Could Principles of Purpose Leadership Come Under Attack?
By Bruce Bolger
Anything That Appears to Take a CEO’s Eyes Off of Profits Is Suspect
An Argument Based on Lack of Research
Where Does This Definition of Stakeholder Capitalism Come From?
Who Are the Bogey Men and Why?
Are Their Hidden Economic Motives Behind This Argument
Additional Background on Andrew Puzder
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If companies state that they have a higher purpose than generating short-term profits for investors and shareholders, they may find themselves under growing scrutiny. The next US ambassador to the United Nations, Andrew Puzder has written a new book, A Tyranny of the Good of Its Victims, the Ugly Truth About Stakeholder Capitalism takes aim at companies that wish to harmonize the interests of their shareholders and stakeholders toward their purpose, goals, and objectives and be good stewards of the environment under the guise that they are diverting profits from investors to underwrite “woke” ESG (environmental, social, governance) policies and "anonymous" communities.
In fact, the concept of stakeholder capitalism is so closely related to the Golden Rule. In fact, one of its key proponents, Mars, Inc. calls it the Economics of Mutuality.
Puzder, former CEO of private-equity owned CKE Restaurants, owner of Carl’s Jr. and Hardee’s, and now the incoming ambassador to the European Union, is a fierce opponent of companies that believe they should focus on enhancing returns for shareholders only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment. To oppose this view, he and others have fabricated a definition of stakeholder capitalism one can only find in a few conservative journals with no basis in the 70-year-plus history of the movement. His definition implies that such organizations are taking money away from shareholders to give money to their pet causes. By deliberately conflating an established field of theory with greenwashing and virtue-signaling, opponents appear to be deflecting attention from the prevalent form of capitalism which often is based on extracting from rather than creating value for customers, employees, distribution and supply chain partners, and communities for the sole the benefit of shareholders.
Puzder asserts that stakeholder capitalism is comprised of a cabal of elites led by BlackRock, State Street, and a few other banks whom he says believe that companies must address the needs of all their stakeholders, even those outside their own communities so that they can in effect take over the world. In so doing, he is calling into question the motives of all purpose leaders trying to make money by creating rather than extracting value from people, communities, and the environment. Of greenwashing and virtue-signaling, guilty as charged. Of trying to take over the world through ESG, it's hard to make a case.
Anything That Appears to Take a CEO’s Eyes Off of Profits Is Suspect
To anyone versed in the long history and multiple information sources on stakeholder capitalism, his book, A Tyranny of the Good of Its Victims, the Ugly Truth About Stakeholder Capitalism, it is immediately apparent that the book contains many inaccuracies and unsubstantiated claims that make it clear he has not research the history and economic benefits of harmonizing the interests of shareholders and stakeholders toward a common purpose, goals, objectives, and values. Decades of literature, research, and case studies refute his premise that stakeholder capitalism is about elites taking over the world. Conflating stakeholder capitalism with greenwashing and virtue signaling under the guise that it is corporate social responsibility and ESG (environmental, social governance), he says, without substantiation, that though the use of the acronym ESG is being suppressed, “these elites have pursued—and will continue to pursue—their ESG goals: to transform our consumer-driven free-market economy into one that is subject to their elitist demands, overriding the will of the people whom they deem incapable of self-government.” This ambiguity all the practices of all purpose leaders into question.
As a result, CEOs committed to purpose leadership to inspire and guide their organizations with a sense of purpose and mission, or who believe in being good stewards of the environment and their communities, may come under attack for failing in their fiduciary responsibilities to shareholders. Under the guise of fighting “woke” policies, opponents to the underlying principles of stakeholder capitalism and purpose leadership are trying to set back a capitalism reform movement that supports the principles of enhancing returns for investors only by creating value for employees, customers, distribution partners, communities, and the environment, as defined in an article in Forbes.
Opponents of purpose leadership argue that anything that stops companies from maximizing profits for shareholders violates the fundamental rules of capitalism as long as they act within the law—including the right to mistreat employees through low pay and onerous work practices; to make misleading claims in advertising as long as it's not fraud; to squeeze distribution and supply chain partners and or to leave derelict structures behind or to pollute communities. In a free market, shareholder capitalists assert, if customers, employees or other stakeholders aren’t happy, they can go elsewhere.
The anti-stakeholder capitalists specifically oppose the practices of purpose leaders who have a vision that goes beyond short-term financial profits or personal gains to make a positive impact on their stakeholders, communities, and society, because they believe such practices deprive shareholders of maximum benefit. Some of them even suggest class action suits by shareholders against public companies that view people as a source of value creation, rather than a sunk cost, and that are committed to not offloading costs on to society in the pursuit of higher profits. If one can legally offload costs on to society, it's apparently a fiduciary responsibility.
An Argument Based on Lack of Research
In his book, Puzder overlooks the fact that the original authors of the 2004 Global Impact Study that gave birth to the term were financiers and business people asked by the United Nations to create a roadmap for a more sustainable path to profitability, long before "woke," or that the concept of stakeholder capitalism goes back to the work of management consultant Peter Drucker in the 1940s, total quality management pioneer W. Edwards Deming in the 1950s, and research at the Stanford Research Institute in the 1960s as a means of enhancing capitalism through value creation, not hidden taxation.
