One hears frequently of the leftist indoctrination of college students in the United States, whose recruitment to the ranks of progressives and, more recently, socialists, is apparent.
Opinion polls show the approval of socialism among millennials at just over 50%. I presume that in the liberal arts and humanities this indoctrination occurs in history, political science and related classes somewhat systematically, and in other courses by random observations of socialist professors. In the case of business students, I am fully aware of the indoctrination process, having taught for many years in business schools.
For many years I assumed that the exposure to economics in college and having been the victims of regulatory measures once they begin careers in business, businessmen would be natural advocates of laissez-faire capitalism and the market system. With the introduction of systematic indoctrination in business schools, however, one can find all sorts of indoctrinated socialists in business and, perhaps especially, in financial firms. This essay will address the nature of the indoctrination of business students.
The corporation has always been vilified by its socialist detractors – those who ignore the fact that corporations are the producers of the goods we consume and the provider of jobs. They are the institution that develops and applies new technologies, and gives us investment opportunities for our 401K plans. But according to “stakeholder theorists,” who provide systematic indoctrination of our future business leaders, the corporation has the potential for doing some good, but academics must train students to overcome the corporation’s history of evils and abuses.
Once, people like people like John D. Rockefeller, Cornelius Vanderbilt, Henry Ford, and Andrew Carnegie were derided for their business practices and their negative impact on the public welfare. But they gave away huge amounts of money to fund philanthropic causes. Nevertheless, stakeholder advocates maintain that those in society who understand ethics and proper managerial behavior must transform corporations into “socially responsible” institutions. Our large corporations must show concern not only for the stockholding owners of corporations and their profits. No, they must consider and respond to the needs and desires of all the groups and organizations which are affected by the functioning of corporations. All such groups who have a stake in the outcomes of corporate activity – the “stakeholders” of the corporation must be a part of the corporate leaders’ concerns.
Moderate stakeholder theorists, if I may use a distinction made by a stakeholder theorist among my business school colleagues, are simply individuals who wish to teach ethics to prospective managers. The more radical among business school faculty advocate more forceful methods of imposing stakeholder principles on corporations. This latter type of stakeholder advocate hopes to impact the functioning of corporations by applying “social controls” to corporate management. Some might be willing to be satisfied with teaching corporate leaders their corporate social responsibility (CSR), but others would like to take further, more extreme measures to make sure that CEOs rigorously apply the stakeholder principles they learned as undergraduates.
One might notice the asymmetry of the stakeholder theory. All corporate activity imposes external costs on the society. Those thus impacted are thought to have a claim on the corporation. But corporations produce both costs and benefits. For example, corporations pay taxes and perform other positive functions. Perhaps those who benefit from the existence of a given corporation whom they do not patronize should be considered “beneficiaries”, rather than “stakeholders”, and provide revenues in some form for their beneficiary social responsibility (BSR), which would be remitted to all socially acceptable corporations.
Those corporations performing helpful social functions, such as would bring happiness to any state chosen to be the headquarters of such a corporation, should probably also have an agent serve in the upper echelons of the tax administration of such states, if not in the IRS in Washington, D.C. This notion, of course, will not attract any positive response from socialists (“stakeholder theorists”) in our business schools.
It is hardly difficult to find persuasive refutation of stakeholder claims from the perspective of economics. According to stakeholder advocates, their objective is to make “values” necessarily and explicitly a part of doing business. Managers are to be indoctrinated and trained to share the wealth the corporation creates with their core stakeholders.
“The Corporate Objective,” the highest stakeholder value, is that “truth and freedom are best served by seeing business and ethics as connected.” The notion of intervening in private commerce to achieve social justice originated, of course, in the public sector. Stakeholder advocacy merely extends the process of “pursuing social justice” to the private sector. We are accustomed to perceiving the public sector in terms of politics and political action. Aside from the public corporation, only governments – federal, state, and local – can generate resources on a large scale. In a sense governments also have shareholders, citizens who pay taxes and provide services such as voting and volunteering for public projects. Strictly speaking, we do not separate ownership and non-ownership in governance, since the founders perceived an equal creation of all the governed. Those not in a position to contribute to the generation of wealth, however, are akin to the stakeholders of governments. They are franchised to use the public infrastructure, receive subsidies, enjoy public health services, educational programs, and so on. Legislatures have recognized their entitlement, which is by community agreement separated from ownership.
