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Why “Stakeholder Capitalism” Is a Disaster for Entrepreneurs

During the 1990s there was a legal and philosophical idea, championed by Milton Friedman among others, that a corporation exists to serve the interests of the shareholders, being that they are the rightful owners of the corporation. Progressive thought leaders responded with the countertheory of stakeholder capitalism. Under stakeholder theory the shareholders have a stake in the success of the firm, but the firm also has a competing obligation to other entities deemed “stakeholders.” Stakeholders are employees, customers, suppliers, and the community. While this theory is presented as a commonsense truism, it has one specific foundational flaw: it dilutes and undermines the principle of private property.

To own a thing in principle is to have control over its use. An owner of a company, in a market system, has ultimate discretion over and responsibility for how the assets of the company are used. In a joint-stock company, the decision-making is shared by the various owners of shares. But in stakeholder capitalism, all of the stakeholders have influence in company decisions. Therefore, stakeholders are de facto joint owners of the corporation, and advocates of stakeholder capitalism would seek to make this ownership a legal reality.

When stakeholder capitalism is expounded by its advocates, it’s easy to believe that it is not as much a social theory as simply good advice. Businesses seek to develop mutually beneficial relationships that will last into the long term. As a means to that end, it is good business practice to maximize the contentedness of your employees, deal honestly with your suppliers, survey the needs of your customers, and keep a good image in the community. However, stakeholder capitalism goes beyond good practice by putting government power on the side of the stakeholders.

We can see what the joint ownership of stakeholders looks like in practice. For employee stakeholders, control would mean union representation on the corporate board. For supplier stakeholders, industry oversight associations would oversee contracts, making them impossibly difficult to terminate while outlawing any market choice. Customers would be represented by consumer protection bureaus. And community stakeholders would mean democratic approval of business actions by government committees.

While in the free market stakeholders vote directly with their dollars, in stakeholder capitalism the nominal stakeholders never exercise their ownership stake directly. Rather they are represented indirectly or bureaucrats are imbued with the authority to interpret their desires. The driving force behind the stakeholder capitalism philosophy is precisely that it creates opportunities for political actors to assert disproportionate control over the economy’s resources. Rather than create real wealth for society, politicians and bureaucrats use their social ownership of companies to extort economic resources for their purposes.

In such an environment, entrepreneurial decisions are reduced to a political process. The entrepreneur is made impotent to improve the status quo, because any intrepid decision will be vetoed by political stakeholders who fear to lose. Prices can never rise. Wage rates must always rise. Risk must be averted. Nothing must be allowed that would inconvenience the community or make anyone uncomfortable.

Recently, the most dangerous aspect of stakeholder capitalism has been its amalgamation with the climate change agenda. Any minute decision a business makes will infinitesimally affect the climate for people all over the globe. Therefore, the concept of a community stakeholder is expanded to the entire world, eliminating individual and local sovereignty. Under a climate change regime, decisions as small as remodeling an office building will be as politically charged as the ongoing Keystone Pipeline fiasco.

Clearly, many of the principles of stakeholder capitalism have been implemented in different ways for a long time, including politicized unions, regulatory schemes, and extortion of campaign contributions. But the threat to private property has also worsened in the US in recent years. In particular, politicians openly extort corporations with the threat of targeted regulation, like the Big Tech companies are facing over fake news and censorship. Socialist bureaucracies have unaccountable authority to investigate and persecute businesses, like suing petroleum companies for vague climate change damages. Large investment firms use their customers’ accounts as leverage to push politically driven reforms that are not in the financial interest of the account holders, like divesting from fossil fuels. Not to mention corporate leaders are swarming to affirm every social justice fad.

We cannot take for granted that the heart of a peaceful and prosperous economic system is respect for private ownership of property by individuals. Private property rights need to be strictly delineated in an objective and absolute way. When ownership of property is shared with “society,” as in stakeholder capitalism, there will be inexorable conflict. Because stakeholder capitalism is built on a collectivist version of property rights, free market advocates should fully denounce it.