Puzder argues that “An asset manager’s traditional duty is to maximize returns for its investors, but these financial elites expand their duties through stakeholder capitalism, the idea that a company is responsible not only for its actual shareholders, but for everyone who is affected by the company—which translates to everyone in the community. Thus, they can impose their preferred ESG goals under the guise of benefitting an amorphous group of non-investors—a group that has no say over whether ESG goals actually benefit them.”
He does not clearly explain how the elites benefit from having businesses sacrifice profits to pay for social issues government and taxpayers should address, given that most of the elites generally press for lower taxes, not more. Why would these elites seek to submit themselves to "an amorphous group of non-investors," he does not explain. Nor does he explain how a company can maximize returns without fully engaging their employees, customers, distribution and supply chain partners, and communities, or preventing environmental risks that could impose big costs on future shareholders, unless one simply wishes to exploit everyone for short-term gain, which frequently occurs.
In a review of the book in Lawliberty.org, Mark Pulliam, an attorney, writes that Puzder’s solution could include class action litigation because “ESG and stakeholder capitalism—social activism masquerading as business—demonstrably underperforms actual capitalism, the woke proponents of such schemes are vulnerable to class action claims and other forms of legal redress by shortchanged shareholders.” Purpose leadership could easily fall under this broad definition. Meanwhile, the assertion ignores extensive research and simple logic that companies with highly engaged customers, employees, supply chain and distribution partners, and communities, without high levels of environmental or social risks, sustainably outperform the major stock indices. It also overlooks the fact that leading stakeholder capitalists oppose contributions to politicians unless an issue is directly related to an organization’s purpose, oals and objectives.
Is Puzder arguing that if a practice is good for shareholders, it’s just fine to underpay employees and subject them to excessive overtime and dangerous working conditions or for that matter deceive customers, squeeze distribution and supply chain partners, and pollute communities? Milton Friedman argued that of course it might make sense for a company to create housing for employees and to provide health care and other amenities to attract talent, but this point is often overlooked. He also argued that organizations must act ethically and play by the rules. Is it ethical in Milton Friedman's world to optimize profits by mistreating employees, misleading customers, squeezing distribution and supply chain partners, offloading costs on to communities in the form of pollution or leaving behind derelict structures in order to maximize profits?
Where Does This Definition of Stakeholder Capitalism Come From?
It is not clear where his definition of stakeholder capitalism comes from, even though he could have found one inconvenient to his position in Forbes published in 2021 based on an analysis of 30 years of actual usage in academia and business: “Optimizing returns for investors only by creating value for customers, employees, supply chain and distribution partners, communities, and the environment.” Clearly, Puzder has not read R. Edward Freeman's seminal work published in 1984, Strategic Management, a Stakeholder Approach. A Professor of Management at the Darden School of Business at the University of Virginia, who is considered a father of the field, demonstrates that organizations can optimize returns for investors by harmonizing the interests of all stakeholders toward a clearly defined clear purpose, goals, objectives and values that isn't always about the money.
What stakeholder capitalists argue is that it’s impossible for organizations to optimize returns for shareholders over the long run unless they fully engage and harmonize the focus of those who create the value and without whom it’s impossible to optimize returns: engaged employees, loyal customers, committed distribution and supply chain partners, and welcoming, healthy communities. Do shareholder capitalists believe that businesses defy the laws of success in sports or war--that it's possible to win a major competition or battle with a demotivated, incapable team?
In response to an email from me, Pulliam writes: "The trouble with 'stakeholder capitalism' is that it means different things to different people and can be used to advance very destructive ideas. Shareholder capitalism has a well-developed meaning with decades of corporate law, fiduciary duties, etc." I agree. That doesn't mean it cannot be improved, given that shareholder capitalism has also led to very destructive ideas. The latest Edelman and Gallup surveys find faith in business and engagement at work at record lows, with consumers giving business only a C for customer service. How can that be good for shareholder returns? Besides, the same argument applies to shareholder capitalism: it obviously means very different things to different people given enormous legal fees spent each year in business.
A Tyranny for the Good of its Victims says it exposes “how, although they may abandon the acronym ESG, these elites have pursued—and will continue to pursue—their ESG goals: to transform our consumer-driven free-market economy into one that is subject to their elitist demands, overriding the will of the people whom they deem incapable of self-government.”
Nowhere in the literature about this field can one find any reference to any such notions or a clear explanation of how big investment banks benefit from making the businesses they invest in divert money to social causes. There is no explanation as to how the elites benefit from diverting profits to pet causes.
Who Are the Bogey Men and Why?
His entire indictment of a field more akin to total quality management than to any concept referenced in his book appears based on his opposition to “investment firms, Black Street, Black Rock, State Street, and Vanguard...at the forefront of this agenda. Each of them has accumulated massive shareholdings on behalf of its investor clients. Supposedly passive asset managers actively vote those shares to impose their collectivist ESG agenda on American businesses and by proxy on the American people. As people have come to understand what ESG represents, these elites have attempted to distance themselves from the acronym...But not from the underlying environmental social and governance agenda,” who are now using “replacement phrases, including sustainability, rational sustainability, decarbonization and transition or trans investing, or conscientious (actually, conscious capitalism),” a term in fact developed about 14 years ago by a capitalist, John Mackey, founder of Whole Foods Market.
