Download Stakeholder Theory for Libertarians

Stakeholder Theory for Libertarians:
A Rothbardian Defense of Corporate Social Responsibility
by Roderick T. Long
DRAFT – WORK IN PROGRESS
I. Friedman’s Famous, Unknown Argument
In an influential article for the popular press, published in 1970 and reprinted in
numerous business ethics textbooks since,1 economist Milton Friedman argued that when
corporate managers allow considerations of social responsibility to influence their
decisions, they violate their fiduciary obligations to the corporation’s owners, the
shareholders.
In a free-enterprise, private-property system a corporate executive is an
employee of the owners of the business. … [I]n his capacity as a corporate
executive, the manager is the agent of the individuals who own the
corporation … and his primary responsibility is to them. … What does it
mean to say that the corporate executive has a “social responsibility” in his
capacity as businessman? … [I]t must mean that he is to act in some way
that is not in the interest of his employers.2
Therefore, if a corporate manager forgoes an opportunity for profit-maximization in order
to promote some socially worthy cause – Friedman mentions “providing employment,”
“eliminating discrimination,” and “avoiding pollution” as examples3 – then she is using
the shareholders’ assets in a manner to which the shareholders have not agreed. It is as
though you were to hire me to mow your lawn, giving me the use of your lawnmower for
the purpose, and I, prompted by altruism, were to take the opportunity to mow every lawn
in the neighbourhood, free of charge, with your lawnmower, returning it to you with its
blades chipped and dulled from overuse. If I wish to be charitable with my own property,
that may be fine and commendable; I have no right, however, to be charitable with your
Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times
Magazine, 13 September 1970; reprinted in, e.g., Joseph DesJardins and John J. McCall, eds.,
Contemporary Issues in Business Ethics, 3rd ed. (Belmont: Wadsworth, 1996), pp. 8-12.
1
2
Friedman, in DesJardins and McCall, pp. 8-9.
3
Ibid., p. 8.
Stakeholder theory for libertarians – 9/04 – p. 1
property, but must use it in only such a manner as is consistent with your purpose in
granting me its use. Since shareholders presumably invest in a corporation in order to
make money, the primary responsibility of a corporate manager is to maximize returns to
shareholders, and any socially worthy goals whose promotion would conflict with that
primary responsibility must be forgone. The corporate manager may be as charitable as
she pleases, on her own time and with her own money; but she violates her contractual
obligations to the shareholders as soon as she allows such considerations to sway her
decisions in her capacity as corporate manager and so diverts shareholder resources to
purposes incompatible with their wishes.
Such, in essence, is Friedman’s argument – at least at first glance.
It seems natural, from today’s perspective, to view Friedman’s 1970 article through
the lens of more recent disputes between two theories with momentous implications for
business ethics – stakeholder theory and libertarianism. Stakeholder theory claims that
corporate decisions should be guided by concern for the interests not only of
shareholders, but of all those groups (e.g., employees, customers, the local community)
whose interests are vitally affected by the corporation’s actions – all those who “have a
stake” in the outcome of corporate decisions.4
Libertarianism, at least in the
deontological version defended by Murray Rothbard and Robert Nozick, claims that
actors in the market have the right to do with their property as they please, and to enter
into any contractual arrangement they like with other consenting adults, so long as they
do not violate the similar rights of others.5
Since Friedman regards contractual
obligations to owners as legitimately overriding broader concerns with social
For statements of stakeholder theory, see William M. Evans and R. Edward Freeman, “A Stakeholder
Theory of the Modern Corporation: Kantian Capitalism,” in DesJardins and McCall, pp. 77-85; and
Anthony F. Buono and Lawrence T. Nichols, “Stockholder and Stakeholder Interpretations of Business’s
Social Role,” in W. Michael Hoffman and Jennifer Mills Moore, eds., Business Ethics, 2nd ed. (New York:
McGraw-Hill, 1990), pp. 170-75.
