What’s at Stake in “Stakeholder” Capitalism?

A Tyranny for the Good of Its Victims: The Ugly Truth about Stakeholder Capitalism. By Andrew F. Puzder. Encounter Books, 2024; xiii + 335 pp.

Andrew Puzder, who is both a leading business executive—he was the CEO of a restaurant chain that owns Carl’s Jr.—and an experienced attorney, tells a dramatic tale. The free market is by far the best economic system and has made possible, since the Industrial Revolution, a historically unprecedented rate of economic growth. The free market is an economic democracy in which entrepreneurs vie to do the bidding of consumers, who, in most cases, want the most money possible. In corporations, the consumers are the corporations’ owners, the shareholders, and officers of corporations have a fiduciary duty to them.

In recent decades, a new conception of the free market—“stakeholder capitalism”—has become influential, although a resistance movement has arisen that has been able to thwart the most drastic ideas of the stakeholder advocates. According to them, the managers of companies should take into account the interests and values of all of those affected by the company. The stakeholder advocates do not deny that managers have a fiduciary duty to the owners of their business, but they claim that other things must be considered as well. Two of these other concerns—encapsulated in the acronyms ESG and DEI—especially concern our author. I will not explain what these acronyms stand for—readers who want to know can easily find out. Suffice it for our purposes to say that they call for more “diversity,” by which is meant hiring more women and members of ethnic minorities and putting them on the company’s board of directors, and also greatly decreasing the use of fossil fuels in order to deal with “climate change.”

Puzder, to say the least, is not sympathetic to “diversity” as it is currently understood, although he does not reject it altogether. He thinks it is desirable to have women and members of ethnic minorities on company boards of directors, because this promotes “cognitive diversity,” but he thinks that this will come about as a side effect if everyone elected to the board is committed to putting their fiduciary responsibility to the shareholders above other considerations, and he opposes mandating these other considerations by government agencies that have been taken over by the “woke” left.

Puzder in this connection tries to gain unmerited credence for his view by invoking Milton Friedman’s famous article “The Social Responsibility of Business Is to Increase Its Profits,” but Puzder’s view is exactly the opposite of Friedman’s. Friedman argued in the article that promoting social goals is not the job of corporate executives, who have a fiduciary responsibility to their owners. Corporate executives who act to promote social goals are spending money that rightfully belongs to the shareholders. In Friedman’s opinion, the managers of corporations must aim exclusively to increase the investment returns of the shareholders, indeed to maximize them.

Puzder’s view is just the opposite of Friedman’s. Puzder supports what is today called “enlightened shareholder values,” according to which shareholders want “woke” goals. If shareholders value promoting “diversity” and reducing the use of fossil fuels, even if monetary profits suffer, managers and boards of directors should in that circumstance be guided by those goals. But a development since the 1970s has raised a severe problem for Puzder’s approach.

The new problem is this: index fund investing has become increasingly popular, especially for small investors. In this form of investing, individuals no longer have to do detailed research about the companies they have under consideration for investment. Instead, they can purchase shares in a fund that invests in many thousands of companies. Here is where the severe problem arises. What happens if the managers of the fund are guided by social considerations to the detriment of maximizing monetary gain? Does this circumstance expose a fatal flaw in Puzder’s analysis of the free market?

The problem is more than a minor flaw, in that the great size of some of these index funds makes them substantial shareholders in a large slice of the American economy. The managers of these funds are in a position to ensure, or at least make highly likely, that companies that the fund invests in will do their bidding.

Puzder, perhaps surprisingly, is prepared to put up with this, because by purchasing shares, investors in the funds are tacitly consenting to the policies of the managers. If they are not satisfied, the investors can shift to a different fund, and Puzder favors laws giving investors options that allow those who reject “social responsibility” to get what they want.

He makes a sharp distinction, though, between “active” and “passive” index investing. So long as the managers of the funds attempt to put candidates they support on the corporation’s board of directors, he is willing to accept this.

What he opposes is “passive” investing, in which the index fund’s managers skew the corporate board’s votes by supporting their own nominees to the board and then ousting the directors who refuse to vote in favor of these nominees. This sort of “leverage” is anathema to Puzder. Unfortunately for him, some of the largest index funds—such as BlackRock, Vanguard, and Safe Street—follow exactly the policy he deplores.

Larry Fink—the chief corporate officer of BlackRock—is Puzder’s bete noire, and the problem from Puzder’s perspective is that BlackRock’s assets are in the trillions, giving Fink a great deal of influence over the American economy. Fortunately, in recent years a substantial resistance to ESG and DEI investing has burgeoned, and even Fink has had to profess his allegiance to the standard of fiduciary responsibility, though Puzder, with ample grounds, suspects him of deception—he has by no means abandoned his efforts to transform the American economy in a “woke” direction.

I’d like to close by bringing up a problem that index investing raises for Austrian and libertarian theory. According to Mises, consumers in the free market cast “dollar votes” for companies that offer them the products and services they demand. A standard objection to Mises’s argument is that the rich are able to cast more dollar votes than the poor; but to this, Mises responds that the vast number of votes by the poor enable them to get what they want. Capitalism is a system of “mass production for the masses.” Does the plural dollar vote objection become substantially stronger if one or a few investors have millions of votes? I do not know the answer and will leave it to my readers to sort out for themselves.

 

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Originally Posted at https://mises.org/

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