Three Problems With the Stakeholder Theory: Business Roundtable's misguided decision to put shareholders last: An unpleasant deja vu.

Author:Elson, Charles M.

There is nothing really new about the Business Roundtable's Statement on the Purpose of the Corporation. It is simply the return of the groups historic and misguided support for stakeholder governance.

Why misguided? Because it was the stakeholder approach, so lauded years ago by corporate America, that led to the awful corporate results which in turn sparked the large institutional investors, led by the public pension funds, to press for the dramatic corporate governance reforms of the past 25 years.

Before examining the problems with stakeholder governance, it is important to state out front that a shareholder primacy model does not mean the diminution of the other stakeholders in a corporation. To create the long-term value that the shareholders deserve, a company must deal appropriately and respectfully with the other stakes.

Even Al Dunlap, who was an anathema to the stakeholder community (and whom I made the motion to fire as a Sunbeam director) stated:

... for shareholders to do well, we need employees who care about the company, work hard, and feel they are being treated right. It is important to treat employees well ... because it is good business. ... Stakeholders benefit when the shareholders benefit. If a company performs well and its shareholders make money, then the community benefits because it taxes people, and employees benefit because the company is successful. There are three distinct problems with the stakeholder theory espoused by the Business Roundtable members with regards to the recent "purpose" statement:

* First, having a manager accountable equally to multiple stakes, as evident from a reading of the group's statement, diminishes dramatically a manager's accountability and performance. If you are accountable to everyone, then you are accountable to no one. Even a broken watch gets the time right twice a day. The pole-star of long-term shareholder value creates an appropriate metric for boards and the public to evaluate a manager's performance, and this ultimately increases accountability and the odds of a successful, thriving business for which all in society will benefit. In this respect, the statement appears a bit self-serving on the part of its signatories.

* Second, the Business Roundtable's placement of shareholders last on the list of corporate stakeholders is troubling. Shareholders come last in preference in bankruptcy and are protected by fiduciary duties primarily for that reason, and placing them last...

To continue reading