“No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. Matthew 6:24
In his famous 1970 New York Times Magazine essay, The Social Responsibility of Business Is to Increase Its Profits, Milton Friedman argued that corporate executives are agents of the shareholders who own the business. Their duty is to operate the company in accordance with the owners’ interests, which generally means making as much money as possible while engaging in open and free competition, avoiding deception or fraud, and obeying the law.
Friedman’s point was not that shareholders are heartless, or that business should be lawless, dishonest, or indifferent to society. Rather, his point was much simpler: corporate executives do not own the shareholders’ money. When executives spend corporate resources pursuing broad “social responsibilities,” they are effectively taxing shareholders and allocating those funds to causes shareholders may or may not support.
Shareholders, of course, are free to use their profits, dividends, and personal wealth to support any charitable, political, religious, or social cause they choose. But that decision belongs to the owners, not to hired managers using someone else’s capital. This view became known as shareholder primacy, or the shareholder model.
A decade later, R. Edward Freeman advanced a very different view in Strategic Management: A Stakeholder Approach. Freeman argued that corporations have responsibilities not only to shareholders, but also to employees, customers, suppliers, labor unions, local communities, government, and society at large. Under this model, management’s job is not merely to maximize shareholder value, but to create value for all stakeholders together.
Over the following decades, Freeman’s thesis gained traction, particularly in Europe. A pivotal moment came in 2019, when the U.S. Business Roundtable shifted its official position and declared that corporations should deliver value to all stakeholders rather than prioritize shareholders alone. Around the same time, Klaus Schwab and the World Economic Forum intensified their long-standing advocacy for stakeholder capitalism, branding it as “a more responsible and sustainable alternative to shareholder primacy.” By 2020 and 2021, stakeholder capitalism had become a mainstream talking point in global business, public policy, and ESG discussions.
It is easy to understand why the stakeholder model became popular in academic and polite corporate circles. Unlike Friedman’s shareholder model, which critics associate with Gordon Gekko’s “greed is good” meme from Wall Street, stakeholder capitalism sounds kind, fair, and noble. But sounding good isn’t the same as doing good.
The shareholder model provides clarity. Management works for the owners of the business. That doesn’t mean customers, employees, suppliers, communities, or the law doesn’t matter. They obviously do. A company that mistreats customers, abuses employees, cheats vendors, or ignores legal obligations will eventually destroy shareholder value.
The difference is that under the shareholder model, those relationships are evaluated through a clear lens: does this decision help the company create durable, lawful, competitive value for its owners? The stakeholder model does the opposite. It muddies the water.
What happens when one stakeholder benefits at the expense of another? Higher wages and benefits may be good for employees, but bad for shareholders. Relocating a corporate office to a more desirable area may benefit management and administrative staff, but harm the community the company leaves behind. Vertically integrating the supply chain may benefit employees and shareholders, but displace existing vendors. Raising prices may allow a company to pay higher wages, increase benefits, or pay more taxes, but customers now bear the cost.
How is management supposed to balance competing interests? Who decides which stakeholder matters most? By what standard? And who holds management accountable when the answer changes?
That’s the central problem. Stakeholder capitalism sounds compassionate, but gives management enormous discretion with little accountability. Almost any decision can be justified by claiming it benefits some stakeholder somewhere.
Profits are not a dirty word. Profit is the market’s way of signaling that a company is creating more value than it consumes. It tells management whether resources are being allocated productively. When profits disappear, the market is signaling something important: improve or make room for someone who can allocate those resources better.
The stakeholder model weakens that signal. It allows managers to justify lower returns, higher costs, inefficient operations, and political or social projects by wrapping them in the language of responsibility. But eventually the bill comes due. And competition doesn’t care about intentions.
A company trying to serve every stakeholder equally is like a runner competing in a three-legged sack race against an Olympic sprinter. It may feel fairer, kinder, and more collaborative. But it isn’t going to win.
Since 2007, per-capita income has increased by approximately 7.89% in the UK, 14.39% in Germany, and 25.47% in the US. The Brits and Germans may enjoy bragging rights in polite company when discussing the nobility of stakeholder capitalism, but Americans have enjoyed much stronger income growth and a significantly higher standard of living.
Perhaps not coincidentally, Americans also give far more to charity. On average, Americans give nearly three times as much as Brits and more than eight times as much as Germans.
That matters. Wealth creation and generosity are not enemies. A society that creates more wealth has more capacity to help others. A company that earns more profit has more ability to hire, invest, innovate, pay taxes, support communities, and reward the owners who took the risk.
The stakeholder model, like socialism, offers a value system that sounds more humane than something as crass as profit. But good intentions don’t alter economic reality.
Margaret Thatcher famously warned, “The problem with socialism is that you eventually run out of other people’s money.” The same problem ultimately haunts stakeholder capitalism. It works only so long as there is enough excess profit, accumulated capital, or market protection to absorb the inefficiency. But over time, inefficient capital allocation weakens companies, reduces competitiveness, lowers returns, and harms the very stakeholders the model claims to protect.
Germany offers a cautionary example. Its manufacturing sector is down 10% from its 2018 level, and the UK has also flagged. Meanwhile, despite all its flaws, the US remains the largest, most productive manufacturing nation in the world.
The shareholder model may not sound as noble at a Davos cocktail party. But it works.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
