In "The Company: A Short History of a Revolutionary Idea", John Micklethwait and Adrian Wooldridge

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The Company: A Short History of a Revolutionary Idea

In “The Company: A Short History of a Revolutionary Idea”, John Micklethwait and Adrian Wooldridge capture the evolution of a business company from its earliest predecessors in 3000 B.C. in Mesopotamia to the modern day multinational corporation. They assert that it is impossible to fully understand the last four hundred years of world history without placing the joint stock company and its wide-ranging economic, political, social and cultural consequences at the heart of the picture. To show their steadfast support for the organization which they claim to be the most important one in the world, the authors claim that the limited liability company is “the basis of the prosperity of the West and the best hope for the future of the rest of the world”.

In this paper, I am not going to oppose their contention, for after reading their arguments, I find myself inclined to agree with them on the significance of capitalism and the organization of the company, as well as the benefits of both. What I am going to do though, is address the direction that the company as a whole takes, towards achieving the end of prosperity for the civilization that it serves. In simpler and less eloquent words, I am going to dissect the company’s relationship with society, a persistent theme throughout the book, and one that can be scrutinized by analyzing the two forms of governance that companies can adopt. The issue can be summarized in a question that has cast a shadow on the institution of the company ever since it arose in mid-nineteenth century Britain: “Is the company essentially a private association, subject to the laws of the state but with no greater obligation than making money, or a public one which is supposed to act in the public interest?”

Broadly speaking, there are two forms of capitalism that a company or companies can implement, namely stockholder capitalism or stakeholder capitalism. The Anglo- American shareholder ideal holds that companies are run for the benefit of their owners, that is, their shareholders. Their, purpose, as documented by a 1916 Michigan Supreme Court ruling, was to serve the interests of the shareholders by making profits ultimately payable to them. On the other hand, the German-influenced stakeholder ideal holds that companies are meant to work for the benefit of all those affected by the business, and to therefore profit not only shareholders, but also employees, customers, suppliers and members of the local community. The corporate model chosen by any nation has far-reaching implications for the country itself as well as its companies, and more importantly in the context of this paper it shapes the way companies interact with society.

To begin with, let’s analyze the stakeholder companies, where the management is obligated to act as agents of the stakeholders, while ensuring that the company remains a going concern. In this respect, the management is required not to violate any stakeholder’s rights, be it legal or moral, as well as to give equal importance to the conflicting interests of all stakeholders in order to strike an optimal balance between them. The stakeholder ideal would be supported by deontological ethical theories, which maintain that one should act according to his duty rather than by the consequences of the action itself. The notion of duty is significant in justifying the obligations that arise from relations, such as that of an employer and employee, manager and owner, and firm and customer. The emphasis on duty also paves way for the importance of motives in actions, and hence the intentions of each of the involved parties, in our case each of the involved stakeholders, should be good towards one another.

The most prominent example of a deontological theory, that of Immanuel Kant, emphasizes the principles of universalizability and respect for persons, both of which seem to favor the stakeholder ideal over the stockholder one. The principle of universalizability asserts that if an act is wrong for one person, then it is wrong for all similarly placed persons, thereby enforcing consistency in one’s judgments. It implies that if it is wrong for one party, such as the shareholders, to be ignored in the operations of a company while only keeping other stakeholders’ interests in mind, then it is also wrong ...

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Kant’s second principle, the principle of respect for persons, upholds the dignity, rationality and autonomy of human beings. It maintains that one should never use free and equal beings only as a means, as it would make people indistinguishable from mere things. In order to respect people, it is necessary to always consider them as an end in themselves, and never as merely a means to an end. Thus, though all the stakeholders are participants or a means for the end of production, distribution, and marketing of goods and services, they should simultaneously be considered as ends themselves, which necessitates the protection of their welfare alongside the completion of the aforementioned aims of the business. However, even though exploiting other parties such as workers and consumers, as might happen in shareholder capitalism, is out of the question in the stakeholder model, Kant’s theory does not provide a way of justifying the inevitable trade-offs that must be made even in this model.

In order to account for the management of unavoidable trade-offs, I am going to borrow from the second principle of justice in the egalitarian theory of John Rawls. Rawls claims that given everyone enjoys the most comprehensive system of basic rights and liberties, which would not be traded for welfare at any cost (though this assumption is debatable in the light of the poor standards of living of third world country populations), some inequalities can be justified in order to increase the total social wellbeing. However, these inequalities are to be arranged in such a way so as to benefit the least advantaged as much as possible, and to be attached to positions that are equally accessible to all. Applying this principle to the business sphere, conflicts of interests between the affected parties must be resolved so that the most deprived group benefits as greatly as is compatible with the increase of the overall welfare. As a result, stakeholder theory is backed by Rawls’ second principle of justice, as it enables parties, such as shareholders for instance, to advance their own good if at the same time the interests of the least advantaged stakeholders, such as workers maybe, are furthered to the greatest extent possible. The ambiguity involved in my use of terms such as ‘greatest extent’ and ‘as much as possible’ is to me unavoidable, but I think that it is essential to note that the long run should be considered as well in terms of benefits accruing to other stakeholders, instead of focusing rather narrow-mindedly on the immediate short term all the time.

