Table of contents
- A short history of shareholders vs./ and stakeholders
- The virtuous loop: Customers > Stakeholders > Shareholders
As companies generally — and tech companies specifically — play a greater role in social and economic issues, the fundamental question that many consumers, politicians, and company builders are asking is, Do corporations exist only to maximize shareholder value… or can boards also consider ESG (environmental, social, and governance) issues, among others, when making decisions?
It’s an old question that resurfaces and evolves in many forms, most recently with a debate sparked by the largest money-management firm in the world around the themes of “purpose and profit”. Unfortunately, too many people are treating this discussion as an either-or, when good, well-operated corporations have always recognized that you can have both: maximize long-term shareholder value and respect other priorities as important to a broader set of people both within and beyond the corporation. And not only can we have both, but we don’t need to use legislation to achieve goals in empowering consumers.
The fundamental tenet that corporations exist only to maximize shareholder value goes way back to the 1960s-1970s, when Milton Friedman popularized the “shareholder” primacy view, implying that profits therefore always come first and foremost. A few years later, business professors Ian Mitroff and R. Edward Freeman argued for a “stakeholder” primacy view — that the definition of stakeholders could be broadened beyond just owners, to other interested groups within and around a corporation’s mission or purpose: employees, unions, local communities, and so on.
More recently, politicians have been proposing legislation to address the apparent tension between shareholders and stakeholders, between profits and so-called purpose — through everything from the Accountable Capitalism Act to other calls to action. Senator Warren’s act proposes that shareholders have a “cause of action” to sue companies if they have not considered all stakeholders in their decisions. Meanwhile, Senators Schumer and Sanders have also raised this issue in the context of stock buybacks and dividends among U.S. corporations, since 93% of corporate profits in the last ten years have been disbursed that way, arguing that this excess cash could have instead been allocated to wages, hiring, and R&D.
And even before this more recent wave of legislation, many states created a legal structure about a decade ago — the B Corporation — as a way to structurally enforce the concept of stakeholder primacy. “B-corps” enable companies to more explicitly consider the interests of constituents, even where such activities may not enhance shareholder value.
All of these proposals, while noble, are not really new. And they are, I believe, misguided in their attempts to use legislation — which often has unintended consequences — to encode the concepts of stakeholder primacy into the nature of the corporation.
Why? Because the tension between “shareholder” and “stakeholder” primacy is a false dichotomy. For good corporations, these two principles have never been in conflict. Good corporations have long recognized that maximizing long-term shareholder value requires an understanding of how customers, employees, and other constituents make decisions to engage (or not) with corporations, based on whether those corporations respect their priorities. In fact, deep and sustained engagement from stakeholders can translate into greater corporate profits, which drives long-term shareholder value.
If a corporation is managed well, balancing the goals of profit and purpose through good decision making, governance, and more, then “stakeholder primacy” reinforces “shareholder primacy”, and both are ultimately subservient to customer primacy. But how is that possible, given seemingly competing motives among all these stakeholders?
Because before anything or anyone else, corporations exist to serve the customers of their products or services. Without customers — without a market — a corporation cannot exist (at least, not without subsidies or other wells of cash). And customers — who have choice in a capitalist economy — can vote with their wallets. Don’t like something? Leave. This is why often brand boycotts and campaigns prove more effective in changing things than do laws.
In fact, customers who care about social responsibility can not only leave, but can influence corporate behavior in the same way that customers who request or desire new features or service offerings do. And it’s the job of the board and the executive team to respond to this broad array of customer demands and prioritize them appropriately. Failing to do so will mean the end of the corporation and the destruction of shareholder value. In this way, responding appropriately (and proportionally) to customer needs drive long-term growth, profitability, and shareholder value. Everyone wins.
Airbnb’s recent request to the SEC for a rule change to provide stock options to home hosts is just one example of this alignment. Airbnb recognized that what’s good for its hosts is good for its shareholders, given its belief “that twenty-first century companies are most successful when the interests of all stakeholders are aligned.”
