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The idea of stakeholding, that the individual can have a stake - or makean investment - in all aspects of society, whether it is financial or not,isn't new. Its history can be traced back to the 1930s. However, it maybe the Big Idea that wins the next election for Labour.

One thing is certain: the debate sets up a political dogfight between leftand right; between those who believe that "stakeholder capitalism" leadsto a better society, and those who believe in individual empowermentthrough "shareholder capitalism".

True, the number of people owning shares has risen sharply, thanks to the government's policy ofallocating a large slice of privatisation shares to individuals, rather than selling them only to bigfinancial institutions. About 3m people owned shares in 1979; 11m did so in 1991. The total hassince fallen back, to 9m. But the advocates of popular capitalism had grander designs than merely toincrease the number of shareholders. They believed that wider share ownership would inspire a newenthusiasm for capitalism. People would follow the performance of the firms they owned shares in,relishing the thought that they had a stake in the economy. Oh yes, and these budding new capitalistswould probably vote Conservative.

In addition, the government could do more to encourage employee share-ownership, which hasalso grown rapidly thanks to privatisation. Employee share-option schemes still remain typically aperk for senior managers, rather than for all the firm's workforce. Employees who do receive sharesor options usually sell their shares or exercise their options at the earliest opportunity, rather thanretaining them as long-term investments. On the other hand, argues Proshare, promoting share ownership is not a task for governmentalone. Many building societies plan to become public companies. They should encourage (Prosharedoesn't say how) the millions of savers and borrowers who will receive free shares to hold on tothem rather than sell. The flaw in all this--and the reason why the proportion of shares owned directly by individuals islikely to go on shrinking--is that for most people buying the shares of individual companies is animprudent way to invest in the stockmarket. Far better to invest with a big institution such as apension fund, insurer or mutual fund. These have in-house expertise and--more important--are ableto reduce risk by holding shares in many different firms.

 What of the broader aim of popular capitalism--to make capitalism popular? This is often seenas no more than a Tory ruse to make cheap privatisation seem respectable (an unnecessary one, bythe way, now that Labour loves capitalism). Certainly, financial institutions are sceptical: all the signsare that they regard communicating with their small investors as a waste of time. This may be unwise. Future governments, Tory or Labour, reluctant to raise taxes on incomes,are increasingly likely to raise taxes on company profits, and to tap the assets held by financialinstitutions. Those assets are for many people the "stake" in the economy that Tony Blair, Labour'sleader, says they so desperately need. If financial institutions can help individuals not merely to"own" this stake, but to understand and take an interest in its value, it would be far more difficult forpoliticians to do anything that hurts them.

What matters about Mr Blair is his willingness to accept most of the Tories' economic reforms.By "stakeholder society", he seems to mean only that Labour will try harder to help the poor, theunemployed and the disadvantaged. He has avoided suggesting that he wants to reform the basicworkings of the economy. But that is precisely what Mr Hutton advocates.

 Unlike Mr Blair, Mr Hutton objects to the government's anti-inflation policies. He favours a"Keynesian" fiscal boost to promote full employment. He differs, too, in regarding fundamentalchanges in the financing and management of firms as crucial to the creation of a stakeholder society. In a review for Prospect of "The Blair Revolution", a book by Peter Mandelson and RogerLiddle (close advisers to Mr Blair), Mr Hutton approved of the authors' attacks on short-termism inthe City of London, but not the "minimalist stakeholder reforms" they proposed. (They, in turn,accused him of using "pseudo-Marxist language".) He wants the state to encourage investors to actlike committed long-term owners; to expand the supply of cheap, long-term debt; to make firmslower the returns they expect from investing; and to make employers more loyal to their workers. Ifthis is stakeholding, Mr Blair wants nothing to do with it. Unlike Mr Blair, Mr Hutton objects to the government's anti-inflation policies. He favours a"Keynesian" fiscal boost to promote full employment. He differs, too, in regarding fundamentalchanges in the financing and management of firms as crucial to the creation of a stakeholder society. In a review for Prospect of "The Blair Revolution", a book by Peter Mandelson and RogerLiddle (close advisers to Mr Blair), Mr Hutton approved of the authors' attacks on short-termism inthe City of London, but not the "minimalist stakeholder reforms" they proposed. (They, in turn,accused him of using "pseudo-Marxist language".) He wants the state to encourage investors to actlike committed long-term owners; to expand the supply of cheap, long-term debt; to make firmslower the returns they expect from investing; and to make employers more loyal to their workers. Ifthis is stakeholding, Mr Blair wants nothing to do with it.