4
5
Murray N. Rothbard, For A New Liberty (New York:
Collier Macmillan, 1978),
<mises.org/rothbard/newliberty.asp>; Murray N. Rothbard, Power and Market (Kansas City: Sheed
Andrews and McMeel, 1970), <mises.org/rothbard/power&market.pdf>; Murray N. Rothbard, The Ethics
of Liberty (New York: New York University Press, 1982), <mises.org/rothbard/ethics/ethics.asp>; Robert
Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974). Nozick’s rather idiosyncratic theory
is the version of deontological libertarianism most familiar to academic philosophers, but Rothbard’s has
had more influence among libertarians themselves. (Indeed Rothbard was a major influence on Nozick: see
Ralph
Raico,
“Robert
Nozick:
A
Historical
Note,”
February
5,
2002;
<lewrockwell.com/raico/raico15.html>.)
Stakeholder theory for libertarians – 9/04 – p. 2
responsibility, his position is easily viewed as being in harmony with libertarianism and
in opposition to stakeholder theory.
In fact this interpretation of Friedman is quite wrong. To begin with, Friedman’s
position itself turns out, on closer examination, to be a version of stakeholder theory!
While Friedman starts out with an argument that seems to grant special status to
shareholders on the grounds that that they are the owners of the company, as he develops
the argument it becomes apparent that Friedman thinks it desirable for corporate
managers to act as agents not only of the shareholders but also, in certain respects, of the
employees and the customers.
[T]he corporate executive [who pursues social responsibility] would be
spending someone else’s money for a general social interest. Insofar as
his actions in accord with his “social responsibility” reduce returns to
stockholders, he is spending their money. Insofar as his actions raise the
price to customers, he is spending the customers’ money. Insofar as his
actions lower the wages of some employees, he is spending their money.
… The executive is exercising a distinct “social responsibility,” rather
than serving as an agent of the stockholders or the customers or the
employees, only if he spends the money in a different way than they
would have spent it.6
Friedman appears to mean quite seriously the claim that the corporate manager who
pursues social responsibility is illegitimately spending the money of these constituencies,
for he goes on to describe her as in effect “imposing taxes” on them. The group being
unfairly “taxed” appears to include not only the shareholders but also employees and
customers. In short, Friedman’s article is not a defense of shareholder rights against
those of stakeholders, but of stakeholder interests against those of society at large. The
manager’s obligation to her shareholder employers is simply, it seems, a special case of
her obligation to the stakeholders in general.
Further evidence of Friedman’s allegiance to stakeholder theory comes in his
explanation of why his critique of corporate social responsibility does not apply to
individual proprietors. Friedman says:
6
Friedman, op. cit., p. 9.
Stakeholder theory for libertarians – 9/04 – p. 3
The situation of the individual proprietor is somewhat different. If he acts
to reduce the returns of his enterprise in order to exercise his “social
responsibility,” he is spending his own money, not someone else’s. If he
wishes to spend his money on such purposes, that is his right, and I cannot
see that there is any objection to his doing so.7
So far this is just what we should expect Friedman to say if he upholds the rights of
shareholders against other stakeholders. Managers must abide by the will of the owners;
when manager and owner are the same person, the manager may pursue any social goals
she pleases, but otherwise not. But notice what Friedman immediately goes on to say:
In the process, he, too, may impose costs on employees and customers.
However, because he is far less likely than a large corporation … to have
monopolistic power, any such side effects will tend to be minor.8
In other words, the reason it is permissible for individual proprietors, and not for
corporate managers, to “impose costs” on their stakeholders is that individually owned
companies are smaller and less influential, and so their imposition of costs doesn’t do
enough harm to be a matter of concern. The clear implication is that if an individually
owned company were large enough to have an influence comparable to that of a major
corporation, then it would be illegitimate for the individual proprietor to pursue socially
worthy goals in such a way as to lower wages or raise prices. The interests of employees
and customers turn out to have comparable weight, on Friedman’s view, to the interests
of shareholders. What is this if not a version of stakeholder theory?
