Stakeholders Versus Shareholders

Several people who regularly comment on this blog are extremely critical of capitalism. That’s understandable, given the distorted version currently practiced in the U.S., but I would caution that broad-brush diatribes against a market economy and calls to abolish the entire system are misplaced.

The culprits that have led to what we actually have–a “system” more accurately described as “corporatism” or “crony capitalism” are twofold: a lack of understanding of  where markets work and where they don’t–and public policies based both on that misunderstanding and on the outsized influence of monied interests.

A good deal has been written about the lax enforcement of anti-trust laws, and the concentration of economic power, but there has been less attention paid to structural problems that provide perverse incentives.

Earlier this month, Elizabeth Warren introduced a bill intended to address those problems. Titled The Accountable Capitalism Act, Warren’s plan “starts from the premise that corporations that claim the legal rights of personhood should be legally required to accept the moral obligations of personhood.” Warren has described herself as a “huge” proponent of capitalism, whose goal is to make the system work properly for all stakeholders.

And “stakeholder” is the operative word.

Shareholder primacy—the belief that everything a corporation does must be for the benefit of shareholders (who should extract as much wealth from the company as possible) and no one else—is the dominant legal framework operating within firms today…. Ignoring the contributions of all stakeholders to corporate success, the shareholder primacy model has driven the deep-rooted economic inequality that we live with in America today.

The linked discussion from the Roosevelt Institute traces the origin of this focus on shareholders to the detriment of others who have important interests in the operation and health of the corporation.

Part of the problem is that in the U.S., states charter corporations. As any corporate lawyer will confirm, larger enterprises “shop” for states in which to incorporate by looking to see which states have laws that are most beneficial (i.e., least restrictive). States woo new businesses, and so corporate law has become a race to the bottom (which is Delaware).

Warren’s bill would require large corporations–those with revenues over one billion– to be chartered by the federal government.

Under current law, corporate boards are elected by, and represent, shareholders. The consequences are predictable:

Board members who want to hold onto their seats are going to do what they can to please short-term oriented shareholders. And chief executives are now largely compensated in ways that are tied to the price of shares, so they have an additional incentive to steer the board towards decisions that push up short-term share prices. The existing shareholder primacy model means that boards focus too much on increasing their share price. That’s why Goldman Sachs estimated that American corporations are on track to spend $1 trillion dollars in 2018 on stock buybacks,essentially propping up the entire stock market by repurchasing their own stock.

Stakeholder governance would recognize that many different groups contribute to a corporation’s success. Employees, customers, even the public, have a stake in that success along with the shareholders, and they all should play some role in the corporation’s decision-making, as they do in a number of other countries.

This means that employees have real representation on corporate boards, so that decision-making is shared among stakeholders, instead of shareholders electing all board members. Accountability to stakeholders also means that the board has to consider all of the company’s stakeholders when making decisions, including customers, suppliers, and the broader public.

The focus on shareholder returns to the exclusion of all else hasn’t always been a part of corporate behavior, as Vox points out. That single-minded focus has come to mean that

for executives to set aside shareholder profits in pursuit of some other goal like environmental protection, racial justice, community stability, or simple common decency would be a form of theft. If reformulating your product to be more addictive or less healthy increases sales, then it’s not only permissible but actually required to do so. If closing a profitable plant and outsourcing the work to a low-wage country could make your company even more profitable, then it’s the right thing to do.

There is nothing about market competition that requires government to allow rapacious business behaviors. For that matter, markets only work properly when government works properly– insuring a level playing field and requiring obedience to laws and regulations.

When government fails to work, capitalism devolves into what we see around us.


  1. I believe that in Germany, labor unions are represented on the boards of directors of corporations. That puts stakeholders on somewhat of an equal level as the shareholders. And I don’t believe that the executives of German companies get the kind of compensation that seems to be common here. Perhaps that is due to the overall culture, or perhaps due to the makeup of the boards of directors. Putting stakeholders on the boards will be criticized by the right-wing as Socialism, because few on the right know the difference between full-blown Socialism and the Social-Democratic systems in Europe.