 Nevertheless, it is also true that the apparent growthof inequality has made many Britons uneasy. It is this uneasiness which Mr Blair has tried to addresswith his idea of the "stakeholder society".

Mr Blair's desire to emulate Mr Clinton's success is evident in his espousal of Clintonite policiessuch as workfare, and his endorsement of communitarianism. Moreover, Mr Blair's big idea, the"stakeholder society", has led leftish thinkers on both sides of the Atlantic to talk of possiblecommon policies, much as Margaret (now Lady) Thatcher and Ronald Reagan jointly pursuedincome-tax cuts and deregulation. Mr Reich is a keen advocate of "stakeholder capitalism": headvocates making companies "good citizens" by giving them new duties to stakeholders such asemployees and the "community". A group of congressional Democrats is exploring ways to promotethe "responsible corporation" as, in Britain, Will Hutton has done in a best-selling book, "The StateWe're In" .

 Thus Blairites are attempting to restrain public expectations before Britain's general election andare grappling with the practicalities of constitutional reform, the policy most likely to provide MrBlair's equivalent of the health-care fiasco. Whatever else they do, however, neither Mr Clinton nor Mr Blair plans to reverse the economicreforms of their right-wing predecessors. History may judge that to be the most significant thingthese leaders of the left had in common.

Mr Blair says that the Conservatives have spent their time in power not merelygoverning badly but "tearing apart the fabric of the nation". Tory policies have favoured the luckyfew. The less fortunate, those least able to take care of themselves, have paid the price. Publicservices have been starved of resources; the welfare state has come under withering attack. TheTories stand for ruthless individualism; man's better instincts, his need for community and for socialcohesion, have been denied or denigrated. Slavish regard for market forces has replaced industrialpolicy. The rights of workers have been trampled. Britain's manufacturing industries have shrivelled.Privatisation was a fraud on taxpayers and consumers. The rich have prospered: the poor, thehopeless, the insecure and the unemployed have multiplied. Britain, says Labour, has become a coarser and crueller place. The Tories have diminished thecountry economically and morally. What will New Labour do? It will start to put all this right. If Labour's description of the Tory legacy were true, and if Labour really meant to do somethingabout it, drastic measures would indeed be required. The distance between the Tories' policies andLabour's radical new alternative would be great. The fate of the country really would hinge on thenext election.

Advocates of stakeholding and scourges of City short-termism are in a paradoxical position.Under the Tories, these critics of the government would agree, shareholder capitalism has madegreat strides. Companies are no longer anything like as constrained as they used to be by powerfulunions; enterprises once owned and run by the government are now owned by shareholders and runby their agents. Yet, as the productivity figures make plain, these changes have gone hand in handwith a marked improvement in the performance of British companies. Admittedly, productivity is only one way to judge industrial efficiency. Critics of British postThatcher capitalism emphasise, as you would expect, other measures. Gordon Brown, the shadowchancellor, often draws attention to Britain's relatively poor record on investment, calling this the"root cause" of Britain's relative economic decline. Put to one side the point that Britain has not, infact, been in relative economic decline since 1979. Wouldn't its performance (good, bad orindifferent) have been be a lot better if investment had been higher?

The "stakeholdereconomy", that splendidly elastic term, encompasses demands not only for greater participation byworkers in the running of their firms but also for a tempering of shareholders' power to demand highshort-term profits of their managers.

In recent years the term "stakeholder" has been introduced into the language of business ethics. It ismeant to sound like, and to replace, the traditional term "stockholder" in dealing with questions ofcorporate responsibility. Corporations now are said to be primarily obligated to their stakeholders,rather than to their stockholders.

Originally corporate managers were seen as primarily accountable to stockholders. Indeed, theywere thought of as the stockholders' fiduciaries. Replacing "stockholder" with "stakeholder"undermines this fiduciary relationship. Thus, the last vestige of private contractual responsibility isalso undermined, making obligation a public affair open to "public" control.

According to an article by Anthony F. Buono and Lawrence T. Nichols in a popular business ethicstext, a corporate stakeholder is "any identifiable group or individual who can affect or is affected byorganizational performance in terms of its products, policies, and work processes.''1 By this rathervague definition, everyone is a stakeholder of virtually every corporation. Thus, once the proponentsof the "stakeholder" terminology have made it difficult to think of corporations as private institutions,they try to draw a distinction between primary stakeholders and others.

"Primary stakeholders" are those groups needed for the corporation's "survival" (e.g., consumers,labor, and management). But this distinction only indicates which groups are being given favoredstatus. There is no nonarbitrary way to discriminate between primary and other sorts ofstakeholders, since under the right circumstances any stakeholder group could threaten acorporation' s survival.

