Corporate America is in crisis. Hardly a day goes by without a business commenting on an issue unrelated to its work, often in a manner that appeals to progressives and aggravates conservatives. Some Republican lawmakers, who see themselves as traditional boosters of American business, are having second thoughts, even as CEOs, investors, politicians, and the public are debating the proper role of business in society. Yet, it is not too late for business to return to its proper role of bringing people together to create long-term value.
Two recent changes are driving the debate. First is a renewed interest in “stakeholder,” as opposed to “shareholder,” capitalism: the idea that businesses have responsibilities to their employees, customers, and community members, not just their shareholders. Second is the perceived ideological split between the business community and a Republican Party long viewed as its defender.
But beneath all this lies a deeper, more concerning issue: a growing bipartisan interest in radically overhauling the relationship between business and government by replacing corporate fiduciary responsibilities with a government mandate that businesses prioritize political objectives.
The stakeholder–shareholder debate turns on a distinction that, for now, is mostly spurious. Law professors Roberto Tallarita and Lucian Bebchuk found that 47 of 48 CEOs signed a Business Roundtable restatement of the purpose of a corporation without consulting their boards, which suggests a shift not in actual corporate goals but in rhetoric. The Business Roundtable lent credence to this reading by later clarifying that it did not mean to downplay or dismiss shareholder interests in its statement, nor to imply that it supported politicians’ dictating stakeholder commitments to CEOs.
Confusion also reigns in the academic conversation. The literature contains hundreds of different definitions of “stakeholder.” The lack of a consistent definition creates a circular logic: we’re told that a corporation’s primary objective is to serve its stakeholders, while the field’s authoritative text defines “stakeholder” as “any group or individual who can affect or is affected by the achievement of the organization’s objectives.” The stakeholders determine the objectives, and the objectives determine the stakeholders. One can forgive business leaders for being confused.
But shareholder-primacy advocates have made their own mistakes. The champion of that position, Milton Friedman, once claimed that managers who spend corporate resources “in a different way than [shareholders] would have spent it” are “in effect imposing taxes.” But businesses are not governments—they cannot compel anyone to partner with them, nor can they tax anyone. If a business’s shareholders disagree with management’s decisions, they can sell their stock or vote for a board that reins them in. Similarly, suppliers, employees, and communities can all refuse to do business with a company that fails to consider their interests.
Indeed, the greatest pressure for corporations to embrace stakeholder interests often comes from shareholders themselves. Investment firm BlackRock, with nearly $9 trillion in assets under management, is a prominent example, with CEO Larry Fink emphasizing the firm’s commitment to “sustainability” and “deeper connections to stakeholders.” Its peers, State Street and Vanguard, seem largely aligned with BlackRock’s interpretation of stakeholder capitalism and such related concepts as environmental, social, and governance (ESG) investing. Simply asserting shareholder rights against stakeholder commitments will not matter if the largest institutional investors are all committed to an expansive view of the social responsibility of business.
Conservatives have termed the phenomenon of businesses expressing support for progressive politics “woke capital,” but their proposed responses have not always been sound. Some of them, often referred to as “national conservatives,” have conjured an ideal past when American businesses took care of their employees, customers, and communities—a past undone by libertarians and neoliberals, who took control of Washington, controlled economic policy for two generations, and made business serve Wall Street instead. This potted history usually culminates in an appeal for government to require companies to serve, once again, the common good. Progressives from Ralph Nader to Elizabeth Warren have told a similar story in calling for centralized federal control of corporate decision-making.
Calls for the government to discipline corporations, then, are coming from both sides. And with a top advocate of mandatory stakeholder capitalism operating within the Biden White House, and the Security and Exchange Commission’s increasing interest in ESG, changes may be in the offing. Legislation such as Warren’s Accountable Capitalism Act or the more recent Stakeholder Capitalism Act, drafted by Ford Foundation grantees B Lab and Shareholder Commons, would bring about a truly radical overhaul.
A populist-progressive coalition to “reimagine capitalism” may not be feasible, however. In a recent Senate Banking Committee hearing, Republican and Democratic senators grilled CEOs of the nation’s six largest banks. Both groups of senators wanted banks to lend more to the right groups and less to the wrong ones, but they had conflicting definitions of right and wrong. Political micromanagement of corporate governance won’t be easy if one side’s friends are the other side’s foes. And even if a bipartisan coalition were able to replace shareholder primacy with the bureaucratic enforcement of “social responsibility” goals, how would implementation and enforcement work? Imagine the turmoil that would result when control of Congress changes hands.
For now, those most concerned about stakeholder capitalism should beware of government policies that mandate its key components, even when they are framed in ideologically appealing terms. The U.S. has benefited from a system in which businesses can innovate and create value for others without worrying that every decision they make is aligned with a political agenda. Destroying this system will make us all worse off.