Shareholder vs stakeholder capitalism
The virtue of shareholder wealth maximization is its simplicity, argues John Matsusaka: managers adopt all projects with a positive net present value with no need to know anything about the preferences of investors. Shareholder welfare maximization, on the other hand, requires managers not only to know shareholders’ preferences but also to adjudicate differences of opinion. Would voting by individual voters resolve this problem? No argues, Matsusaka as there are four main issues related to the way individual preferences are aggregated into a social welfare function:
- Arrow’s Impossibility Theorem, which shows that it is impossible to aggregate preferences in a way that does not violate at least one of the basic decision principles;
- Strategic voting i.e. voting in which people do not select their top choice and hence make it impossible for companies to rely on voting to accurately reveal preferences;
- The power of agenda control i.e. he who decides what is to be voted on, and in what order, has tremendous power to influence the outcome;
- Influential groups’ capture i.e. the disproportionate influence wealthy and organized groups have on a company’s decision making.
[T]he current system of shareholder value maximization has served us well, and should not be replaced without a strong sense that there is a superior alternative.
A Challenge for Stakeholder Capitalism: Solving the Paradoxes of Voting
By: John Matsusaka – University of Southern California
Is stakeholder capitalism feasible?
In environmental regulation, finance, consumer safety, antitrust, or trade policy, government officials have ceded control to corporations because it is corporations that determine how knowledge is produced and disseminated. This gives them the power to determine how problems are defined, which solutions are considered, what the technology envelope looks like. […] In such circumstances, it is difficult for governments to set socially desirable ground rules without significant input, and hence influence from firms. […] Ultimately, though, the only real solution to the conundrum is to make business itself more democratic. That means giving employees and local communities a direct say in the way firms are governed.
The Public’s Business
By: Dani Rodrik – Harvard University
Can stakeholders achieve a socially desirable outcome?
Broccardo and al., in this paper show that investors who are well diversified and only remotely altruistic, can, through voting, push firms to act in a socially responsible manner. Why then this social engagement is so rare? In some cases one shareholder holds the majority of shares, a là Facebook, some powerful firms are private and finally, voting by proxy in the US tends to limit shareholders’ ability to influence corporate policy.
Individual shareholders have the incentive to vote on issues in a socially optimal way and their engagement can lead to more efficient outcomes.
Exit vs. Voice
Authors: Eleonora Broccardo, Luigi Zingales, Oliver D. Hart
From: University of Trento, University of Chicago, Harvard University