This is not the case for the vast majority of the gig economy participants however — they are neither employees nor contractors, and thus ineligible to receive stock options. The only people who have a claim on the underlying value generated by a corporation are equity holders. In some cases, as in venture-backed startups, employees can also be equity holders through the grant of stock options… but that’s not the case for the vast majority of employees in traditional enterprises.
Yet we still don’t need legislation to compel better longer-term or broader ESG thinking from these corporations. The free market works well here.
Take for example cryptonetworks, which we’ve defined as a new way to build “community owned and operated digital services”. As such, these new networks — and ways of coordinating human activity well beyond the scope of the traditional, limited structure of a firm — might have more answers for a more socially and economically conscious form of capitalism. (Or at least one that aligns participants in each cryptonetwork to the networks that match their values, instead of a one-size-fits-all model of “the firm”).
Because cryptonetworks don’t rely on the good behavior of centralized corporations, but are governed by a decentralized network/community of users, operators, maintainers, and others, the value created by them can accrue to any participant in different ways. The key mechanism for this is through “tokens” — which seek to align economic, capital, governance, mission, reputation, or any other incentives for the community — through proof of work, proof of stake, skin in the game, power users, karma points, and other game-theoretic and mathematical (and therefore more reliable) mechanisms for measuring work and value. In this sense, cryptonetworks could be the ultimate vehicle to democratize access for more people to capital, to wealth gains, and a say in governance — not just for corporations themselves but also for the ownership of their own identities and data too.
The actual mechanisms are much more nuanced than this, but the key point is that software now allows much more than what’s possible in traditional offline structures for coordinating activity. In fact, this networks model might be even more efficient than the classic coordination costs of the firm — the original argument made in Ronald Coase’s 1937 paper for why firms exist — because there is no one central entity determining and extracting value. Not only have many of the frictions and transaction costs been mediated by software, new forms of coordination and incentive mechanisms become possible as a result.
To make this more concrete, imagine a company like Airbnb, but built in the era of fully developed cryptonetworks. If it were established using blockchain architectures, this new organizational entity could issue a token that would be utilized as a reward system for the operators (or miners) who would ensure the veracity of transactions on the network and for the participants in the network (i.e., hosts, reviews, etc.). If the organization were to then become a successful business, the value of the token could increase commensurate with this value.
But for company builders and developers, not just users and maintainers, there are other benefits. We believe such token economies could help solve the network-bootstrapping problem: Instead of having to subsidize hosts (and therefore have to take more, as in the high “take rate” of marketplace businesses) to help build the supply side in these new markets, the early users (both hosts and early adopters) could participate in the gains of the marketplace, thus aligning their participation with the growth of the company and its value. Similarly, guests could own their own reputation, reviews, and other associated data and activity on the network (as opposed to the network itself owning it). Or, power users like superhosts and frequent/ loyal guests could have more say in the future strategic direction of the entire organization by voting based on the level of their involvement(as opposed to who arbitrarily got there first, or only speculatively snapped up the tokens first). All of this would be structurally built in up front, through code (as opposed to corporate fiat).
In this way, cryptonetworks could not only address many of the issues outlined above, but through decentralized autonomous organizations, could even reinvent the very nature of the firm… which is due to be revisited in an era of globalization, abundant bits, and widespread software.
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Ultimately, the question isn’t who or what should have more say — shareholders or stakeholders, profit or purpose, wealth or capital — but rather, what’s the right time frame to judge tthat a corporation has satisfied its constituents? Short-termism — whether in the form of activist shareholders who demand cash-ectomies from corporations (through dividends and stock repurchases) or through fund managers who punish companies for trading off near-term earnings per share for long-term investments — is at the root of issue.
We don’t need legislation to compel longer-term and broader ESG thinking from corporations; we need to give corporation the benefit of time and for consumers to exercise their voice through their wallets.
Corporations and boards of directors already understand very clearly that they’re beholden to customers; without this, those companies can (and should) die. Their voices, in a fair period of time, will always dominate.