It is, of course, an extremely strange version of stakeholder theory; for Friedman
never says – and there is every reason to think he would deny – that corporations are
under a general obligation to avoid lowering wages or raising prices. Apparently, the
imposition of such costs on employees and customers counts as an illegitimate tax only if
it is the result of pursuing social responsibility, not if it is the result of ordinary profitseeking activities.
(One suspects confusion or inattention on Friedman’s part here.
Friedman’s expertise lies in economics, not in moral philosophy; when venturing into an
unfamiliar field, it is easy to get oneself into a muddle without realizing it.)
7
Ibid., pp. 10-11.
8
Ibid., p. 11.
Stakeholder theory for libertarians – 9/04 – p. 4
Not only is Friedman’s argument not opposed to stakeholder theory, it’s not clear that
it has any particular affinity with Rothbardian or Nozickian libertarianism.9 Friedman
does not explicitly say that corporate managers should be required to refrain from
imposing these costs on their stakeholders, but his language – his talk of using other
people’s money, of illegitimately imposing taxes, and so on – suggests as much.10 And
if, as it seems, Friedman is committed to imposing such a legal requirement even on
individual proprietors, should their companies be of sufficient size, then he is certainly at
odds with the Rothbardian’s or Nozickian’s commitment to the sanctity of private
property.
Why has Friedman’s article been so consistently misinterpreted? I think it is because,
given his reputation as a proponent of the free market, readers have naturally assumed
that he must mean something different from what he literally says, and so they give his
arguments a libertarian gloss which the text does not justify. In fact Friedman’s article is
not at all what it is often thought to be: an anticipatory libertarian critique of stakeholder
theory. If anything, it would be more accurately described as a stakeholder theorist’s
critique of libertarianism – though I doubt that this is exactly what Friedman intended.
However, the argument that Friedman is widely thought to have given is actually
made by a number of contemporary libertarian critics of stakeholder theory. 11 One
example is Douglas Den Uyl, who is in broad agreement with Rothbardian and Nozickian
libertarianism, and who dismisses stakeholder theory as “socialism with a vengeance!”12
9
There will of course be a conflict between Friedman and the Rothbardian or Nozickian libertarian on
the issue of ethical foundations, since Rothbard and Nozick are deontologists while Friedman appears to
vacillate between positivism and consequentialism. But Friedman and the deontologists could be in broad
agreement on policy recommendations even if they disagreed on the reasons for those recommendations.
As we shall see, however, the divide is still greater.
Friedman claims that this imposition of “taxes” is illegitimate because it is done by private parties
rather than by government. This assumption of the legitimacy of governmental taxation is another obvious
difference between Friedman and the Rothbardian or Nozickian.
10
It is unfortunate that most business ethics texts present the argument only in Friedman’s muddled
version rather than in one of these more sophisticated and coherent versions.
11
Douglas J. Den Uyl, “Corporate Social Responsibility,” p. 147; in Robert W. McGee, ed., Business
Ethics and Common Sense (Westport: Quorum Books, 1992), pp. 137-53; cf. Fred D. Miller, Jr., and John
Ahrens, “The Social Responsibility of Corporations,” in Tibor R. Machan, ed., Commerce and Morality
(Totowa NJ: Rowman & Littlefield, 1988), pp. 140-160.
12
Stakeholder theory for libertarians – 9/04 – p. 5
Den Uyl presents an elegant restatement of Friedman’s argument, in a form that
leaves behind the odd pro-stakeholder, anti-libertarian implications of the original
version:13
1.
Corporate managers are fiduciaries of the corporate owners
(stockholders) ….
2.
Corporate owners have only one interest and reason for hiring
managers – to maximize profits.
3.
Therefore, corporate managers would violate their fiduciary trust by
engaging in actions that are unrelated to (or that consciously minimize)
profit maximization. …
[4.] Acts of corporate charity (“social responsibility”) lessen the amount
of profits the firm and/or owners receive. …
[5.] If corporate managers act to lessen profits (as in the preceding
statement), they violate their contractual responsibilities to owners.
