Opinion | Profit Keeps Corporate Leaders Honest

The World Economic Forum knows never to let a good crisis go to waste. The organization behind the famous conference of politicians, executives, celebrities and “thought leaders” at Davos is now promoting an initiative called “The Great Reset.” The idea is to repackage shibboleths of the technocratic center-left for the marketing opportunity presented by Covid-19.

Quite a few of these policies are dangerous, but one deserves special attention: stakeholder capitalism.
Apple,
Facebook,
IBM
and
Walmart,
all listed as corporate partners on the World Economic Forum website, are evidently on board with a vague and open-ended mandate for corporations to do good in the world. Yet beneath the lofty rhetoric, stakeholder capitalism is mostly a front for irresponsible corporatism. It is an attempt to siphon off cash flow from productive uses to advance the mission of “global governance” and create corporate and government sinecures for cronies along the way.

Milton Friedman
famously fixed the modern paradigm of shareholder capitalism in a 1970 article. Writing against the dangers he perceived in popular notions of corporate social responsibility, Friedman argued that the chief duty of business was “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.” Friedman noted correctly that, in a market economy, profits represent value created for customers. In their capacity as corporate officers, businessmen could do the most good by focusing on their bottom lines.

The self-perceived aristoi of Western liberal democracies hated this argument and have fought it ever since. Business leaders, eager to avoid the moral taint of greed, have often led the anti-Friedman coalition. In 2019 the CEOs of the Business Roundtable released a statement affirming that they “endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.” By stakeholders they mean “customers, employees, suppliers, communities and shareholders.”

As National Review’s Andrew Stuttaford notes, this vision of wide-ranging corporate beneficence introduces a host of principal-agent problems in ordinary business decision-making. Profit is a concrete and clarifying metric that allows shareholders—owners—to hold executives accountable for their performance. Adding multiple goals not related to profit introduces needless confusion.

This is no accident. Stakeholder capitalism is used as a way to obfuscate what counts as success in business. By focusing less on profits and more on vague social values, “enlightened” executives will find it easier to avoid accountability even as they squander business resources. While trying to make business about “social justice” is always concerning, the contemporary conjunction of stakeholder theory and woke capitalism makes for an especially dangerous and accountability-thwarting combination.

Better to avoid it. Since profits result from increasing revenue and cutting costs, businesses that put profits first have to work hard to give customers more while using less. In short, profits are an elegant and parsimonious way of promoting efficiency within a business as well as society at large.

Stakeholder capitalism ruptures this process. When other goals compete with the mandate to maximize returns, the feedback loop created by profits gets weaker. Lower revenues and higher costs no longer give owners and corporate officers the information they need to make hard choices. The result is increased internal conflict: Owners will jockey among themselves for the power to determine the corporation’s priorities. Corporate officers will be harder to discipline, because poor performance can always be justified by pointing to broader social goals. And the more these broader goals take precedence, the more businesses will use up scarce resources to deliver diminishing benefits to customers.

Given these problems, why would prominent corporations sign on to the Great Reset? Some people within the organizations may simply prefer that firms take politically correct stances and don’t consider the cost. Others may think it looks good in a press release and will never go anywhere. A third group may aspire to jobs in government and see championing corporate social responsibility as a bridge.

Finally, there are those who think they can benefit personally from the reduced corporate efficiency. As businesses redirect cash flow from profit-directed uses to social priorities, lucrative positions of management, consulting, oversight and more will have to be created. They’ll fill them. This is rent-seeking, enabled by the growing confluence of business and government, and enhanced by contemporary social pieties.

The World Economic Forum loves to discuss the need for “global governance,” but the Davos crowd knows this type of social engineering can’t be achieved by governments alone. Multinational corporations are increasingly independent authorities. Their cooperation is essential.

Endorsements of stakeholder capitalism should be viewed against this backdrop. If it is widely adopted, the predictable result will be atrophied corporate responsibility as business leaders behave increasingly like global bureaucrats. Stakeholder capitalism is today a means of acquiring corporate buy-in to the Davos political agenda.

Friedman knew well the kind of corporate officer who protests too much against profit-seeking: “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” He was right then, and he is right now. We should reject stakeholder capitalism as a misconception of the vocation of business. If we don’t defend shareholder capitalism vigorously, we’ll see firsthand that there are many more insidious things businesses can pursue than profit.

Mr. Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University, a fellow at Texas Tech’s Free Market Institute, and a senior fellow with the American Institute for Economic Research’s Sound Money Project.

Read the Full Article here: >WSJ