Stakeholder Theory – Reject It (2004 Nov)

by Barry A. Liebling

Stakeholder theory is a general guideline about how to manage a business. It is the nemesis of Shareholder theory.

Proponents of Shareholder theory maintain that a business concern ought to be managed for the benefit of its owners – or shareholders. To be sure, the managers of a business are obligated to respect everyone’s individual rights – shareholders, customers, employees, suppliers, and members of outside communities. Shareholders, however, have a special position derived from the fact that the business belongs to them. It is their private property. Of course, people other than owners obtain benefits from a particular business. Customers, employees, and suppliers will only have a voluntary relationship with a business if they judge it is to their advantage to do so. But these non-shareholders do not have the type of claim on the company that legitimate owners have.

Stakeholder theory is antagonistic to Shareholder theory. Advocates of Stakeholder theory maintain that the management of a business concern should formulate policy and strategy for the stakeholders, that is, anyone who has a “stake” in the business. Besides the shareholders, this includes customers, employees, suppliers, and “communities.” The mission of management is to weigh and balance the competing requirements of stakeholders in planning business actions. Adherents of Stakeholder theory would urge managers to discount the interests of the owners to make room for the demands of people who are not the owners.

Among a high proportion of business “ethicists” Stakeholder theory is the vogue. They regard Shareholder theory as serving selfish interests, old fashioned, narrow minded, out-moded, lacking in social conscience. By contrast, they glowingly describe Stakeholder theory as socially responsible, modern, the right path for the new century, democratic, empowering, and egalitarian.

These “ethicists” are mistaken. In fact, Shareholder theory correctly identifies the legitimate owners of a business as the appropriate primary concern of management. Stakeholder theory is a surreptitious method of taking the rights of ownership away from the shareholders and awarding special privileges to those who are politically well connected.

Proponents of Stakeholder theory frequently set up a false dichotomy. If you accept Stakeholder theory you endorse the transfer of ownership rights to stakeholders who are not owners. Alternatively, if you reject Stakeholder theory, the proponents say, you must sanction the violation of the rights of stakeholders who are not owners. Of course, the truth is that no one’s rights should be violated, but only shareholders legitimately have owners’ rights.

Most people who accept Stakeholder theory are making an innocent mistake because they have been exposed to it repeatedly and have not considered its implications. Stakeholder theory is touted so frequently – in schools, in magazines and newspapers, on television and radio, in books – and is refuted so seldom that it has become a bromide.

The “intellectual” architects of Stakeholder theory are not innocent. They long to do away with private property. They detest the idea that owners of a business should have the final authority to decide how a business shall be run. All affected parties, especially those who are not owners – the Stakeholder theorist asserts – should have some say on what will be done. This is a sneaky way of confiscating Shareholder rights that are inherent in the concept of ownership. It is underhanded because the more honest assertion would be to proclaim that all property is owned communally and that business policies and actions should be decided by a vote of the politically connected. The designers of Stakeholder theory know that this blatant grab for power would not be palatable to most Americans, so they use Stakeholder theory to conceal their objective.

What about business executives who favor Stakeholder theory? While most are simply mistaken, some managers in the corporate world use Stakeholder theory nefariously. A high ranking executive who is determined to take power from the owners of a business might welcome Stakeholder theory as the method of choice. A malicious manager would be pleased to have license to interpret “creatively” exactly who the relevant stakeholders are and how their various “needs” should be weighed in setting policy. The rogue executive can always find ways of thwarting the will of shareholders, the legitimate owners, by appealing to Stakeholder theory.

Reject Stakeholder theory. This doctrine should be identified for what it is – a method of taking ownership away from legitimate shareholders and giving power to those with political connections. Stakeholder theory is especially insidious because it is dishonest. It is an attempt to disarm the shareholders by having them accept the fallacy that it is “ethical” for them to surrender their property rights to those who “speak for the stakeholders” – individuals who are not owners.

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