Don’t forget the many virtues of shareholder capitalism

Even as Europe hounds America’s tech titans, it strives to build its own

Do critics of “shareholder capitalism” — capitalism of the sort currently practiced by all those CEOs who are now promising to focus more on “essential stakeholders” — have a problem with the shareholder part or the capitalism part? Their core critique is based on a cynical and wrongheaded view about how market economies work. They seemingly see the world of business as a fundamentally grubby one where greedy corporate executives crush workers, mislead consumers, cheat suppliers, and devastate communities in pursuit of maximizing the company’s share price.

Any heroes in this dystopian reality? Maybe mom-and-pop retailers in small towns and bodega owners in big cities. And Patagonia.

Perhaps this apparently fundamental dislike of commercial society prevents some critics from learning deeply about it. Too many might not know that the explicit “shareholder value” movement came as corrective response to a brand of unaccountable “managerial capitalism” that helped leave too much of Corporate America stagnant and uncompetitive by the mid-1970s. Shareholder capitalism put the focus back on the interests of the owners.

But here’s the twist, which gets at another thing proponents of “stakeholder capitalism” misunderstand: The interests of the owners are served over the long term by ethical behavior. Investor Cliff Asness: “If the stock price is indeed the long-term value of the company, then things like treating customers well, compensating employees fairly, etc., are likely vital parts of maximizing the stock price.”

Good corporate behavior that doesn’t damage key relationships is generally rewarded by the stock market. I recently noted in The Week that Fortune magazine annually compiles a list of the “best companies to work for” that takes into account worker and customer satisfaction. And that group of companies has handily beaten the broader stock market for nearly two decades. As I just wrote for The Week, “it really does seem to be the case that treating customers well and compensating employees fairly is a great way to maximize returns for shareholders.”

An unsurprising result if you start from the premise that a business-loving society is full of virtue. Economist Deirdre McCloskey has written of such virtues, including:

… the Prudence to buy low and sell high …  to trade rather than to invade, to calculate the consequences, to pursue the good with competence … the Temperance to save and accumulate, of course. But it is also the temperance to educate oneself in business and in life, to listen to the customer, to resist the temptations to cheat, to ask quietly whether there might be a compromise here … the Justice to insist on private property honestly acquired. But it is also the justice to pay willingly for good work, to honor labor, to break down privilege, to value people for what they can do rather than for who they are, to view success without envy … the Courage to venture on new ways of business. But it is also the courage to overcome the fear of change, to bear defeat unto bankruptcy, to be courteous to new ideas, to wake up next morning and face fresh work with cheer … the Love to take care of one’s own, yes. But it is also a bourgeois love to care for employees and partners and colleagues and customers and fellow citizens, to wish all of humankind well, to seek God, finding human and transcendent connection in the marketplace …  the Faith to honor one’s community of business. But it is also the faith to build monuments to the glorious past, to sustain traditions of commerce, of learning, of religion, finding identity in Amsterdam and Chicago and Osaka … the Hope to imagine a better machine. But it is also the hope to see the future as something other than stagnation or eternal recurrence, to infuse the day’s work with a purpose, seeing one’s labor as a glorious calling…

Anyway there really is no alternative. As business journalist Hugo Dixon has written:

Part of the attraction of the stakeholder theory is that it sounds fair. As such, it has particular appeal among these on the center-left of politics. The stakeholder model seems a happy compromise between shareholder capitalism and Marxist philosophy. The main problem is that stakeholder theory is fuzzy. If companies are accountable to multiple stakeholders, they can all too easily end up being accountable to none. Ironically, this is why some managers rather like it. Merely telling them to strike a balance between the different interest groups leaves them wide discretion. Unfortunately, lack of clarity over what a company is supposed to be doing can sap it of dynamism. And ultimately, that is not just bad for shareholders but also bad for companies and, by extension, entire economies.

Economies like those in Europe, where stakeholder theory hold more sway, provide a poor model for America. (And this includes Scandinavia.) Of the 50 most valuable public companies in the world, only a handful are headquartered in Europe. Perhaps those economies could use a bit more virtue.


Even as Europe hounds America’s tech titans, it strives to build its own

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James Pethokoukis, a columnist and policy analyst, is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog.

Before joining AEI, he was the Washington columnist for Reuters “Breakingviews,” the opinion and commentary wing of Thomson Reuters, and the business editor and economics columnist for US News & World Report.


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