[6.] A call for managers to be “socially responsible” is a call for them to
violate their contractual obligations.
[7.] Thus managers should not direct their firms into “socially
responsible” activities.14
There does exist, then, a Friedmanesque libertarian argument against stakeholder theory,
although it is not Friedman’s. It is this argument (call it the Shareholder Argument) that I
wish to challenge.
II. Inadequate Responses to the Shareholder Argument
The Shareholder Argument – usually (though, I have argued, mistakenly) attributed to
Friedman – has already come under a fair amount of attack. But I think many of the
standard responses are guilty of changing the subject.
There is yet another way in which Den Uyl revises Friedman’s position in the direction of Rothbardian
and Nozickian libertarianism. Friedman writes that a corporation’s pursuit of profit should be subject only
to the constraint of “the basic rules of society, both those embodied in law and those embodied in ethical
custom.” (Friedman, p. 8.) This seems to open the door to relativism, since social rules – both customary
and legal –could vary from society to society. (It also leaves Friedman with no argument against laws
mandating social responsibility.) Den Uyl, by contrast, maintains: “We would suggest that corporations
must act in ways that do not violate individual rights and that the nonviolation of individual rights is the
moral principle that supersedes all others. … Rights, then, are what Robert Nozick calls ‘side constraints’
on the goals we pursue. Businesses have the goal of pursuing profits, but they cannot do so by any means
and people cannot contract to violate individual rights (e.g., by forming ‘Hit Man, Inc.’). These side
constraints keep us between the bounds of legitimacy.” (Den Uyl, p. 147.)
13
14
Ibid., pp. 141-42.
Stakeholder theory for libertarians – 9/04 – p. 6
One such response is what I shall call the Strategy Response. According to the
Strategy Response, corporations ought to engage in socially responsible activities
because even if these activities curtail profits in the short run, they are likely to increase
profits (and thus returns to shareholders) in the long run, through enhancing the
corporation’s reputation, promoting employee morale, and the like. In other words, the
most efficient way to promote the interests of the shareholders may be to do so indirectly,
by looking after the interests of the stakeholders instead.
As general policy advice, this argument is plausible as far as it goes; but if it asks us
to suppose that the goals of stakeholder welfare and shareholder profits never come apart,
it strains credulity. We must suppose that at least in some cases the goals will conflict,
and then we are faced with the question of whether, in such cases, sacrificing shareholder
profit to stakeholder welfare is permissible or not.
One reply to the Strategy Response is what might be called the Strategy CounterResponse. While the former regards concern for stakeholders as the best strategy for
(indirectly) benefiting shareholders, the latter regards concern for shareholders as the best
strategy for (indirectly) benefiting stakeholders.
(Friedman’s article occasionally
gestures in the direction of this Strategy Counter-Response.) The argument is that profits
are achieved by finding better ways to serve the customer, and since all stakeholders are
customers of some firm or other, all stakeholders benefit from a system in which each
firm does all it can to maximize profits. Since market interactions provide corporate
managers with clear signals concerning their success or failure at benefiting the customer,
while effective feedback is less available in the case of charitable activities, businesses
are likely to be more effective at promoting stakeholder interests in the first way than in
the second.
While the Strategy Response and the Strategy Counter-Response each
contain some truth, both as they stand seem overstated. It is hard to believe that there are
no cases in which a corporation could bring about directly a clear and easily discernible
benefit to stakeholders that would not be outweighed by a corresponding indirect harm.
Another response to the Shareholder Argument we may call the Threat Response.
This response maintains that corporations would be well advised to adopt socially
responsible policies voluntarily, for if they do not, it is likely that a public backlash will
Stakeholder theory for libertarians – 9/04 – p. 7
lead to laws mandating such policies.15 But this appeal ad baculum fails as a critique of
the Shareholder Argument, for it makes no effort to refute the claim that corporate
managers have an obligation to refrain from socially responsible policies; it is no
argument in favour of a wrong action to say that if you don’t commit the wrong
voluntarily, you might be forced to do so by governmental edict.