Having assessed the stakeholder companies and their philosophical backing in detail, I am going to move on now to the stockholder companies, building on the foundation that I have already created so far in order to compare the two and patronize one over the other. Stockholder companies, just to recap, are those which are managed with the intention of providing profits or returns on investment to the shareholders, or the owners of the business. However, even though they clearly prioritize the shareholders’ interests over those of the other stakeholders, shareholder companies are still required to operate under the legal system while at the same time also conforming to the basic rules of society. After putting forth all the arguments in favor of the stockholder ideal and on the verge of doing the same for the shareholder one, I feel that at this point of time it is necessary to reveal that I share the bias of the authors, Micklethwait and Wooldridge, towards the latter.

For now, in order to present my case for the shareholder model, I am going to make certain assumptions about the conditions that exist when this model is in operation. Though all these assumptions can never be absolutely true, I believe that relatively similar conditions can, in general, exist, with certain exceptions to every one. I am going to assume a perfectly competitive market, perfectly symmetric information, a perfect labor market and rational individuals who act to maximize their utility. On the basis of the establishment of such conditions under shareholder capitalism, teleological ethical theories would tend to support it, since they maintain that the rightness of actions is determined by the ends they achieve rather than the characteristic features of the actions themselves. This brings me to one of the focal points of my paper: the ends achieved by the stockholder model are superior to those attained by the stakeholder one, though the approach of the latter maybe inherently more ethical than the former.

Using the utilitarian cost-benefit analysis, which employs monetary values to calculate the advantages and drawbacks of various alternatives, the dollar amount of the benefits accruing from using the shareholder model exceed the costs associated with it, over and above those of the stakeholder model. The reason for this is that competition between companies instead of cooperation (as may take place in the stakeholder model), to attract utility-maximizing consumers, leads to the most efficient allocation of resources due to the need for reducing costs, improving quality of goods and services offered, and increasing productivity. Companies, as a result, end up benefiting society as a whole much more than they intended to merely by operating in a competitive environment. This falls in line with Adam Smith’s “Invisible Hand” argument, where people, and in our case, companies, are led by an invisible hand to promote social good, and end up producing the highest level of welfare for society. Hence, just as capitalism is argued to be the best type of economic system by the authors, among the alternatives available, shareholder capitalism is the best form of corporate governance as compared to its alternatives, as it provides the greatest net benefit in terms of welfare.

If the theory about stockholder companies achieving greater all-round results for the economy and society than stakeholder ones has managed to be convincing so far, it still fails to account for one of its greatest criticisms and weaknesses compared to the stakeholder theory: the protection of human dignity and respect for persons. The fear that stockholder companies can exploit other stakeholders for the increased benefit of their owners to such an extent so as to violate their (stakeholders’) basic rights is not unfounded, since shareholder companies such as big multinationals for example have been seen to breach social norms in the past. However, the reaction towards the exposition of cases of abuse by multinationals in the past and the trend towards a decline in their exploitation of parties such as workers in third world countries only confirms their correlation and reinforces a key aspect of companies : companies have, do and always will require a sort of “franchise from society” . By society is meant all those groups that are affected by a company’s activities, and hence in other words, the various stakeholders of a company. What this implies is that besides the owners, or shareholders, all the other stakeholders, such as workers, suppliers, and consumers are also essential parts of the machinery of a company, so without their approval and support, a shareholder-oriented company will inevitably collapse. This notion appeals to common sense, as how would a company survive if its workers, being badly treated, withdraw their labor services from the company, or if its customers, or consumers, being exploited in one way or the other, stopped buying its products. Therefore, the advantages of the free market economy come into play here, as any infringement of the terms of that franchise that companies enjoy from society, would be corrected by the market under the assumptions laid out in the preamble of my discussion of shareholder companies.

The only thing left for me to do is, I feel, to account for situations that radically differ from the ones that I assumed to be true while the shareholder model prevails, and upon which I developed all my arguments. In order to deal with scenarios where imperfect competition (more specifically monopolies and oligopolies), an imperfect labor market, and asymmetric information exist in unison or in isolation, the institution which I have conveniently left out in all my arguments heretofore- the government, is required to enforce certain regulations and restrictions on shareholder companies, in order to prevent them from taking advantage of circumstances to suit their owners at the expense of others. The role of the government can not be downplayed, as it is required to protect the rights of the least advantaged stakeholders involved in companies when they are not in a position to enforce them on their own or are not aware of them, thereby negating to some extent the comparative advantage that the stakeholder model had of according respect to and preserving the dignity of all individuals, as intervention by the government can ensure that individuals are treated as ends rather than as means only. In addition, the government is also supposed to monitor the various operations of companies which create negative externalities such as pollution of the environment, which affects local communities, and for which the government can basically charge the company with the cost of cleaning up or undoing the damage done by them. Thus, the government essentially acts like the watchdog for shareholder companies in order to guard the rights and interests of the other stakeholders, and hence reducing the difference of treatment to stakeholders under the two separate models of operation.

To conclude, I would like to stress that in today’s world, the Anglo-American shareholder model is quickly gaining ground as opposed to the stakeholder one, which is even shedding some of its governing principles in its traditional strongholds of Continental Europe and Japan. However, in my view, the two models have come closer to each other over time rather than drifting apart, being displayed no greater than in America, the heart of shareholder capitalism, where companies are facing increasingly burdensome social responsibilities such as providing for the pension and healthcare costs of employees. That being said, I think that the flexibility and dynamism that is cultivated under the shareholder model will undoubtedly make it the most attractive model to implement, especially in an era where globalization and free trade will mean that competition will soar to new levels altogether. It is this rivalry though that will breed ingenuity on the part of companies, in the form of new methods, techniques, and technologies used by them. It is said that necessity is the mother of invention, and it is up to companies, society and the government to try to translate this innovation into economic and social welfare for everyone.