Stakeholders vs. stockholders?

A Stanford University business professor, Jeffrey Pfeffer, takes on “shareholder capitalism” in an article in the July-August issue of Harvard Business Review.

Pfeffer argues in “Shareholders First? No So Fast …” that the pendulum is swinging from stockholders toward stakeholders. Noting the recent political changes and populist backlash after the carnage in financial and credit markets, he says CEOs and the rest of us need to get away from shareholder-driven decision making.

I’m not sure I buy the stakeholder-stockholder dichotomy. But we certainly do need to study the mood of our society as we work out corporate strategies – and craft messages for investor relations and corporate communications.

Pfeffer says companies used to be run (in the 1950s and 1960s) for employees, customers, suppliers and communities, as well as shareholders. In the 1970s and 1980s, he says, faith in the wisdom of financial markets became pre-eminent.

He describes the current shift back to stakeholders:

Now opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder value is rightfully under fire. Given the political realignment occurring in many countries, and the residue of the worst economic meltdown and destruction of wealth since the Great Depression, the chances are pretty good that stakeholder interests will remain at the top of the list a bit longer this time.

Even while stockholders were king, some of the most successful companies like Southwest Airlines put employees first, customers second and shareholders third, Pfeffer notes. The people who most influence a company’s success – employees and customers – don’t really get fired up by shareholder value, he suggests. Employees want to be valued (and paid), and customers want quality, price and service.

To me, there’s an element of “straw man” in the stakeholder vs. stockholder debate. Most companies I’ve worked with see shareholder value as a long-term outcome of working to motivate employees and excel in meeting the needs of customers. To the extent that any CEOs actually do fit the image of greed-crazed robber barons, I don’t see their behavior as having anything to do with the interests of shareholders.

Pfeffer even suggests that shareholder capitalism contributes to causing recessions. In that, I think he goes beyond economic evidence and joins the political hordes. Not much good can come from taking up torches to burn CEOs at the stake for our current woes. I doubt that shareholders’ interests led to this or any recession.

But stakeholders are the people our companies serve – shareholders, employees, customers, suppliers and communities – whatever order you list them in.

Our message has to do with what leads to business success. So, yes: stakeholders … and stockholders. What’s your view?


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5 Responses to “Stakeholders vs. stockholders?”

  1. Dan Dykens Says:

    Dick thank you for such a great post. I agree with you completely. The crowd is confusing capitalism with excessive leverage. Better banking regulation would have prevented the “worst economic meltdown and destruction of wealth since the Great Depression”. CEOs at public companies were victims of the excessive leverage deployed in the banking system. The sharp contraction of credit that followed the meltdown hurt well run businesses lead by well intentioned CEOs. The government is blaming capitalism for the failure of government to properly regulate.

  2. Rob Berick Says:

    Don’t all boats rise with the tide?

  3. A J&J employee, shareholder & stakeholder Says:

    Well before Southwest Airlines, Robert Wood Johnson, Chairman/CEO of Johnson & Johnson, was perhaps the earliest-adopter and espouser of this business philosophy: Put customers/patients first, employees second, communities third, and stockholders fourth. Follow that order of priority and the rest should take care of itself.

  4. Dick Johnson Says:

    J&J is a tremendous example of many good things. The heritage from Robert Wood Johnson and the actions of so many who’ve followed should challenge and inspire all of us. You earn people’s admiration – and shareholder value – by delivering good things for all of these stakeholders.

  5. Shareholders don’t own companies? « IR Café Says:

    […] and other universities seem to be advocating on this issue: In an HBR article last summer, a Stanford business prof made a similar point, arguing that stakeholders, rather than […]

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