Applying this principle to the business sphere, conflicts of interests between the affected parties must be resolved so that the most deprived group benefits as greatly as is compatible with the increase of the overall welfare. As a result, stakeholder theory is backed by Rawls’ second principle of justice, as it enables parties, such as shareholders for instance, to advance their own good if at the same time the interests of the least advantaged stakeholders, such as workers maybe, are furthered to the greatest extent possible.
The ambiguity involved in my use of terms such as ‘greatest extent’ and ‘as much as possible’ is to me unavoidable, but I think that it is essential to note that the long run should be considered as well in terms of benefits accruing to other stakeholders, instead of focusing rather narrow-mindedly on the immediate short term all the time. Having assessed the stakeholder companies and their philosophical backing in detail, I am going to move on now to the stockholder companies, building on the foundation that I have already created so far in order to compare the two and patronize one over the other.
Stockholder companies, just to recap, are those which are managed with the intention of providing profits or returns on investment to the shareholders, or the owners of the business. However, even though they clearly prioritize the shareholders’ interests over those of the other stakeholders, shareholder companies are still required to operate under the legal system while at the same time also conforming to the basic rules of society.
After putting forth all the arguments in favor of the stockholder ideal and on the verge of doing the same for the shareholder one, I feel that at this point of time it is necessary to reveal that I share the bias of the authors, Micklethwait and Wooldridge, towards the latter. For now, in order to present my case for the shareholder model, I am going to make certain assumptions about the conditions that exist when this model is in operation. Though all these assumptions can never be absolutely true, I believe that relatively similar conditions can, in general, exist, with certain exceptions to every one.
I am going to assume a perfectly competitive market, perfectly symmetric information, a perfect labor market and rational individuals who act to maximize their utility. On the basis of the establishment of such conditions under shareholder capitalism, teleological ethical theories would tend to support it, since they maintain that the rightness of actions is determined by the ends they achieve rather than the characteristic features of the actions themselves.
This brings me to one of the focal points of my paper: the ends achieved by the stockholder model are superior to those attained by the stakeholder one, though the approach of the latter maybe inherently more ethical than the former. Using the utilitarian cost-benefit analysis, which employs monetary values to calculate the advantages and drawbacks of various alternatives, the dollar amount of the benefits accruing from using the shareholder model exceed the costs associated with it, over and above those of the stakeholder model.
The reason for this is that competition between companies instead of cooperation (as may take place in the stakeholder model), to attract utility-maximizing consumers, leads to the most efficient allocation of resources due to the need for reducing costs, improving quality of goods and services offered, and increasing productivity. Companies, as a result, end up benefiting society as a whole much more than they intended to merely by operating in a competitive environment.
This falls in line with Adam Smith’s “Invisible Hand” argument, where people, and in our case, companies, are led by an invisible hand to promote social good, and end up producing the highest level of welfare for society. Hence, just as capitalism is argued to be the best type of economic system by the authors, among the alternatives available, shareholder capitalism is the best form of corporate governance as compared to its alternatives, as it provides the greatest net benefit in terms of welfare.
If the theory about stockholder companies achieving greater all-round results for the economy and society than stakeholder ones has managed to be convincing so far, it still fails to account for one of its greatest criticisms and weaknesses compared to the stakeholder theory: the protection of human dignity and respect for persons. The fear that stockholder companies can exploit other stakeholders for the increased benefit of their owners to such an extent so as to violate their (stakeholders’) basic rights is not unfounded, since shareholder companies such as big multinationals for example have been seen to breach social norms in the past.
However, the reaction towards the exposition of cases of abuse by multinationals in the past and the trend towards a decline in their exploitation of parties such as workers in third world countries only confirms their correlation and reinforces a key aspect of companies : companies have, do and always will require a sort of “franchise from society” 3. By society is meant all those groups that are affected by a company’s activities, and hence in other words, the various stakeholders of a company.
What this implies is that besides the owners, or shareholders, all the other stakeholders, such as workers, suppliers, and consumers are also essential parts of the machinery of a company, so without their approval and support, a shareholder-oriented company will inevitably collapse. This notion appeals to common sense, as how would a company survive if its workers, being badly treated, withdraw their labor services from the company, or if its customers, or consumers, being exploited in one way or the other, stopped buying its products.
Therefore, the advantages of the free market economy come into play here, as any infringement of the terms of that franchise that companies enjoy from society, would be corrected by the market under the assumptions laid out in the preamble of my discussion of shareholder companies. The only thing left for me to do is, I feel, to account for situations that radically differ from the ones that I assumed to be true while the shareholder model prevails, and upon which I developed all my arguments.
In order to deal with scenarios where imperfect competition (more specifically monopolies and oligopolies), an imperfect labor market, and asymmetric information exist in unison or in isolation, the institution which I have conveniently left out in all my arguments heretofore- the government, is required to enforce certain regulations and restrictions on shareholder companies, in order to prevent them from taking advantage of circumstances to suit their owners at the expense of others.
The role of the government can not be downplayed, as it is required to protect the rights of the least advantaged stakeholders involved in companies when they are not in a position to enforce them on their own or are not aware of them, thereby negating to some extent the comparative advantage that the stakeholder model had of according respect to and preserving the dignity of all individuals, as intervention by the government can ensure that individuals are treated as ends rather than as means only.
In addition, the government is also supposed to monitor the various operations of companies which create negative externalities such as pollution of the environment, which affects local communities, and for which the government can basically charge the company with the cost of cleaning up or undoing the damage done by them. Thus, the government essentially acts like the watchdog for shareholder companies in order to guard the rights and interests of the other stakeholders, and hence reducing the difference of treatment to stakeholders under the two separate models of operation.
To conclude, I would like to stress that in today’s world, the Anglo-American shareholder model is quickly gaining ground as opposed to the stakeholder one, which is even shedding some of its governing principles in its traditional strongholds of Continental Europe and Japan. However, in my view, the two models have come closer to each other over time rather than drifting apart, being displayed no greater than in America, the heart of shareholder capitalism, where companies are facing increasingly burdensome social responsibilities such as providing for the pension and healthcare costs of employees.
That being said, I think that the flexibility and dynamism that is cultivated under the shareholder model will undoubtedly make it the most attractive model to implement, especially in an era where globalization and free trade will mean that competition will soar to new levels altogether. It is this rivalry though that will breed ingenuity on the part of companies, in the form of new methods, techniques, and technologies used by them.
It is said that necessity is the mother of invention, and it is up to companies, society and the government to try to translate this innovation into economic and social welfare for everyone.