When leaders of corporations make decisions, they are necessarily, if only implicitly, expressing preferences about tradeoffs. For example, a decision to invest in growth, which might be better for longer-term shareholders, can often come at the expense of a higher dividend, which might suit short-term investors; a choice to pay higher wages and make employees happy and allow for price reductions, the benefits of which go to customers, impossible; and so on.
So whose interests should corporate leaders put first when making these decisions? My vote: the survival of the corporation itself. Not shareholders, not stakeholders, not customers, not society — not even profits. The corporation's survival should come first.
In practical terms, what this means is that management should not seek to maximize the wealth of any one of its major constituencies — customers, investors, employees, and society (in the form of obligations to governments). Employees provide human capital, customers provide revenue and social capital, governments provide critical infrastructure (not just "pipes and schools" but most fundamentally the rule of law) and legitimacy, and shareholders provide financial capital. None comes first in line; none is even primus inter pares. Rather, corporate leaders should seek to pay each supplier what is necessary in order to secure the requisite inputs, and no more.
There are at least two objections to this view: one moral, the other pragmatic.
Consider first the moral argument. Proponents of shareholder capitalism point to fundamental notions of property rights as the foundation of their position. In the words of the late Nobel laureate Milton Friedman, "In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires."
Some retort that this view breaks down in an era of short-term investors and could be salvaged with an emphasis on cultivating a strong base of long-term shareholders. But this is a red herring: One's rights are not diluted simply because one wishes to enjoy them only briefly, nor enhanced if one wishes to enjoy them over decades.
What does matter is that the "shareholders are owners" view overlooks a critically important implication of the limited liability conferred on shareholders by the corporate form: They can only lose as much money as they put in, regardless of the actions of the corporation — no matter one's investment horizon. How can one claim the exclusive right to determine the objective of a corporation when one is not held accountable for the full extent of any harm wrought in the pursuit of those aims? If one wishes to forgo limited liability, then by all means call the shots. But anyone wishing to protect their assets behind the corporate veil should be prepared to pay a price for that. A stock certificate is a particular sort of claim on corporate wealth; it is not a deed of ownership.
Pragmatic objections to "corporate survivalism" (if I might call it that) tend to focus on its allegedly "exploitive" elements. Executives who aim to maximize corporate survival will end up, either deliberately or through the cumulative effect of unfettered decision-making biases, taking advantage of the corporation's "suppliers", aiming to enrich either the corporation or themselves at the expense of other parties.
What this misses is that the socially beneficial effects of market-based exchanges are premised on precisely the kind of self-interest being decried. Adam Smith put it first and best in 1776 in Wealth of Nations when he noted, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses [sic] to depend chiefly upon the benevolence of his fellow-citizens."
In other words, thanks to Smith's "invisible hand," the net effect of each actor pursuing its own self-interest is the most nearly optimal social outcome. In contrast, when any given party is expected as a feature of the system to look out for someone else, the likelihood of exploitation can be expected to rise.
Of course, to realize these benefits we require not only self-interest but also well-functioning markets. In the case of corporate survivalism, the markets for corporate control (to keep management in check), products (to protect customers), capital, and labor must all be sufficiently efficient. This does much to ensure that the transactions executed among the various actors are true exchanges of value and not exploitive. These requirements are no more constraining than those assumed by any other theory of optimal corporate behavior.
Corporate survivalism has some rather intriguing overlap with at least one other view expressed in this set of blogs: Joe Bower argues that those who rise to the position of CEO from inside an organization can be much more effective than outsiders. In addition to the reasons Bower offers for this, it is worth considering whether home-grown executive leadership is more likely to be emotionally invested in the corporation as an institution: They want the company to survive for its own sake and so are perhaps better able to find that set of trade-offs that maximizes corporate survival.
Thanks to Michael E. Raynor / Blog HBR / Harvard Business School Publishing
http://blogs.hbr.org/cs/2011/10/the_corporations_survival_shou.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
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