The "Stakeholder" and the Marketplace

The central difference between the stockholder theory and the stakeholder theory does not,however, rest on realizing that there will be fewer stockholders than "stakeholders." It is rather thatthe stockholder theory is oriented toward markets, while the stakeholder theory is not.

As Buono and Nichols put it, the stockholder approach "assumes that the interactions betweenbusiness organizations and the different groups affected by their operations (employees, consumers,suppliers) are most effectively structured as marketplace activities."2 In one sentence we have thecrux of what is at issue here-the private enterprise system versus its socialistic alternatives. For ifwhat is central to the "old" stockholder concept is that business relations should proceed alongmarket lines, then the "new" concept plans to replace the market with something else.

And why should we abandon the market in favor of the stakeholder theory? Buono and Nicholsoffer four reasons:

 1.The stockholder model has failed to deal adequately with contemporary societal problemsand the true complexities of economic transactions and interactions. 2.It is in the long-term interest of business to take a broader view of its responsibilities. Ifbusiness does not become accountable for its actions on its own, growing stakeholderpressures will ensure government-imposed accountability. 3.Understanding and satisfying the needs of stakeholders is important to the well-being of thefirm.... In today's highly competitive economic and social environment, no importantstakeholder can be ignored. 4.The stakeholder model is in keeping with our notions of fairness. Employees, consumers,communities, etc., are not just instruments for enriching stockholders.3

How good are these reasons? The first is either false or begs the question.

It is false if it claims that businesses don't pay attention to their social environment, becausebusinesses won't survive if they ignore what is going on around them. It is also false if it claims thatthe stockholder view presented itself as a complete theory of the economic or social relations of thefirm. The stockholder model was about establishing primary management responsibility and usingmarket processes to allocate resources. It wasn't designed to list all the interest groups a firm mightconfront or impact.

The first reason begs the question if it implies that the stockholder view does not easilyaccommodate nonmarket alternatives or broad public obligations. Of course it doesn't, but whetherit should is precisely what is at issue.

The second reason is equivalent to a threat. If businesses don't behave, "growing stakeholderpressures" will lead the government to impose "accountability." A business's property rights andprivacy are to be sacrificed to bullying interest groups.

The second reason also can be read as a prediction of what will happen "if business does notbecome accountable." But if that is so, nothing is being justified, and there is no reason to abandonadvocacy of the market-any more than there would be to abandon the rights of the accused in theface of a lynch mob just because someone predicted what the mob might do.

The third reason assumes that the stockholder model focuses less on business competitiveness andsurvival than does the stakeholder model. This is obviously false. If businesses are having troublebeing competitive, it probably isn't because they have failed to consider the groups with whom theyinteract. It may, however, be that they are not particularly adept at nonmarket strategies, at courtinggroups who have the ear of regulators, or in appeasing others who oppose the market. (And if abusiness were good at such things, it is by no means clear why we should want it to be!) Indeed,competitive disadvantages may result from having to cater to groups or forces that contributenothing to successful market activity.

The fourth reason is the only one appealing to ethics. But it depends on the acceptance of "ournotions of fairness." Even if we accept what is implied about fairness in this fourth reason, it couldjust as well be used to claim that businesses cannot be used as instruments for some stakeholder' sconception of the social good. Businesses, in other words, could be said to have rights to propertyand privacy independent of any demands made by stakeholders.

In any case, businesses don't turn employees, consumers, and communities into "instruments" anymore than shoppers turn a businessman into an "instrument" when they buy his product. Mutuallybeneficial trade hardly qualifies as "instrumentalizing" conduct, unless one has concluded that markettransactions are inherently such. But if that were so, we would be back to the problem of beggingthe question.

Moreover, the stockholder theory doesn't say that the managers' only conceivable obligations are tostockholders, but rather that their primary obligation is to them because the stockholders, in effect,have hired the managers to serve their interests. Such a relationship is tangible and direct. Contrastthat with the amorphous set of obligations to anyone and everyone the stakeholder theory is likely togenerate. The stakeholder theory, as a consequence, will issue in actions according to the views ofthose who are the most vocal or politically sawy.

In short, there are no compelling reasons to adopt the stakeholder view and plenty of good reasonsnot to.

