Trade Practices: Blog

  • Stakeholder Theory

    Posted by
    David Morris
    Monday
    8/13/2012

    Shareholder value theory: companies exist to make money for their shareholders. See: Milton Friedman, 1970: “The Social Responsibility of Business is to Increase its Profits.”

    In the opinion of Jack Welch, former head of GE:
    Strictly speaking, shareholder value is the dumbest idea in the world.

    Stakeholder value theory: companies exist for the benefit of their customers, workers, and communities. The US economy between the New Deal and the 1970s was a version of stakeholder capitalism, in which the gains from superior growth were shared with workers, CEOs were moderately paid, and the rich engrossed far less of the economy. In today’s markets especially, the “shareholder” is increasingly abstracted (computers buying and selling, shareholders who don’t even know the companies they’ve invested in, etc.) and often “the short term value” becomes a stand-in for “the shareholder’s wants/needs.” This shareholder/short-term focus has a tendency to steer wealth toward CEOs and the shareholders at the expense of everybody else.

    Movements emphasizing other types of successful performance — the triple bottom line concept (TBL), for one, and “patient capital” (the monetary equivalent to slow food) — are pushing the US economy to adopt a more stakeholder-oriented focus.
    Kenneth Mason, then-president of Quaker Oats in 1979 said:
    Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life’s purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit.
     

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