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”1. 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? “2 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 for other stakeholders to suffer at the expense of just the shareholders, as all the parties are vital to the success and survival of the company. 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.