Written By Ron Knecht
In college 50 years ago, I took Introduction to Political Science from Stephan A. Douglas. Not the short, fat Little Giant who debated Abe Lincoln, but a tall, angular very good professor at Illinois.
n thing I remember from his class is his explanation about a compelling revolution in political science and economics that began a decade earlier. Traditionally, he said, political scientists sought to explain how political institutions, practices and processes worked to promote the public interest and common good even as participants pursued their special interests. It was Pollyanna-ish: All for the better.
Then some iconoclasts said that’s not how things are at all. Many institutions, practices, processes and especially politicians and bureaucrats don’t really promote the public interest. Most work with special interests to promote their agendas at the expense of the public interest. This insight, which today seems obvious, changed political science and helped foster a branch of economics known as public choice theory – which has produced a number of Nobel economics prizes.
Against the background of the Viet Nam war and turmoil in American politics in the 1960s, it was a bracing idea, and the insight quickly became a key part of my intellectual make-up. It has served me well in politics and public service.
Now come our big corporate leaders with a perfect example of how political and economic behavior masquerades as public-spirited when it’s really completely self-serving. The Business Roundtable, an association of chief executive officers of America’s largest companies, issued a new “Statement of the Purpose of a Corporation,” signed by 181 CEOs.
“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” they say. They name those stakeholders: customers, employees, diversity and inclusion interests, suppliers, the communities where they work, environment and sustainability proponents. Oh, yes, also “effective engagement with” company stockholders.
Since 1997, their periodic “Principles of Corporate Governance” statements have endorsed shareholder primacy: the idea that corporations exist primarily to serve stockholders. In the New York Times Magazine on September 13, 1970, economist Milton Friedman, one of the intellectual giants of the 20th Century, said business executives who pursue a goal other than making money for their equity investors are wrong.
They are, he said, “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” They become “unelected government officials” who essentially tax employees and customers. They violate their legal and ethical fiduciary duties.
But the new diktat declares all “stakeholders” equal – leaving corporate moguls, our enlightened visionary betters, to decide how to serve many masters and balance everyone’s interests via corporate actions.
The concept of corporate stakeholders arose soon after the public choice revolution. Originally, it was descriptive: It described groups affected by actions of corporations. But once the term was invented, it morphed into a normative concept suggesting the stakeholders have some kinds of claims on the decisions of companies and their leaders that legitimately compete with the fiduciary duties owed to those who put their capital at risk by investing in the firm.
Now the CEOs have thrown in the towel and joined these predatory special-interest claimants. Why?
It’s something I’ve observed the last 40 years in regulation, politics and business. Essentially, executives are – surprise! – pursuing their own self-serving interests. They want to be lionized everywhere as great leaders, compassionate souls, visionary intellectuals. They want to use the resources their stockholders have entrusted to them to buy off everyone: unions, politicians, predatory special interests such as environmentalists, and the lamestream press.
Maximizing long-term discounted stockholder value within ethical norms crimps those aspirations.
This rot is clearest with regulated utilities, where executives can cut implicit (sometimes explicit) deals with regulators: We’ll do almost any foolish thing you want us to, as long as we can pass on the costs to ratepayers.
The problem started a century ago when large corporations were no longer managed by their primary owners, but instead by hired professional managers with their own self-serving agendas. Ironically, consumers, employees and the real public interest in economic growth and fairness suffer with stockholders in this scheme. Friedman was more accurate than he knew.
Ron Knecht has served Nevada as state controller, a higher education regent, college instructor, legislator and economist. Contact him at [email protected].