  2. Wow! Elizabeth Warren has introduced The Accountable Capitalism Act. And she introduced this bill in a legislative body that has been bought by the very capitalist she wants to reign in. Well, good luck with that , Honey.

  3. A market-driven economy pits Oligarchs against Oligarchs. We’ve allowed a concentration of massive wealth and that wealth is used to influence the government and free press. Meaning all four branches of government are corrupted. Period.

    FDR saved capitalism from itself. Warren has no chance in 2018 to do the same. The demand for the year over year “growth” has forced the planet and its inhabitants to produce more and more for the sake of profits for corporations.

    Furthermore, as Einstein noted in the 1950’s, the real evil of capitalism is what it does to the people spiritually. This spiritual disease which plagues our country is 100% due to unfettered free markets which are driven by Objectivism – the Ayn Rand theory which supports self-centeredness while dismissing collectivism.

    If you’re born on 3rd base, you love this game. If you’re batting or on deck, it’s not much fun. It’s like playing Monopoly with the guy who owns all the properties. What’s the point?

    At least we know where Warren stands now.

    We need an economy that serves both the collective and allows the individual to thrive. Democratic Socialism accounts for both. You’ll still have a marketplace but within carefully designed limits. A planned economy is not socialism.

    We have to serve both individualism and the collective because that’s who we are as human beings. We are completely out of balance which is why the people and our planet are crying out for help. For those without coping skills, they escape via bottle, drugs or just end it all as it seems hopeless.

    As Chris Hedges recently wrote, “Welcome to serfdom!”

  4. Sheila,

    You are correct in your opening statements about the anti-capitalists. They see capitalism the way it’s always wanted to be and has periodically behaved badly when regulations are removed. Each time they do this via circumventing decency and buying politicians, we get closer to the brink of collapse – See: “Racing to the Brink: The End Game for Race and Capitalism” by Vernon Turner.

    The egregious Citizens United v. FEC ruling by SCOTUS has enabled corporate mindsets to go for the short-term gold instead of preserving a just system of economics. This is what Marx talked about 170 years ago. Greed cannot learn because it is hard-wired into our survival DNA. Greed/hoarding is what allowed humans to survive hard times when the basics were scarce. Thus, the invention of economics.

    Yes, capitalism can work, but I don’t think having the Federal government charter corporations is the answer. Things like Taft-Hartley and McCain-Feingold and Glass-Steagall are the necessities to keep us from plunging off the cliff, a cliff of our own making.

  5. My attitude is that a capital driven market is necessary. We are IN the market big time, have been for many years. It is what allows growth of companies and a new Kohler engine to re-power my tractor! It has been so since ever and anon among human beings – we have traded among groups and devised items of value all along. It is the CAPITALISTS – those who try to manipulate government – those who try to manipulate society (which they have done very precisely since the end of WWII. Ike didn’t rail against capitalism, but the darker forces of greed, power-hunger, and inhumanity by ignorance. That in my mind is what he was referring to: people like donald j. trump and his ilk everywhere.

  6. I wish today’s blog post could be sent to all newspapers as a letter to the editor. The public really needs to be aware of this and you have covered it well in today’s post.

  7. I don’t understand why anyone would want to do anything that lends credence to the notion that corporations are people. I note that people do not have to be chartered by any state. I’d like to say they think therefore they are, but too many don’t think. Let’s just say they are born, therefore they are.

    The first lesson in MBA school is that the goal of corporations is to make money. MBA school fails to note that that mustn’t be the only goal.


  8. A great piece as usual Sheila!!

    The “Robber Barons” of 130 plus years ago would be extremely proud of their latter day counterparts both in terms of their ability to manipulate the government to meet their greedy needs as they have but also their success in subjugating the workforce of this country into what borders on being economic slavery. The government in its “oversight” role was intended to be a speed break on the excess of capitalism in this country as it is practiced but it is obvious, more than the obvious, that it was a pipe dream back then and an even bigger pipe dream right now. We have essentially grown accustomed to this since it’s an everyday occurrence and elsewhere around the world it is most often seen for what it really is, totally unbridled greed.

