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Stakeholder Capitalism Isn’t Working as Planned

Just one of nearly 200,000 Disney employees.
Just one of nearly 200,000 Disney employees. (Photographer: Octavio Jones/Getty Images North America)
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Wouldn’t it be nice if companies cared less about profits and more about the social good? It’s popular to think so. Stakeholder capitalism is fashionable. Shareholder capitalism is not.

Many high-profile business leaders and academics now condemn the idea Milton Friedman laid out in a famous 1970 New York Times Magazine essay:

a corporate executive is an employe of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

If only this wicked notion of maximizing profits hadn’t come along, some seem to think, we’d live in a progressive utopia of high wages, racial harmony, economic equality and environmental purity.

In 2019, the Business Roundtable repudiated the Friedman doctrine, changing its “Principles of Corporate Governance” to embrace the goal of managing companies for the “benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.” It didn’t specify how businesses would resolve conflicts between constituencies.

The usual response is that conflicts are illusory. Do good and you’ll do well.

“In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders,” wrote BlackRock’s Larry Fink in his 2022 letter to CEOs, reiterating the message that made news in 2018: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Of course, if stakeholder-pleasing endeavors and the creation of economic value always went hand in hand, stakeholder and shareholder capitalism would be identical. But life isn’t that simple.

Contrary to what you may have heard, letting stakeholders take precedence over business objectives is anything but nice. Stakeholder capitalism isn’t just a temptation for managers to pursue their pet interests. It’s a prescription for culture wars, political backlash, managerial paralysis and human-resources nightmares.

Every effective enterprise has to consider the interests of employees, suppliers, customers and other stakeholders. But not everyone wants the same thing, and sometimes organizations have to make tradeoffs between goals everyone might agree are good. The question is what to do when faced with a conflict. Without an eye on value maximization, it’s too easy for managers to dissipate company resources by pursuing their personal interests.

The great value of the Friedman doctrine is that it establishes a coherent standard for making tradeoffs. Maximizing economic value tells you to “spend an additional dollar on any constituency provided the long-term value added to the firm from such expenditure is a dollar or more,” as Harvard Business School economist Michael Jensen put it in a 2010 article.

Stakeholder theory, by contrast, tells you nothing. It assumes you just make everybody happy. And, as Jensen wrote, “Without the clarity of mission provided by a single-valued objective function, companies embracing stakeholder theory will experience managerial confusion, conflict, inefficiency, and perhaps even competitive failure.” Jensen’s article is the best articulation of why what he calls “enlightened value maximization” is indispensable.

But neither he nor Friedman fully imagined the chaos that could ensue without it.

Look at the backlash when Walt Disney Co. tried to placate vocal employees by opposing Florida legislation to ban discussing sexual orientation with younger children in schools. The political pushback — like the original protests — reflected a sense of betrayal by a beloved company whose fans see their dreams and values reflected in its characters and stories.

Appeasing one group of stakeholders alienated others. It wasn’t hard for conservatives to find opposing voices within the company. Disney has nearly 200,000 employees and countless customers. All are stakeholders, and they represent every conceivable viewpoint.

By focusing on business goals, by contrast, Netflix, despite other challenges, has more successfully weathered its own controversies, from conservative uproar over the French film “Cuties” to more recent protests about Dave Chappelle’s jokes about trans women. To make expectations clear, the company revised its cultural guidelines for employees to explicitly say, “As employees we support the principle that Netflix offers a diversity of stories, even if we find some titles counter to our own personal values.”

Stakeholder capitalism implicitly assumes a cultural consensus identical to whatever its advocates believe. It harks back to the mid-20th century, when big US companies enjoyed little competition, mass media marginalized all but a narrow range of political, religious and social views, and hierarchy and security dominated worker expectations. It pretends social media, Slack channels and “bringing your whole self to work” don’t exist.

For a purer version of what stakeholder-oriented management can engender, forget profits and political disagreements. Look at the turmoil roiling all sorts of left-wing nonprofits. In a report in the Intercept, Ryan Grim details why Washington D.C.-based groups have spent the past few years engaged in “knock-down, drag-out fights between competing factions of their organizations, most often breaking down along staff-versus-management lines.”

He writes that:

Instead of fueling a groundswell of public support to reinvigorate the [Democratic] party’s ambitious agenda, most of the foundation-backed organizations that make up the backbone of the party’s ideological infrastructure were still spending their time locked in virtual retreats, Slack wars, and healing sessions, grappling with tensions over hierarchy, patriarchy, race, gender, and power….

Grim quotes the executive director of one such group, anonymously:

“A lot of staff that work for me, they expect the organization to be all the things: a movement, OK, get out the vote, OK, healing, OK, take care of you when you’re sick, OK. It’s all the things,” said one executive director. “Can you get your love and healing at home, please? But I can’t say that, they would crucify me.”

Despite their commitments to making the world a better place — and general agreement on what that means — trying to please every vocal stakeholder is wreaking such widespread organizational havoc that one group’s head, also quoted anonymously, told Grim “you couldn’t conceive of a better right-wing plot to paralyze progressive leaders.”

The problem isn’t that the groups are leftist. It’s that their missions and decisions are constantly up for internal debate. New attitudes and forms of communication have destroyed the legitimacy of their managerial hierarchies.(1)

Compared with mission-oriented nonprofits, businesses that focus on creating economic value are fortunate to have a clear definition of success. If they want to make the world a nicer place, they should strive to defend that standard.

More From Bloomberg Opinion:

• Mickey Mouse Is Progressivism’s Canary in a Coal Mine: Adrian Wooldridge

• Young Americans Aren’t as Woke as You Think: Adrian Wooldridge

• Disney Is Latest Casualty of Culture Wars’ Crossfire: Adrian Wooldridge

(1) For a deeper dive into this phenomenon, drawing on Mary Douglas’s anthropological studies, see my Substack essay “Purity, Sorcery, and Cancel Culture.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Virginia Postrel is a Bloomberg Opinion columnist. She is a visiting fellow at the Smith Institute for Political Economy and Philosophy at Chapman University and author, most recently, of “The Fabric of Civilization: How Textiles Made the World.”

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