel will move in next door to a primary school or your grandmother’s house (to give an example) are exaggerated. Moreover, there is a great deal that a person can legitimately do to exert consumer pressure on a business organisation that offends against his views. He can refrain from buying and can encourage others to do so. He can exert moral pressure on the business and its customers through non-violent means. I would ask you the converse question: What if your chosen use of your own property means that the purposes for your neighbours being there are no longer satisfied? What action should they legitimately be able to take against you?
Thanks everyone for your comments.
Published: January 30, 2008 3:41 AM
Ben, it seems to me that you are saying that as a legal matter corporations are owned by their shareholders (and ought to be), while Kevin is making the point that, de facto, large public corporations are NOT effectively owned by their shareholders, in that while shareholders have formal indicia of ownership, there are numerous difficulties that essentially leave control with an entrenched management that is concerned primarily with securing its own interests. Shareholders basically are able to vote only with their feet, and the only real checks on management are the pressures of competition, consumers, suppliers, lenders, capital markets, employees, and laws.
While you decry "calls for legal recognition of stakeholder interests in private companies" as "not merely a manifestation of fascism ... [but] — they are an ambitious attempt to entirely socialize the means of production by arrogating the prerogatives of ownership to the government", you are largely attacking a strawman (calls for legal recognition of stakeholder interests get little traction), while the barn door was opened long ago and the horses out and their attempts to plunder the company largely unrestrained by shareholders.
You extensively note that CSR will further weaken management accountability to shareholders, but while railing at the supposed socialization of corporations only in passing note that such weakened accountability plays right into the hands of managers who desire greater freedom from shareholders.
If you wish to put the horses back in the barn, perhaps you might wish to look to the negative role played by burdensome and intrusive federal securities regulation ( not the least of which is Sarbanes -Oxley) and as well to criticize lazy shareholders and cupidous management.
Surely it is not surprising that there are various "stakeholder" groups out there who wish to have more influence over these firms, which are so little controlled by their shareholders and yet play such large roles as rent-seekers. I take it that you do not criticize them, per se.
Published: January 30, 2008 10:38 PM
I first want to sincerely thank Ben for his reply, since so many authors of articles at this and other websites with comment ability do not respond to comments.
However, it appears that Ben did not realize that the text of mine that he quoted:
“When I decide to live in certain area and raise my family there, is it to be merely a matter of chance, whether or not the area will change, from the reasons that I chose it, into an area where my purposes for being there can no longer be satisfied?”
was not something for which I wanted or needed an answer (I already have a complete solution worked out) but was merely a rhetorical question posed as an example of a reasonable comeback by many of the unconverted to Ben's neighborhood example, which text also relied on the surrounding text for completeness. Here is the full item again, making it clear that my text was as I have described it, and to which Ben has certainly not replied.
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[Ben's good example] will be immediately labeled as impractical by vast numbers of people who ask the simple and reasonable questions:
1) By what current non-government mechanism do I prevent the opening of a store in my neighborhood which promotes "more people visit my neighborhood" or offers "products or services" that I find "to be repugnant"? When I decide to live in certain area and raise my family there, is it to be merely a matter of chance, whether or not the area will change, from the reasons that I chose it, into an area where my purposes for being there can no longer be satisfied? By what non-government methods can I ensure that the physical environment of my property purchase will not deteriorate in this manner?
2) If there have been no mechanisms in place to prevent such negative occurrences at the time that I decide to live in a neighborhood, by what current organized non-government methods can I influence the reduction/elimination of such negative occurrences after they have started to appear?
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Furthermore, my questions from the general unconverted public posed above, were only a prelude to my main argument that praxeology, as applied by Mises and currently being promoted by his followers, is still an incomplete system because it does not fully address the meaning of profit within the full context of all human value. Applying this to Ben's article I ended my previous comment with the statement:
"With respect to the current article, the entire reason why the practice of "the corporate manager [being given] given wide scope to determine the identity and importance of the stakeholders who he will work for" has arisen is precisely because there are no organized methods to implement a fully complete profit motive instead of one that deals merely with money and consumers."
Unfortunately, this major comment remains unaddressed at this time.
Published: February 2, 2008 1:14 AM