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The Malign Folly of "Stakeholder" Theory

The Malign Folly of

The only social responsibility of business is to use its resources and occupy its energies in the generation of wealth, so long as it stays within the rules of the game, which are to engage in open and free competition, without deception or fraud.

In recent years, however, the hypothesised benefits of the stakeholder theory of “corporate governance” (i.e. business administration and management) have become wildly exaggerated and widely popularised:

The term “stakeholder” was originally devised in the early 1960’s in an internal working document produced at the Stanford Research Institute in California.  In this document “stakeholder” was characterised as an individual or group “without whose support the organization would cease to exist”.

However, this term has subsequently been latched on to by malign societal elements who seek for themselves an uninvited role in the administration and management (or what they like to refer to as “governance”) and the fruits of privately owned property.

Stakeholder theory is today actively contrived by activists of social justice to suggest that shareholders are merely one of many stakeholders in a company, and that the purpose of business is not shareholder wealth creation, but “to create as much value as possible for stakeholders”. In order for business to be “sustainable”, executives must apparently keep the interests of shareholders aligned not only with creditors, customers, and employees, but also with an undefined public at large, the list of which grows annually like Topsy.

Stakeholder theorists suggests that it is a theory of organisational management and “business ethics” that addresses “morals” and “values” in managing an organisation, thereby impugning the ethics and morals of those shareholders who do not share their view. This approach was originally detailed by one Ian Mitroff in his book "Stakeholders of the Organizational Mind", published in 1983 in San Francisco. Shortly thereafter a certain professor R Edward Freeman at Virginia University published a similar book entitled: Strategic Management: A Stakeholder Approach.

Under their stakeholder theory, the internal “contradictions” between the ideology of social good on the one hand, and of corporate control on the other, have not in the least been fully accounted for.

The great flaw in their theory is that it lacks specifics and thus cannot be put into effect in a way that permits rational and articulate inspection. It has become little more than a sanitised version of outright socialism and offers no decision-making criteria that can adequately guide those involved in company management. Its theory is vacuous, offering an absurdly idealised and wholly unrealistic view of how organisations operate in the real world.

Currently in vogue with Stakeholder business ethicists is the demand that the traditional wealth-producing corporation be transformed into a curious (and un-spontaneous) business enterprise consisting entirely of an ever-growing list of “Stakeholders”. The shareholders, the people who put up their hard-earned, carefully marshaled, after-tax savings (i.e. their “capital”) and who thus shoulder all the major financial, regulatory and legal risks, are apparently only one small part of this heterogeneous assortment.

Nonetheless, it is not difficult to show that behind the mollifying yet deceitful language of stakeholderism lies a much more sinister doctrine. These ideologues claim that it is an idea and practice that is perfectly compatible with private enterprise (or what they and all socialists like to refer to as “capitalism”). However, it undermines the defining feature of that enduring economic system: the exclusive rights of ownership. What the doctrine amounts to is the “democratisation” of what is essentially an individualistic economic institution. It is therefore no coincidence that “stakeholder groups” are frequently referred to by stakeholder theorists as “constituencies” in their neoteric descriptions of private enterprise.

The stakeholder theorists want to replace a successful production method with one more in keeping with their communitarian and socialist inclinations. For them, it is not the private property invested that should determine who should exercise decision-making rights, but the role that that particular group should be permitted to play in the organisation. Thus, when starting or re-locating a business for example, all sorts of affected “constituencies” - residents of the area where the enterprise is currently situated, and inhabitants of the possible new destination, inter alia - are to be taken into account, in addition to but not necessarily determined by the wealth-optimising goals of those investing their after-tax savings. Apparently, employee remuneration should also be a function of group pressures (i.e. “social” justice) not market value, and severance (if allowed at all) should be negotiated on terms dictated by trade unions and other “constituencies” of “stakeholders”.

Shareholder value optimisation interests are seldom if ever incompatible with the ultimate goal of promoting social well-being. The spontaneous and centuries-old shareholder Theory of business management (or “corporate governance”) represents the only intellectually and ethically meritorious model for assessing both corporate progress and social responsibility. It automatically incorporates and weighs the naturally collaborative interests of society as a whole.

We should therefore carefully avoid the use of the word “stakeholder” and where appropriate to the context, use instead a more time-honoured and accurate collective noun such as:
associates, members, partners, patrons, investors, consorts, donors, colleagues, friends, allies, affiliates, interested parties.

The people who more often than not do have a legitimately recognisable interest in or claim to a role in private business management may for example include the following: shareholders, directors, financiers, investors, creditors, employees, customers, suppliers.

The following examples do not in general have a legitimate claim to a role in private corporate governance: lobby groups, political organisations, trade unions, industry representatives, regulators, government (at any level), undefined public groups, “stakeholder constituencies”, media, celebrities, insurers, competitors, NGOs, refuse removal teams, plumbers, electricians, contractors, car-guards, electricity, water and gas utility providers, passers-by.

Unless we wish altogether to destroy the value of privately earned and owned assets, and together with it all active private enterprise, which is the mainspring of wealth and employment creation, we must eradicate forever belief in the charmingly quaint but malignly sinister notion that everyman and his dog is a “stakeholder”, thereby entitling them to a claim to interfere in the administration of what is not theirs.

By Chris Hattingh, Researcher at the Free Market Foundation

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