Critics of capitalism (and therefore freedom in general) are ever quick to hold up cases of consumers and employees exploited by greedy corporations. These attacks often have negative consequences for the stockholders of corporations. Stockholders of GM and Chrysler were sacrificed in order to serve the “greater good” (a term that, as I’ve stated before, is so idiotic it is depraved in its purported meaning). David Friedman recently penned an excellent blog post on the ways in which stockholders are actually more vulnerable to corporate mismanagement than consumers or employees.
…my situation as customer and employee is very much better in this respect than my situation as a stockholder. It is true that, as a stockholder, I have the option of selling my shares of stock, which at first glance looks rather like my option as a consumer of not buying a product or as a worker of quitting a job. But the apparent similarity is an illusion.
If I choose not to spend twenty thousand dollars buying a car from Ford, Ford has one more unsold car and twenty thousand dollars less money. If I choose to sell twenty thousand dollars of Ford stock, on the other hand, the money I get is not coming at Ford’s expense. Another investor has paid me the money and now owns the stock, leaving Ford itself unaffected.
If the firm is being run in a way that fails to maximize stockholder value, he cannot escape that cost by selling his share, since the price he can sell it for will reflect the reduction in future profits and dividends, insofar as it can be estimated by other stockholders.
It follows that the stockholder is dependent, very much more than the other stakeholders, on other mechanisms for controlling a firm to make it act in his interest. That is a strong argument in favor of the current mechanism for corporate control and the current legal rules defining the fiduciary obligation of the directors.
Indeed, it is an argument for more than that. It is an argument for strengthening stockholder control in order to provide more protection to the most vulnerable party in the network of relationships that makes up a corporation. One way of doing so would be by removing current legal barriers that make takeover bids more difficult, and so protect managers and directors from the consequences of serving their own interests at the expense of the stockholders whose interests they are supposed to be serving.
I would like to add two points to this already outstanding argument. First: regardless of the practical effects on stockholders and stakeholders; the fact of the matter is that the corporation belongs to the stockholders. It is their property. As property is gained by money, as money is gained by production, as production is performed at the expense of an individual’s time, and as an individual’s time is an individual’s life, the right to property is inseparable from the right to life – which is an inalienable possession of every human being. So, practical considerations aside, the stockholders’ interests should still be protected over the interests of the stakeholders (note that “interests” are not synonymous with “rights” – the protection of the rights of one individual cannot necessitate the violation of the rights of another).
Second: the stakeholders rely on stockholders for their lives. Stockholders are not pirates scouring the market for plunder – they are the enablers of production. It is only by the productive energies and subsequent investments of stockholders that capital is raised to improve the quality of life for the masses (the beauty of capitalism is that society’s betterment is in no way a necessary motivation of the investors).
For all of the reasons discussed above, stockholders should be lauded for their contributions to society and not branded as blackguards of “corporate greed”.