Shareholders bear the risk, deserve the reward (or loss)

The Wall Street Journal reported in its May 27 edition that major bank CEOs were called to task by Congress on a variety of issues, including excessive compensation, overdraft fees, and a drop in lending during the pandemic.

One other issue, stakeholder capitalism, was reportedly called out by Sen. Pat Toomey, R-PA. He pressed the bank CEOs for their stated support of stakeholder capitalism, in which “corporate decisions should take all stakeholders—employees, customers, and society at large—into account.”

Specifically, Sen. Toomey, stated: “I would just ask you to reconsider this because stakeholder capitalism is meant to diminish the importance of a company’s obligation to shareholders, relative to other stakeholders, and I think that’s a contradiction of the fundamental aspect of capitalism.”

Senator Toomey is absolutely correct in his statement.

Here is how the capitalistic system works: CEOs are hired by a Board of Directors, which is elected by shareholders, to make the best decisions for those who bear the business risk, the shareholders.

In other words, those who bear the risk make the decisions.

This is irrefutable.

It is easy to lose sight, or conveniently forget, how the system works. Capitalism speaks to risk and decision-making. To allow stakeholders to make corporate business decisions will not work.

This concept is contrary to not only the legal structure of businesses, but the fundamentals of conducting business.

The tension between shareholder capitalism and stakeholder capitalism is front page news these days.

Company CEOs are being tasked with doing more than making economic decisions about the companies they run; they are being asked to speak publicly to important societal issues, such as voting rights, union concerns, where the All Star baseball game should be played, and hiring issues.

There is no doubt that these and many more issues are very important and must be discussed and addressed.

While each business unit is free to make its own decisions, if risk and decision-making are primary, the interest of shareholders is paramount.