No Commitment, No Stake

In the end it must be noted that most groups considered to be "stakeholders" have no stake incorporations at all. With the possible exception of employees, stakeholder groups have no interest inthe well-being of any particular corporation. True, they may have an interest in how corporationsaffect them, but to have a stake in something is to care about its prospects, as one might wheninvesting in a firm. Whether the "good" the stakeholder group wants is provided by this or thatcorporation (or the state) doesn't matter to them; whether the "bad" it complains of is alleviated bythis or that corporation (or the state) also doesn't matter. Whether a given corporation is succeedingin the market is of no concern to these groups because they have made no commitment to it. Theirperspective is strictly societal.

To actually have a stake by investing in a corporation would be an act of private enterprise andprivate interest-something stakeholding, by definition, opposes. For it would contradict the spirit ofstakeholding to invest in a corporation even as a vehicle for protest, since there would be nogrounds in stakeholder theory for the corporation to pay more attention to the stakeholders asstockholders than any other group the stakeholders may claim to represent.

The issue, then, is not semantic, nor is it that the term "stakeholder" carries with it tacit implications.We have seen that the implications, once appreciated, are all out front. The issue is that this new useof language is being pushed by those with an anti-market message.

Business people are especially vulnerable to such verbal manipulations and may therefore fail to seeall the implications of the substitution. In an age of competition from a widening variety of sources,expanding markets, and increased diversity in employment populations, businesses may feel they arebeing hit from all sides. It is easy, therefore, to insert a term like "stakeholder" into the businessvocabulary because it seems to capture the feeling of having to concern oneself with multiple pointsof impact. Yet we shouldn't let the feeling cloud our judgment. Those speaking loudest aboutobligations to stakeholders are not innocent purveyors of linguistic aid. For when the term"corporate stakeholder" is correctly used, the only true stakeholders are stockholders.

"We need a country in which we acknowledge an obligation collectively to ensure eachcitizen gets a stake in it. One Nation politics is not some expression of sentiment, oreven of justifiable concern for the less well off. It is an active politics, the bringing of acountry together, a sharing of the possibility of power, wealth and opportunity....If people feel they have no stake in society, they feel littleresponsibility towards it, and little inclination to work for its success. ....

The implications of creating a Stakeholder Economy are profound. They mean acommitment by Government to tackle long term and structural unemployment. thedevelopment of an underclass of people cut off from society is mainstream, living oftenin poverty, the black economy, crime and family instability is a moral and economicevil. Most western economies suffer from it. It is wrong, and unnecessary and,incidentally very costly.

The Stakeholder Economy has a Stakeholder Welfare System. By that I mean that thesystem will only flourish in its aims of promoting security and opportunity across thelife-cycle if it holds the commitment of the whole population, rich and poor. Thisrequires that everyone has a stake.

today's demands and changed lifestyles require a more active conception of welfarebased on services as well as cash, childcare as well as child benefit, training as well asunemployment benefit.

Finally, stakeholders in a modern economy will today, more frequently than everbefore, be self-employed or small businesses. We should encourage this, diversify therange of help and advice for those wanting to start out on their own and again use thehuge potential of the developing technology to allow to do so successfully. They maywork alone or in small units, but they are part of the larger economic picture.

we must build the right relationship of trust between business and Government.For far too long, relations have been dogged by the fear that business left to its owndevices will not be socially responsible. In reality, in a modern economy, we needneither old style dirigisme, nor rampant laissez faire.

" Tony Blair Singapore January 7 1996

Fellow of Jesus College, Oxford: "It is a society in which the ordinary citizen isconvinced that the institutions of the country are fair. They don't feel that the rewardsare being unfairly distributed."

John Major

 "It is entrenched and steeped in the traditions of the left, of socialism, of corporatism."

Brian Mawhinney

 Conservative Party Chairman: "Its essence is corporatism. Welcome back all the oldfriends - the trade unions, the vested interest groups, the Labour-dominated localauthorities . . . it's second hand socialist policies wrapped up in Tory ribbons . . . It is adevious way to attempt to bring in new taxes through the back door. When Mr Blairhas reached the limit of his willingness to defend our national interest in Europe, whowould be the stakeholder in Britain? Not only Labour's old friends, the trade unions,and the same old pressure groups. No. Under Tony Blair, they will be joined ascorporate stakeholders in Britain by Brussels."

Conservative rhetoric that this interferes with private ownership really is a recipe for disaster. Thechallenge is to find mechanisms for making clear the involvement which people already have in theeconomy. but which - because its ability to measure things is so limited - are currently hidden.Certainly it has to involve employee share ownership and decentralisation of power, and new morerealistic measurements of national and corporate success. But as Paddy Ashdown said at his lecturethis week: a real stake in society has to include an equal vote. You can't have a stakeholder societywithout PR.

