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Shareholders still the stakeholders that matter most - San Francisco Business Times

From the San Francisco Business Times :http://www.bizjournals.com/sanfrancisco/stories/1998/02/16/editorial4.html Feb 15, 1998, 9:00pm PST Updated: Feb 15, 1998, 9:00pm PST

Guest Opinion

Shareholders still the stakeholders that matter most

Jeff Scott The record rate of mergers and acquisitions over the past year has prompted affected parties to revisit the issue of corporate responsibility. No wonder: Big bucks are at stake during corporate control transactions. Anyone with a seat at the bargaining table will fight for a share of the pie. One unscrupulous way to fight for benefits is to start the debate on false premises by claiming that CEOs should balance "stakeholder" interests rather than serve the owners. Modern stakeholder advocates are a political coalition: ? The political Left calls for corporate responsibility as a means of burdening business with a social agenda they cannot pass legislatively. ? Labor unions endorse virtually any platform they believe offers protection from plant relocations and competition. ? State and local legislators seek to protect established business interests in their districts, especially those of corporate managers and campaign donors who feel their own jobs threatened by layoffs. ? Anti-capitalist economists like Robert Kuttner and Robert Reich decry the alleged "excesses" of executive salaries and worker layoffs. ? Liberal academics claim that corporate acquisitions are artificial transfers of wealth from workers to shareholders. The coalition has succeeded in passing constituency statutes, that fulfill the stakeholder ideal. In effect, benefits are transferred from shareholders to labor and management. The implied promise is that the manager-diplomats will grant favors to local politicians, environmentalists or regulators against the interests of the shareholders. Constituency statutes are a littleunderstood form of protection from competition. Insulating poor competitors from failure reduces the wealth of other producers and consumers. Defending the primacy of shareholder rights requires an understanding of the requirements of wealth creation. Since a corporation is an entity with a purpose, managers must set goals in
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Shareholders still the stakeholders that matter most - San Francisco Business Times

accordance with a hierarchy, and shareholders properly belong at the top of that hierarchy. Shareholders, the owners, acting through elected and appointed directors, hire the managers and bear the ultimate risks. All legitimate interests in a company must be aligned with an unambiguous purpose: profitability through customer satisfaction. Corporations work because shareholders expect exclusive loyalty from the directors. The web of mutual interests between the corporation and other stakeholders -- banks, workers, customers -- are fortified under the different forms of law. Advocates of stakeholder laws, by contrast, threaten corporate survival when they demand that everyone connected to or affected by a corporation -- suppliers, customers, managers, community neighbors -- should be given an equal say in decision making. Under a stakeholder model of responsibility, the interests of these diverse groups could never be harmonized under nebulous "public interest" goals, since they would vote to benefit themselves and subvert the shareholders' will to create wealth and pursue profits. Robert Reich argues that corporate takeovers are an artificial transfer of wealth from workers to shareholders. When a worker and company bond together, they create an asset. That human capital disappears if the employer-employee relation is severed artificially. True enough. But there is nothing artificial about corporate takeovers. Though highly controversial at one time, today the consensus is that hostile takeovers, leveraged and otherwise, were good. In fact, the opposite of Reich's point is true: The 1980s saw an undoing of the artificial transfers of wealth in the 1960s and 1970s. Companies had been operating under a protectionist regime whereby executive management held discretion over the use of corporate earnings. The cash that should have been paid out to shareholders was used in misguided conglomeration strategies and was a key cause of bloated middle management. The deals between workers and corporations by diplomat CEOs were made at shareholder expense, under the guise of balancing diverse interests. In the 1980s, shareholders, with the help of oft-maligned corporate raiders and investment banks, recaptured the value-creating potential that was being squandered on friends of management. Corporate acquisitions increase shareholder wealth by offering values to customers. The artifice arises when corporations violate shareholder trust, juggling corporate assets for political interests, and sacrificing the values of producers and consumers. Scott, a financial analyst at Wells Fargo, is the author of "The Decade of Achievement: Another Look at the Eighties as a `Decade of Greed.' " San Francisco writer Fredric Hamber contributed to this opinion.

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