By David Hatherly, Ronald K. Mitchell, J. Robert Mitchell, & Jae Hwan Lee
Corporate operations create new wealth, potentially for all stakeholders. But as we describe below, they also transfer wealth between stakeholder groups without any accountability. In our paper, we seek to better explain the mechanisms that control this unaccountable transfer of wealth, through a re-imagination of the accounting concepts of capital maintenance—which references “the amount [of capital] an individual [or firm] can consume and expect to be as well off at the end of the [period] as at the beginning”—and profit.
Consider some common examples of corporate behaviours that impact business and society: the end of defined benefit pensions, outsourcing, the preferential treatment of new customers and the avoidance/reduction of corporation tax. These examples serve to transfer wealth from other stakeholders to stockholders, but leaves managers insufficiently accountable to all parties to the value creation. Directors, whose interests are aligned with stockholders through long-term incentive plans, are also beneficiaries and thus cannot be impartial in holding managers accountable. Such preferential treatment is potentially damaging to the effectiveness of the stakeholder coproduction network, which involves all stakeholders necessary for the creation and realisation of value. Profits from such unaccountable transfers may not be sustainable due to stakeholder disengagement from the co-production network and these transfers might need to be reversed before opportunities for growth through the further creation of value can be realised.
Unaccountable transfers may also transfer wealth among other stakeholder groups or subgroups. For example, “off-shoring” strategies benefit customers and off-shore workers, but at the expense of ‘on-shore’ employees. Thus, there is a complex pattern of winners and losers that emerges at the sites of unaccountable transfer of wealth. In the long term, this imbalance can create political difficulties and government interference on the grounds of fairness or to protect perceived national interests.
But beware! Even well-intentioned government action can have consequences for stakeholders—some even unintended. In this paper, we re-imagine accountability in ways that can render governmental intervention unnecessary through appropriate treatment of stakeholders, both as a matter of ethics and of enlightened self-interest.
Unfortunately, the performance measures assessing corporate executives and fund managers (e.g., ROA, ROE, ROI, etc.) do not leave much space for enlightenment through better accountability for transfer-based profits. Such measures reflect returns to stockholders based upon profit, which often include transfers that are not new wealth creation. Therefore, we argue that transfer-based profits should (1) be excluded from performance measures and (2) be unavailable for distribution to stockholders. In our thought experiment, we envision that transfers (from stakeholders to stockholders) are treated not as profit, but as stakeholder capital to be retained and invested in the company for the benefit of all stakeholders. Thus, the maintenance of stockholder capital (which underlies current concepts of profit) is extended to the maintenance of the capital attendant to other stakes in the company.
Accordingly, profit distributable to stockholders becomes conditional not only on the maintenance of stockholder capital, but upon the maintenance of all stakeholder capital. Our thought experiment leads to identifying the sometimes difficult judgements required to separate wealth transfers from new wealth creation in circumstances of changing efficiency and quality. These judgements imply the need for a strong audit function accountable to a salient stakeholder base.
To summarise, we envision a stakeholder capitalism that recognises the capital contribution of all salient stakeholders. The ambition is to remove or reduce many of the existing tensions among stakeholders and within stakeholder categories. We argue that this is important because what has previously been argued as wealth creation (e.g., the performance of the stock market) may not be wealth creation after all, but might instead just be masking the effects of the transfer of wealth from certain stakeholders to stockholders. Thus, instead of concentrating on creating unaccountable transfers that are damaging to business and society, we argue that it is more important to concentrate management effort on the true creation of new wealth that benefits all stakeholders. We see such an approach as being sustainable over time.
References:
Hatherly, D., Mitchell, R.K, Mitchell, J.R., Lee, H.W. 2020. Reimagining Profits and Stakeholder Capital to Address Tensions Among Stakeholders. Business & Society, 59(2). https://doi.org/10.1177%2F0007650317745637 https://journals.sagepub.com/doi/full/10.1177/0007650317745637
Hicks, J. R. (1946). Value and capital: An inquiry into some fundamental principles of economic theory. Oxford, UK: Clarendon, p. 172.