Puzder does admit that companies that seek to address social issues have every right to do so. “Ben and Jerry's and Patagonia are examples, but that is because they are providing with their customers want. Social justice is a selling point for them fair enough. Those companies do not need people telling them how to appeal to their consumers and make a profit.” Stakeholder capitalism isn't about addressing social causes; it's about generating profits without offloading costs on to society by mistreating employees, misleading customers, squeezing distribution and supply chain partners, leaving derelict buildings or by polluting. He obviously has not bothered to do any of the research demonstrating that public companies with highly engaged employees, customers, distribution and supply chain partners, and communities consistently outperform their stock market benchmarks, or that what he appears to be opposed to is actually corporate sustainability efforts or virtue-signaling, not stakeholder capitalism.
So what are the motives of the elite? “They can compel corporate America to do their political dirty work for them. They avoid the inconvenience of having to persuade consumers or voters since their financial coercion is less visible than government action. They believe they can avoid accountability for the financial damage. Their decisions will inflict economic benefits to those with economic power.” Since obviously there is no benefit to investing in companies subject to unlegislated taxes or constraints from anonymous sources, the completely unsubstantiated implication is that the elites want to impose so many constraints on business—by lowering their profits somehow—that only large companies can prevail. He continues, “When the economic power lies with consumers, businesses respond to their demands...The point of stakeholder capitalism is to reorient modern business so that they prioritize ESG's collectivist social and political goals over profits to accommodate that reorientation that leads to forcing businesses to prioritize, social, and political goals, over consumer demand, diminishing consumers economic power, and transferring that power to themselves.” Why would they do that? How could such policies possibly be good for anyone, let alone bankers? The book provides no clear motive.
Are Their Hidden Economic Motives Behind This Argument
When people use illogical arguments without any attempt at serious substantiation or clear references to credible information to support their accusations, one must immediately suspect another motive. Is there a recording of the elites at Davos or some other resort chuckling about their nefarious plot to take over the world by forcing shareholders to make it greener and friendlier to people?
Puzder, a highly accomplished corporate attorney, is credited with helping to turn the company he ran around and to arrange a sale to a private equity firm that presumably benefited the shareholders. But how did he accomplish that: was it by creating a powerful and enduring brand that passionately engaged its customers and employees, or by doing everything possible to cut costs on the backs of employees while professing to delight customers. Puzder was rejected as Labor Secretary under the first Trump administration based in part of accusations by credible labor and employees of widespread labor violations at Hardees, unsafe working conditions and low wages and benefits. In fairness, accusations in political hearings do not always reflect the truth. Supporting the case, however, is Puzder’s public opposition to minimum wages on the premise they suppress employment, although unemployment is far below the rate current at the time he was pressing the argument despite the imposition of minimum wage laws in both Red and Blue states What Puzder overlooks is that stakeholder capitalists have the same belief in generating profits. They just do not believe the best path to sustainable success is to do so by squeezing the people without whom there could be no profits, the employees, customers, and other stakeholders, simply because if they don’t like it they can go elsewhere. They also believe that fulfillment of a purpose is also a form of profit, because it inspires people to reach even higher.
What are the chances of an army or team winning a battle or competition with demotivated, under-skilled teammates and support people? Is it not a fiduciary responsibility to unlock the full potential of people?
It is conceivable that the true motive of shareholder capitalists for creating a such a frightening straw man definition of stakeholder capitalism is a simple case of deflection: the understanding that few investors, customers, employees, customers, supply chain and distribution partners, and communities are motivated by the fact that all their efforts and loyalty are solely designed for the purpose of lining the pockets of management and shareholders.
Let investors and the free market decide which type of capitalism they prefer.
What do shareholder capitalists have to fear so much that they wish to suppress what they call stakeholder capitalism through legal action?
Additional Background on Andrew Puzder
Puzder surely will be at the forefront of any discussions about US opposition to the EU Corporate Sustainability Reporting Directive, the “anti-greenwashing” law founded on the principles of a capitalism based on enhancing returns for investors only by creating value for customers, employees, distribution partners, communities and the environment, rather than at their expense. The stated mission of the law is to stop companies from greenwashing about ESG (environment, social, and governance) because of the prevalent misrepresentations. It appears that ESG principles are so important to investors, employees, customers, communities, and others, that companies lie about their practices. Puzder's appointment to the EU ambassadorship should be interesting based on his negative views about regulation. It increases the chances that the US will attempt to use opposition to the law as a bargaining chip in trade negotiations. See ESM: Will EU Corporate Sustainability Reporting Directive Become a Trade Issue?.
Enterprise Engagement Alliance Services
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1. Information and marketing opportunities on stakeholder management and total rewards:
- ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
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- EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020
Management Academy to enhance future equity value for your organization.3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.
4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.
5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.
Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
