Shareholders come before stakeholders

Recently, business publications have reported that some corporate chieftains have proclaimed they work for stakeholders, not shareholders.

At this point, let’s step back and ask a basic question: Is it not true that for-profit organization employees work for the shareholders, the investors who provide the capital for organizations to exist and who bear the risk of failure?

Absolutely.

The business entity signs your paycheck, pays for your medical insurance, and 401k. Stakeholders do not do these things.

There is a distinction between the two terms. Think of stakeholders as those affected by the actions of a business. Stakeholders need to have a means to affect what actions of a business. This can be accomplished in four main ways: legally, legislatively, via regulatory relief, or most importantly, the marketplace.

If a business is to ultimately thrive, it must be supported by its consumers. If there is no support, a business will fail.

Shareholders expect a return on their investment. If no return is provided, regardless of the wishes of stakeholders, a business will not last long. The marketplace, not stakeholders, determine what products and services will be purchased or not purchased.

If stakeholders are allowed to trump the wishes of shareholders, allocation of capital will cease to go to where it makes economic sense. Instead, non-economic decisions will become the norm. Those decisions may very well become political. If this happens, the whole system will be in trouble.

No one can deny that businesses must be dialed into what stakeholders expect. For example, to ignore the environmental effects of what a business does or does not do is cause for stakeholders to cry foul and seek relief. Businesses can ignore the wishes of the affected stakeholders at their peril.

To be sure, the interests of stakeholders and stockholders are intertwined and interrelated; however, those of the stockholders come first.