    I’m not a socialist but I am envious of the social democracies of Western Europe and how their citizens live with benefits that we should have here but, of course, we don’t.

  9. “Under current law, corporate boards are elected by, and represent, shareholders. The consequences are predictable:”

    Nowhere is this more evident than in every area of the current health care system; about 4 years ago the largest health care insurance corporation located here in Indianapolis, the CEO received an annual salary of $15 MILLION. What can any one person do that is worth that amount? Especially when approximately 2-3 months later more than 900 employees were “let go” because there weren’t enough profits to pay their salaries. Health care, especially regarding our “insurance coverage”, is all now corporation level business.

    How and when do we discern when it is “Stakeholders versus Shareholders” and when it is a Stakeholder/Shareholder situation? “If closing a profitable plant and outsourcing the work to a low-wage country could make your company even more profitable, then it’s the right thing to do.” Do we have any way of knowing if this practice is being used anywhere in our health care system…other than Big Pharma, of course. Hasn’t Eli Lilly outsourced some of its manufacturing facilities?

    I had my annual checkup yesterday; got an excellent report considering my age and physical condition. Also told that, at my age, it is necessary to get a shingles vaccination…but they don’t provide it in the I.U. Health Care system. Told to check my pharmacy; I researched the “necessity” and learned the very dangerous side effects of the vaccine plus the $200 or more cost…with two vaccines recommended. If this vaccine is a necessity for older people, why doesn’t I.U. Health Care/Methodist supply the vaccine…cost prohibitive even to them???

  10. I graduated with a Bachelors Degree with a Major in Finance in 1975, courtesy of the VA and State of Illinois which paid the tuition at a state school for Veterans. The young Econ teacher we had said rather bluntly the system is rigged. This was before the era of Junk Bonds and companies who cooked the books like Enron.

    A section of the Econ Book we used discussed “Interlocking Directorates” that is where members of the Boards of Directors and CEO’s served on the Boards of other companies. It was an exclusive club -You scratch my back, I scratch yours.

    Connections help, for instance Susan Bayh, from the Fort Wayne Journal Gazette – December 16, 2007 – Since leaving Indiana as a first lady, Susan Bayh has become a professional board member, earning more than $1 million a year in director fees for advice she gives to companies that make pharmaceuticals, operate radio stations, sell health insurance policies, offer online banking and distribute ingredients to fast-food restaurants.

    In the past four years, Bayh collected more than $1.7 million in pre-tax income when she exercised stock options from two of the corporations. Susan Bayh’s position as a director for eight businesses puts her in the league of “professional directors,” a term used to refer to people who sit on multiple corporate boards and are not otherwise employed.
    The compensation committee determined how much money the corporate CEO and others in the Corporate High Command would make. The infamous Golden Parachute was always made available to the High Corporate Command.

    Not surprisingly a small portion of Americans benefit from stock holder ownership. We Proles can receive some crumbs via 401K’s or IRA’s but only if you have the disposable income to fund these retirement programs.

    From Money-Time Magazine, which is not some Left Wing Socialist source:
    The Richest 10% of Americans Now Own 84% of All Stocks.
    The top 10% of American households, as defined by total wealth, now own 84% of all stocks in 2016, according to a recent paper by NYU economist Edward N. Wolff.

    “Despite the fact that almost half of all households owned stock shares either directly or indirectly through mutual funds, trusts, or various pension accounts, the richest 10% of households controlled 84% of the total value of these stocks in 2016,” Wolff writes.

    Furthermore, while virtually all (94%) of the very rich reported having significant stock holdings—as defined as $10,000 or more in shares—only 27% of the middle class did. (The study framed that middle class as the group between the poorest 20% and the richest 20% of Americans.)

