An interesting piece about “stakeholders” and how the theory flies in the face of a LOT of reality.
Excerpt below. Original article appeared in City Journal, Spring 2021.
Profits, Not Causes
The enduring wisdom of shareholder primacy
Allison Schrager
A few years ago, at a risk-management conference for big-wave surfers, I witnessed a heated debate over the latest innovation: an inflatable vest that could prevent drowning if a surfer wiped out. The vest was a technological marvel that had taken years to develop. Two vendors made the product: Patagonia, which made a black vest; and Quiksilver, which made a red one.
The crux of the debate was that inexperienced surfers who used the vest might feel emboldened to take undue risks, harming themselves and potentially others. Patagonia’s announcement that it would sell the vest only to experienced surfers brought lots of closed-eye head-nodding among the tanned, fit, and flip-flop-wearing surfers. That crowd fiercely disapproved of Quiksilver, which said that it would restrict the number of stores carrying its vest but would be more liberal about whom it would sell to. One well-known surfer said to me, “You see these guys out there on the waves in the red vests—they don’t belong there. . . . Quiksilver is just about making money.”
I later spoke with a Quiksilver executive who winced when I told him this story. He pointed out that his company is not a charity and had spent years and many resources developing the vest. “Besides,” he said, “are we going to not sell something that can save someone’s life?”
Patagonia is a privately owned company; its owner is entitled to sell to whomever he pleases. Quiksilver is a publicly-traded company that, in theory, anyway, should be primarily concerned with maximizing profits for its shareholders. But this principle—shareholder primacy—is undergoing a rethink in the business world.
Early corporations in America, mostly privately owned, carried out public works projects and were seen as serving the community. But as the industrial era progressed, publicly held corporations began to dominate the private sector. When the manager is also the owner, it’s clear whom he is accountable to: himself. But when a firm employs many people in a community, produces products or services everyone uses, and is owned by many people with no management role or liability, it’s not so obvious whose interests the corporation should serve. Fifty-one years ago, Milton Friedman made the case in the New York Times Magazine that it was the owners—namely, the shareholders—who have a residual claim on a publicly-traded company’s profits.
Friedman argued that shareholder primacy benefits not just the corporation but all of society. When corporate management pursues social objectives other than profit maximization, it is spending other people’s money. The corporate officer who does not pursue profit in effect imposes a tax on shareholders and customers, even though he was not elected to do so and often has no special skills or knowledge when it comes to discerning the common good. Author and biotech entrepreneur Vivek Ramaswamy has questioned why shareholders should subsidize CEOs’ personal brand-building. Friedman went even further, arguing that the alternatives to profit maximization are a slippery slope to socialism.
Read the full article here.