Or perhaps the Threat Response is saying that the best way for corporate managers to
meet their obligations to shareholders is to behave in a socially responsible manner in
order to fend off tax increases that would hurt shareholder revenues even more than the
socially responsible behaviour does; but in that case the Threat Response reduces to a
variation on the Strategy Response, and inherits that response’s limitations.
One argument which even some libertarians have found compelling is the Ignorance
Response, which Den Uyl himself offers elsewhere.16
According to this argument,
corporate managers often cannot know what the most profit-maximizing course of action
is likely to be, and so may allow ethical considerations (over and above respect for
libertarian rights) to guide their decisions. [*** SAY MORE ABOUT THIS ***] But
this argument likewise concedes too much by granting that if corporate managers did
know for certain which decision would be most profitable, then that decision would be
morally mandatory.
Yet another common approach is the No-Such-Preference Response, which points out
that shareholders cannot be assumed to value profits above all else; witness the
15
For an example, see DesJardins and McCall, op. cit., p. 14:
“[I]magine if corporate managers followed Friedman’s advice and redirected all of this
money back into dividends for stockholders. We would thus have a situation in which
corporate profits are up and charities are suffering. At this point we should not at all be
surprised to find the public demanding that government fill the void and, in turn,
legislators increasing corporate taxes to pay for it. … If business restricts its ethical
responsibility to obedience to the law, it should not be surprised to find a new wave of
governmental regulations that require formerly voluntary actions.”
One could raise a number of questions about this argument. Why should we assume that the shareholders
themselves won’t be contributing to charity with their increased revenues? What about the Strategy
Response’s claim that the pursuit of profit makes all of society better off and thus makes charity less
necessary? Will legislators, with their indebtedness to corporate campaign contributions, be more likely to
impose new taxes on corporations, or on the dispersed and relatively voiceless middle class? But these
questions are not my present concern.
16
Douglas J. Den Uyl, The New Crusaders: The Corporate Social Responsibility Debate (Bowling
Green: Social Philosophy and Policy Center, 1984; cf. Miller and Ahrens, op. cit.
Stakeholder theory for libertarians – 9/04 – p. 8
phenomenon of “socially responsible investing,” wherein a company’s stocks are chosen
in part because of the worthy goals that company promotes.17 Hence one cannot simply
read off from a stock purchase an overriding preference for profit maximization. Nor
does any contract between managers and shareholders actually stipulate such a
preference; corporate executives in practice have a great deal of latitude. Shareholders
can choose among potential investments, taking into account each corporation’s
particular mix of profit maximization and social responsibility. If this balance changes in
a direction not to the shareholders’ liking, they are free to transfer their investments
elsewhere, thus exerting pressure on managers through their power of exit.
I think this response is a powerful one, as far as it goes; but if we allow the case
against the Shareholder Argument to rest upon the No-Such-Preference Response, we
implicitly concede that if shareholders were to express a clear preference for profitmaximizing behaviour on the part of corporate managers, then satisfying this preference
would be (not just economically prudent but) morally obligatory. I wish to resist this
concession.
Similar remarks apply to what may be called the Weak-Rights Response, which
attempts to deflect the Shareholder Argument by impugning the property rights of
shareholders. This gambit might take the form of a general critique of the stringency of
private property rights across the board, or it might be more narrowly focused on
shareholders in particular. (The latter approach attempts to cast doubt on the claim that
shareholders are the corporation’s owners, by pointing to paradigmatic features of
ownership – like direct control and unlimited liability – that shareholders do not possess.)
Notice, however, that the Weak-Rights Response concedes the principal contention of the
Shareholder Argument – namely, that corporate social responsibility is inconsistent with
recognizing full property rights of shareholders. Such a strategy requires a critic of the
Shareholder Argument to shoulder a heavy burden – and even if successful, it proves too
much, since it tends to cast doubt on the very legitimacy of the corporation as an
institution, socially responsible or otherwise.
