Any business-governance theory that, if honestly applied, collapses into neurotic indecision paralysis at the fundamental question of setting wages is a failed theory.
Well then, RIP “stakeholder primacy,” 2019-2021 – at least as an honest theory.
Of course, as has been discussed here before, stakeholder primacy is not an honest theory. For the leftwing radicals, it is a trojan horse – the rhetorical trappings of capitalism encasing and disguising the destructive invader of socialism, poised to spring out and sack the economy. To self-impressed CEOs, it looks like an oligarch’s charter, allowing them to interfere in political issues beyond the legitimate interests of their companies at the “behest” of the stakeholders whose sock-puppet concerns they deign to recognize.
By way of illustration, consider the conundrum that would face, for instance, Walmart CEO Doug McMillon if he tried to apply stakeholder primacy to the question of wage rates. McMillon provides a good case study because he serves as the chairman of the Business Roundtable (BRT), the organization that so ostentatiously (and preposterously – it’s a luncheon club) declared the great business reset – the shift from shareholder to stakeholder capitalism. Additionally, the company that he heads employs vast numbers of low-skill, low-wage workers, who will face immediate – and disparate – effects from any rise in the minimum wage.
Note the first problem with stakeholder primacy – the shift from company concerns to general economy- and society-wide concerns (read: politics) that it facilitates. In the dark, evil days from which the BRT so grandly delivered us, in which corporations were run for the overriding benefit of their owners (the shareholders), decisions were made in the best long-term interests of the company. This provided both a metric by which options could be judged and a limit to their scope. Under this system, McMillon was able to set wages (barring government interference) at the amount necessary to compensate workers for the work that they had done for the benefit of the company, not paying them so little as to lose them nor so much that they were earning more than the good they did the company.
But stakeholder primacy allows CEOs to throw off these sensible limitations and to shift their attention from questions they’re qualified to answer – wages for their workers – to questions for which they have no special competence – government-set minimum wages (or government-set policy in general). And so McMillon’s task, according to the pronouncement of the organization he chairs, has become far harder – figuring out a position for Walmart on the minimum wage that takes into account the interests of all stakeholders.
In fact, though, McMillon is hoist on his own and the BRT’s petard, as the task hasn’t simply become harder, but impossible.
When government raises the minimum wage, some workers benefit: those whose work is good enough to justify the higher wage, or whose “pull” is great enough that they can keep their jobs despite being a net loss. But other workers lose: those whose work is not good enough to justify the pay increase. Because when companies are forced to raise wages, they don’t just keep the whole workforce at the higher wage regardless of each worker’s unique value. They lay off the least-productive workers, who now can’t get a job at all because their contributions are worth less than the minimum that the government allows anyone to pay them. Meanwhile, the remaining workers are expected to work harder to take up the slack and earn their raise. Alternatively, the company invests in more automation (which, in contrast to workers with rising minimum wages, has a cost that decreases over time) and now needs fewer workers – and many fewer low-skilled workers – at all.
So stakeholder capitalism makes it impossible to decide what wages to set, even if the only stakeholders considered are the low-skilled workers who will be directly affected by the minimum-wage bump. As more workers’ interests are considered, the paralysis grows.
But now consider other stakeholder interests. What about customers? If the net effect of the minimum-wage increase is to raise prices while decreasing service, most customers will oppose the increase. Now, some will be married to company workers who get the bump, or own restaurants frequented by company workers who keep their jobs, and will therefore get an overall benefit. But that just means that once again there is another intramural fight within a single stakeholder group: customers. More befuddlement; more paralysis.
Then there’s the broader community interest. Whether any given community will gain or lose a few dollars in taxes will depend on what taxes that community levies, which differs everywhere. More paralysis re: a national minimum-wage increase. But a community’s interests uniformly suffer from increased use of taxpayer-funded social services by the people who lose their jobs, and from the increase in crime that follows increases in unemployment. And if the minimum-wage increase drives companies out of business, it could represent an existential threat to the community. Minimum-wage increases always pose such a threat to towns with lower wage bases. More intragroup stakeholder division.
This analysis could continue, but the point should be clear: honest stakeholder capitalism is impossible. And not just with regard to wages. Some shareholder activists (union-funded, naturally) are pushing for worker representation on the board. But what about customers? Small shareholders? We’re all stakeholders, right?
A theory as self-evidently useless as stakeholder primacy should never have made it past a brainstorming session. But that’s true of an awful lot of what passes for cutting-edge economic and social theory today. Wonder why that is?