Profits should have the same priority as paying interest to financial institutions, salaries to employees, taxes to governments, and discounts to customers. Why should enriching shareholders be more important than producing quality products and selling them to customers at fair prices? What logic says that a company should put creating value for shareholders ahead of the economic well-being of its employees? The legendary lawyer Clarence Darrow reinforced this view when he said, “The employer puts his money into ... business and the workman his life. The one has as much right as the other to regulate the business.” Employees should share in the value they create.
As “individual citizens” of the state, corporations are given certain rights and responsibilities in order to serve society. Most modern corporations rely on various groups and institutions to help them meet this goal.
Classical economics suggests that all “residuals” (profits) should go to shareholders or owners. Some students of the modern corporation have used this economic theory as the basis for suggestingthat making money for shareholders is the primary goal of investorowned corporations. Some legal scholars also support this theory, although the courts have not consistently held that the “shareholder is king.”
Margaret M. Blair, the Sloan visiting professor at the Georgetown University Law Center and a nonresident senior fellow at the Brookings Institution, analyzes the legal, economic, historical, and practical issues in Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century. Her book supports the idea that shareholders are only one of many important stakeholders in corporations. “What troubles me most about the shareholder primacy argument is the glibness of it all,” she wrote in The Financial Times in 2002. “Anyone who runs a business on the basis of fundamentals knows that they have to pay attention to human capital, their suppliers, franchise operators, all the different parties involved.” During the past two decades, several states, including Illinois, Massachusetts, New Jersey, New York, and Pennsylvania, have added language to their laws of incorporation that give expanded rights and other considerations to these stakeholders. The shift was evident even in the conservative Board Alert newsletter, which in February 2003 published an article titled “Board Focus Shifts From Shareholders to Stakeholders: Employees, Customers, Communities Become More Important to Directors.” The article stated: “Corporate boards are rethinking whom they represent as they draft governance principles required by new regulations.”
Regardless of the economic and legal issues, however, most CEOs of large organizations know that the classical economic view and a strict legal interpretation of corporate ownership have little relevance to how the modern organization does and should work in reality. Each stakeholder is crucial to a company’s success. Obviously, the company depends on investor capital, but it also needs lenders, customers, productive employees, rights and protections provided by government, and products and services from suppliers. The value created is the sum of the contributions of all these stakeholders. In return, each stakeholder deserves a portion of the value created.