Corporate obligations should reflect stakeholders' best interests

In recent years, the language of business life has become increasingly replete with phrases such as ‘corporate responsibility’, ‘business ethics’, ‘ethical investment’ and ‘the triple bottom line’. The implication is that corporations have somehow lost sight of their ‘wider obligations’.

These developments may do much damage to the capacity of corporations to deliver shareholder value and, perhaps more significantly, may encourage corporate leaders to involve their organisations in activities that corporations are simply not designed to perform.

At the heart of any clear understanding of how corporations are governed is the Aristotelian notion that institutions should be primarily understood in terms of their purpose; that is, the telos that constitutes their fundamental aim. This forces us to recognise that business corporations are not athletic associations or even social welfare organisations, and that a horseriding club does not exist primarily to make a profit.

Each organisation has its own special task to perform, and should be wary of allowing itself to be excessively diverted from its commitments. A trade union, for example, that becomes totally focused on political activity to the extent that it gradually becomes an explicitly political movement will cease to serve its members’ everyday interests and needs except in an indirect and detached way.

The same observation may be applied to corporations. Some may choose to engage in what are at face value non-commercial activities. But once a business corporation loses sight of its corporate objective, or forgets that its primary responsibility is maximisation of shareholder value, then it has effectively betrayed its telos.

This commitment to maximising shareholder value is not of course a mandate for, say, wanton ecological destruction. It does, however, mean that shareholder value must be the priority for directors, managers and other employees. To do otherwise would be to betray the primary responsibility with which they have been entrusted.

Many would disagree with this description of corporations. Prominent among these are advocates of various versions of what are popularly known as ‘stakeholder’ theories of corporate governance.

As a word, ‘stakeholder’ reflects an unsubtle play on the word ‘stockholder’—the implication being that it confers an entitlement not dissimilar to that of ownership. But what does it mean to take account of the interest of stakeholders?

Corporations should be aware that an ‘interest’, even if legitimate, is not necessarily a stake. Even people affected by a corporation’s activities do not necessarily have a stake in them. Simply being offended by a practice, for example, is hardly sufficient to make an individual, group, or even society qualify as a stakeholder.

Stakeholder theory subtly undermines private ownership. Property, derived from the Latin proprietas, means (in the juridical-ethical sense of the word) the dominion that a person may exercise over a certain object possessed. Yet some stakeholder theorists argue that the assets utilised by corporations should be used for the balanced benefits of all stakeholders.

Immediately, one observes that the ‘dominion’ that shareholders enjoy over the corporation is arbitrarily diluted in this stakeholder scenario. A concept that is, at least ostensibly, concerned with producing a situation of fairness, actually disadvantages those who have chosen to undertake risks that others have not.

To this extent, stakeholder theory may actually undermine the process of issuing shares as a means of financing the corporation’s growth and new entrepreneurial ventures. For why would potential shareholders invest, if they knew that their interests would be subordinated again and again to those who had made no financial investment?