Conservatives:Stakeholding Would Damage Britain

o Labour's plans for stakeholding mean two things - new powers forLabour's old friends and backdoor taxes on business.

o Labour's new Clause Four (see box) shows who the stakeholderswould be - trade unions, pressure groups and local authorities.

o Stakeholding means passing social costs on from government tobusiness. Labour would hammer business with a raft of backdoor taxes -including the minimum wage, Social Chapter and a training levy.

Our Vision of Britain

o Labour's stakeholding proposals are very different from theConservative vision of a property-owning democracy based on widerownership of homes, shares and pensions. We give real stakes to realpeople. Labour want a bigger say for vested interests.

Labour's Burdens on Business

Labour's stakeholding policies would mean new burdens on Britishbusiness, undermining our competitiveness. Companies would be requiredto pay for a raft of social measures:

 o the minimum wage;o the Social Chapter; o two-tier boards; o statutory recognition for unions; and- compulsory training;

Labour's Bungled Retreat

In his Singapore speech, Tony Blair made it clear that stakeholdingmeans fundamental changes to the way in which companies operate:

 'it is time to shift the emphasis in corporate ethos - from the companybeing a mere vehicle for the capital market - to be traded, bought andsold as a commodity, towards a vision of the company as acommunity or partnership in which each employee has a stake'(Singapore, 8th January 1996).

Less than a week later, Mr Blair was in retreat from his own speech.Stakeholding, he now said, was nothing more than a 'slogan':

 'You can call it, if you like, a unifying theme or a slogan. The essentialidea is that you cannot move this country on economically or sociallyunless all its citizens are getting the chance to benefit in the wealth thatis being created' (BBC1 Breakfast with Frost, 14th January 1996).

The conclusion is clear: Mr Blair has been badly rattled by the poorreception that his stakeholding ideas have received, and he is trying todistance himself from the full ramifications of the policy he has signed upto.

Yet Mr Blair cannot get off the hook so easily. The existing literature onstakeholding, the text of his own speech and his party's own policydocuments all show that stakeholding is a comprehensive agenda tochange the way in which British businesses are run.

Who are the stakeholders?

'Labour will work in pursuit of these aims with trade unions, co-operativesocieties and other affiliated organisations and also with voluntaryorganisations, consumer groups and other representative bodies' (newClause 4 of the Labour Party constitution, April 1995).

. But Conservatives alreadyhave their own version of the stakeholder society - the property-owning democracy.The best way of giving people a stake in society, they argue, is by spreading ownershipof property. This was a key aspect of the Thatcherite programme and an importantsource of its popular appeal.

Some see New Labour's idea as offering little more than a way of restating thetraditional social democratic goal of equality of opportunity for all through nationalprogrammes to ensure full employment, welfare and education. But there is also anovel issue at the heart of the stakeholder idea. It concerns the ownership andmanagement of companies. A stakeholder society requires stakeholder companies.

In a stakeholder company, by contrast, managers might be charged with maintaining abalance between different stakeholder interests. But this might not improve managers'performance. It could give managers even greater freedom to pursue their owninterests, under cover of rhetoric about serving all stakeholders.

There are two strategies on ownership which the left could pursue. If stakeholders areseen as an integral part of the firm they should be encouraged to take an equity stake intheir company. An obvious example is the development of employee share ownershipschemes which offer a real voice in governance. There is a big opportunity for unionsto assist in negotiating the terms of these schemes. Other stakeholders also need to beencouraged to act: legislation should be reviewed in order to reduce disincentives orrestrictions on cross-shareholdings between suppliers; shares with special voting rightscould be offered to stakeholders; and local development banks which offer equitystakes in community firms could be set up.A second strategy would attempt to reconnect individuals with their own wealth heldon their behalf by financial institutions. Due to the size of funds placed in institutions,they are the principal holders of shares in the UK. More effective governance of ourcompanies must come from them, whether we want higher rates of return on oursavings or more environmentally responsible companies.

 Both of these strategies could fit into the New Labour programme. They aim topromote the economic interests of individuals through collective action. But they dodemand changes in Labour thinking. For too long Labour's project has been conceivedas extracting a ransom from the propertied class to pay for welfare programmes for thepropertyless. But most working people are now owners, either directly or through theirpension funds. The real challenge for a stakeholder vision is to show how ownershipand property rights can be made to work for an egalitarian project. Active governanceis the most effective means to make companies and markets more responsive to thepreferences of all citizens, not just a few. Shareholding is not the enemy of stakeholdingbut the means by which stakeholding can be properly made to work.


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