    So where is middle-class wealth? Wolff finds that the majority of it remains tied to homes. That’s quite different from the wealth holdings of the very rich, whose assets are tied up in equities (whether as publicly held stocks or privately owned shares of businesses). For the richest Americans, a principal residence accounts for just 7.6% of their total wealth.
    This group the upper 10% and certainly the 1% were those that benefited the most from President Agent Orange’s and Pastor Pence’s tax plan.

  11. I can hear the shrieks and moans now- “The Democrats are going to NATIONALIZE General Motors! And Apple! And on and on and on!” of course, that’s distorted BS. What I see in the brief description is basically legislation that would impose a COSO model of enterprise risk management on large companies. That’s not a bad thing, but it makes organizations actually DO things. Auditable things. They’ll complain that it’s burdensome. But that’s also BS.

    And I’m reminded of conversations earlier this year with my 31-year old son, who currently resides in Montreal. Much anti-capitalist diatribe but a desire to make money. And when we listened to his examples of (functionally and ethically) good economic models, we told him it wasn’t so much that he hated capitalism as it was that he hated capitalism done badly.

  12. “The culprits that have led to what we actually have–a “system” more accurately described as “corporatism” or “crony capitalism” are twofold: a lack of understanding of where markets work and where they don’t–and public policies based both on that misunderstanding and on the outsized influence of monied interests.”

    Misunderstanding? Really? The culprits simply see government as theft and redistribution of their wealth.

    That’s why Theresa’s ” Well, good luck with that , Honey ” is spot on.

  13. I am one of those frequent critics of capitalism. However, the term I use is “unfettered” capitalism. Capitalism with restraints is purely a dog–eat–dog, winner take all game in which the losers are innumerable and the winners don’t care.

    Capitalism must be tempered with socialism, which creates the safety nets allowing the poor and the middle class and working poor to survive. Essentials must be regulated. Safety must be regulated, the market, corporations, health care must be regulated. Without regulations capitalism devolves into oligarchy, which is where we are now.

    They usual fate of oligarchies is revolution and overthrow and back to chaos.

    Theresa you hit the head, tho which I append, “Good luck to all of us.”

  14. I believe that in the last century there was much philosophying and experimenting going on around economic systems but a lot was done in attempts to disguise tyranny. That era is over and the winner is……a mixed economy of socialism and capitalism under a liberal democratic government. We also learned what I personally always thought was obvious, capitalism only works in markets where healthy competition can be maintained by regulation, otherwise socialism is a necessary replacement. Also that sustainable capitalism requires regulation to protects all stakeholders, workers, consumers, investors, and the environment and progressive taxation is necessary to correct the wealth redistribution inherent in capitalism.

    Also of course Warren is right. How can corporations be people without all of the ramifications of being a person?

    We have gotten away with our current broken system for as long as possible and all of these simple ideas have been proven beyond all doubt. Now they require fixing and the first move is ours – hire representatives to government who can and will, but first we have to rid DC of all those who can’t and won’t.

  15. Sheila Kennedy and all others here, education is always my primary goal in visiting, lurking, whatever you call my presence in the community of blogs, message boards, etc. that make me think and also give me the incentive to learn more.
    As one of you mentioned, this particular blog piece would be valuable placed in plain sight and even gracing the New York Times.
    As a partially educated person it never ceases to amaze me how much I don’t know and how much I will never know. But, in this space I can always count on learning something valuable. Now, Sheila I have a question for you:
    Do you use some of your blog materials in your teaching? And by the same token do your students inspire some of your topics?
    What a productive and satisfying life you live..To be able to teach and also to be a part of an online community. And who know what else probably.
    Anyway a lot of words to get to ‘thank you.’

  16. Oops! That should read, “capitalism without restraints” not “with” restraints. Otherwise my post is meaningless. Sorry.

  17. Maywin–Thanks for the kind words. As to your question, although I don’t use the text of blogs in my classes, nor do I present issues from a partisan/opinionated perspective as I often do on this blog, I do use the research and reading that I reference here in class discussions, and class discussions often trigger consideration of issues addressed here.