Stakeholder theory comes along much later and places its focus on the private sector, advocating an expansion of the services received by private stakeholders and demanding increasing private provision for their needs and claims. But those needs and claims are more clearly the business of the public sector. Society as a whole, in the form of representative government, agrees to expand the benefits of legitimate stakeholders – low income recipients, the poorly educated, the physically handicapped or chronically ill, and others unable to provide for themselves. This is done to express the community’s preferences for justice and equity and includes taxation of the private sector to secure the essential welfare funds.
Market advocates have long held that more efficient and effective care of social stakeholders would occur if the private sector were concerned strictly with taking care of the ownership and allocation of private resources. If returns are maximized and efficiency prevails in the private sector, large amounts of resources are generated for redistribution of funds transferred to and through the public sector. Moreover, as we learned from the socialist experience in the Soviet Union and East Europe, the generation of public resources is not unrelated to the state of private incentives. If the provision of resources is taken over completely by the state, the resultant incentive incompatibilities guarantee a much diminished national product, much reduced taxation flows, and a much lower level of living in general.
The socialization of the private sector is not an efficient way to generate resources for the underprivileged. Teaching prospective managers that they may consider themselves the “owners” of the corporation’s resources (because they need no longer feel any responsibility to the shareholders, who are the actual owners of the property) and because those resources should be used for social claims is certainly a poor idea from the standpoint of justice or efficient resource allocation. Although managers may engage in moral hazard (using resources in their personal interest, in this case to enhance the position of stakeholders, far and near, rather than create wealth for the firm’s owners), this diversion from efficient management will lead them into unproductive pursuits that shrink the capacity for wealth creation. This diversion of resources from the owners, the shareholders, imposes upon them one more set of redistribution demands through a form of private or “quasi” taxation. And this is performed in the name of ethics?
Advocates are apparently unwilling to perceive that business activity already takes place in a world in which there are numerous laws and regulations on corporations to account for social interests. Calling on business leaders to impose additional, self-administered measures to enhance additional income redistribution at the expense of the firm’s owners can only be the result of over-reach. Thus, Milton Friedman is quoted as saying that stakeholder advocates are “preaching pure and unadulterated socialism.”
Stakeholder advocates rely on sweeping generalizations about the fiduciary and social obligations of corporations. They promote the notion that any individual or organization that “invests” in corporations has the right to some return on the investment, i.e., to some of the fruits of the firm’s productivity. They do not usually elaborate on the idea of what kind of return they might expect from their “investment,” the nature of which is likewise vague. In the current economy, one may rest assured that if any individual or organization has a claim on any specific firm for any specific “investment,” the demand for such a return will already have been pressed in the courts. In any case, all the stakeholders in American corporations having a legitimate claim on a return are already receiving it.
It has occurred to some theorists that stakeholder-oriented companies possessing any monopoly power have lower output and higher prices. Firms in this situation may choose voluntarily to be stakeholder oriented, because they are in a position to charge higher prices (akin to adding a tax). That benefits stakeholders because higher prices are required for firms of this type to produce revenues not only to cover current costs, but also for stakeholder causes.
We need not pursue the analysis of a government tax imposed on an imperfectly competitive firm here. The government already taxes such firms to finance the usual social programs. This tax, generally of the excise type, will be passed along to the consumer. Thus, the stakeholder quasi-tax burden combines with the normal tax burden already imposed by the social-welfare state on the consumer. The imposition of higher taxes is not likely to be seen as a disadvantage to the average stakeholder advocate, but it should serve as a warning signal to other citizens and business people.
Finally, the adoption of a thoroughgoing stakeholder model would transform the corporation from its original situation of focusing on the simple matter of maximizing profits. It would have to focus on all the other “investors” and claims on the earnings of the corporation. It would become like a government agency, no longer worrying about the bottom line. It would only have to transfer any available funds to the diverse causes célèbre of stakeholders far and near. Becoming a government bureaucracy, it could not be expected to exhibit greater efficiency than the I.R.S. or the V.A.
For a more thorough and detailed treatment of these stakeholder issues, I invite the reader to see the much longer and completely documented exposition in two chapters of my book, Socialism. 