Should Corporations Consider Any “Stakeholders” Other Than Shareholders?

CS Lewis, the famed author of The Chronicles of Narnia, once discussed the distinction between advancing ethics and advancing knowledge of facts. In Lewis’ view, ethics changes remarkably little over the years. What changes, and changes rapidly, is our knowledge of how the world works. This advancement of knowledge informs our application of ethical norms, and it is advancing knowledge of facts, argues Lewis, not ethics, that tends to change through time.

Maximizing Shareholder Value

With respect to the operation of businesses, it was famed economist Milton Friedman who laid down the foundational ethic: Businesses should seek to maximize shareholder value only. Working toward any other end, asserts Friedman, is an unjustified exercise in “spending other people’s money.” It is hard to argue with his logic (executives are the employees of shareholders, after all) and the empirical data. Capital tends to seek the greatest return, and economies that structurally reduce returns tend to see capital—and economic growth—flee. For societies that want to improve people’s lives, such a result is a net negative.

Executives maximize shareholder value through an application of the golden rule, not just a focus on quarterly profit.

But our knowledge of both economics and corporate management has advanced over the years. Through experience, we have learned that a singular focus on quarterly profits makes for unhealthy long-term businesses, which is bad for shareholders. Perhaps the world’s greatest shareholder, Warren Buffett, famously opposes extreme executive compensation largely on the grounds that it misaligns incentives and reduces shareholder return. We have learned, through experience, that pollution has a real monetary cost, and it is often paid by shareholders. Desperate and destitute employees, we have learned, are considerably less productive, an opportunity cost to shareholders. As it turns out—and this should be no surprise—treating people as we would like to be treated is just good business.

For all these reasons (and others), I regularly see investment clients consider corporate responsibility in their investment decisions, and so-called SRI (socially responsible investing) has been widely studied and adopted by investment managers. The standard-bearing CFA Institute includes SRI in its candidate

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