  18. This “enhancement of shareholder value” as a primary and now even fiduciary duty of corporate boards and executives is a fairly recent judicial finding, and ignores the interests of other actors in this economy dominated by corporations and their Wall Street financial hucksters. Other actors (workers, consumers, environmentalists et al.) have had some standing in determining what is going on since Adam Smith’s Wealth of Nations (and now, Joseph E. Stiglitz), but the courts have yielded to the rich and corporate class in picking winners and losers among all the actors in this economy, and they have decided in favor of shareholders – even with all the externalities created for the rest of us in our fielding of corporate enterprise and its financing.
    Parenthetically, Delaware is getting a run for its money lately in who can have the weakest corporate governance laws from Oklahoma, which wants some of that “home office” business Delaware has enjoyed for so long in the race to the bottom of who can govern weaker.
    Warren’s bill for federal chartering is a good idea but, of course, will fail, since Republicans, the Kochs, Mercers, GM, GE et al. aren’t having it, but it is a worthwhile endeavor in bringing this cesspool of corporate governance to public attention and may eventually succeed if Democrats gain power.
    This “enhancement of shareholder value” is, I think, a mistake, and leads to buyouts, more wage
    inequality (in order to make more profits available to shareholders), less consideration of the rights of other actors in this economy, etc. I have written several blogs on this “enhancement” issue and its effect on our economy (i.e., buybacks instead of re-investment, failure to raise wages to improve demand etc.), but such efforts are probably ignored by latter day capitalists, where increasing profits is numero uno and all other means of having an economy that fairly distributes its income and wealth to all is framed off as socialist whining though, as I often write, I am trying to save capitalism, if the capitalists will let me.

  19. I drove by Adam Smith’s house in Braemar, Scotland last week and thought about what he had wrought. He simply wouldn’t recognize the American version of capitalism.

    ML, et. al., who hit this nail on its head so solidly: What will happen to all those stinking rich stinkers who have their wealth tied up in the ultimate abstraction: money? What will happen to their “wealth” when the consumer classes are SO poor that they can no longer consume to keep these mindless rich “patriots” become richer? They don’t have all that much “stuff”, just electrons that represent money and wealth. Whatever will they do when all the islands are all bought up or subsumed by rising sea levels? There will be no place for them to go where their wealth, power and egos will matter. Their fate is sealed. They are not as smart as they’d like us to believe.

    I’m reminded of the story about the late owner of the Atlanta Falcons who suggested that the stadiums be built with gridirons criss-crossing on the field. Why? Because, he said, he’d have twice the number of 50-yardline seats and could charge more premium ticket prices for them. See this and other rich guy foibles in Gene Klein’s “First and a Billion.”

  20. a piece by marshall auerback today in spells out alot of the ten year ago fallout. ive become to believe long ago in reagans bluff, how the wall street mob would,and now has taken over. capitalism is fine ad long as we all stay focused,or at least one party would stay focussed and be relied on to watchdog the monied intrests. we can all now recognize the word and media games played, and how a whole class can be dupped onto believing the ones who represent,really resent us,,,except as cash cows of thier dream world… ive called this economic slavery for a long time..i resent people who feel thier above the law,and allowed to run corrupt in a suit and tie world, while we work our ass off and get to spend a whole pay check,to survive,, now tell us were free… afterall,someones putting those tires on your new escalade..and someones picking the veggies..theres an old saying in the prison system,
    if you dont have the capital,you get the punishment..
    i hope mueller can drive a stake into trump, and november stops this mass murder.

  21. Capitalism today in the United States IS crony corporatism minus unions owned by rule of Citizens United with Trump repealing government regulations which protect the public interest and stabilize the economy for the 98% rather than the 2% who currently own it all. Just sayin’ Does this mean we are now – or soon will be – a monarchy? Just askin’

    “When government fails to work, capitalism devolves into what we see around us.”


  22. An afterthought; American citizens are no longer ‘stakeholders” in our own government.


  23. Whenever I hear the words Stakeholders in the Capitalist System I think of the 1% driving a Stake into our collective hearts. Trickle down also evoked an image in my mind we Proles at the bottom of an outhouse, getting crapped on by the 1%.

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