In any case, is it really true that if
shareholders have full and stringent property rights, then socially responsible policies on
17
This phenomenon is not unknown even among libertarians; one libertarian friend of mine, for example,
invests in the Hershey company because “chocolate is good.”
Stakeholder theory for libertarians – 9/04 – p. 9
the part of the corporate managers would be impermissible? I shall argue that it is not.
The odd rightwing Naderism of the Shareholder Argument draws no support from
libertarianism.
III. Why Even Libertarians Should Reject the Shareholder Argument
Let us stipulate, then, that property rights are just as stringent and absolute as the
Rothbardian and Nozickian claim. Let us further stipulate that shareholders are the
genuine owners of corporations, enjoying full property rights, while corporate managers
are merely their agents.18
Let us likewise stipulate (for argument’s sake) that
shareholders want nothing from their investments but revenue maximization, and that
managers are aware of this preference – and perhaps have even contractually committed
themselves to satisfying it. Finally, let us stipulate (again for argument’s sake) that
stakeholder interests cannot be taken into account without to some degree frustrating this
preference. I wish to maintain that a version of stakeholder theory can be defended
against the Shareholder Argument even on these assumptions. Thus I am rejecting the
assumption, common to both proponents and foes of the Shareholder Argument, that
stakeholder theory is incompatible with a libertarian conception of property rights.19 If I
am right, then one cannot evade stakeholder theory merely by embracing libertarianism
(or, of course, vice versa).
18
In fact, even some libertarians of a broadly Rothbardian or Nozickian stripe maintain that the legal
recognition of limited liability is morally illegitimate. But libertarians who reject limited liability as
incompatible with libertarian rights do not want corporations to be socially responsible; they want
corporations to be abolished. My present concern is with versions of libertarianism that do not reject
limited liability as illegitimate. Den Uyl, for example, says:
“[L]imited liability for debts is not a special privilege because it isn’t guaranteed:
creditors can refuse credit. With respect to torts, limited liability is not necessarily
granted to all shareholders: It depends on how active they are in management. The state
merely recognizes degrees of involvement, not special privileges.” (Den Uyl, p. 138.)
Den Uyl, for example, describes stakeholder theory as simply the “newest way the social permission
theory is being sold” (p. 147) – the social permission theory being the view that “[o]wnership is essentially
a trustee relationship between the state and individuals or corporations,” so that corporate managers are
“trustees of society’s resources” and thus “must behave in ways that promote the general welfare” (p. 140).
(Note that Friedman’s implicit contrast between duties to stakeholders and duties to society in general is
apparently being lost sight of here.) In short, Den Uyl sees stakeholder theory as dependent on the WeakRights Response. I shall disagree.
19
Stakeholder theory for libertarians – 9/04 – p. 10
The argument I wish to make – call it the Prior-Obligation Response, since it claims
that the force of a contractual obligation to maximize returns to shareholders is
overridden by moral obligations antecedent to the contract – is not a new one. But I have
not previously seen it stated in such a way as to be consistent with Rothbardian or
Nozickian libertarianism.
Christopher Stone, for example, essentially makes my
argument when he writes:
[E]ven if we do infer from all the circumstances a “promise” running from
the management to the shareholders, but not one, or not one of comparable
weight, running elsewhere (to the corporation’s employees, customers,
neighbors, etc.), we ought to keep in mind that as a moral matter (which is
what we are discussing here) sometimes it is deemed morally justified to
break promises (even to break the law) in the furtherance of other social
interests of higher concern. … In other words, even if management had
made an express promise to its shareholders to “maximize your profits,”
(a) I am not persuaded that the ordinary person would interpret it to mean
“maximize in every way you can possibly get away with, even if that
means polluting the environment, ignoring or breaking the law”; and b) I
am not persuaded that, even if it were interpreted as so blanket a promise,
most people would not suppose it ought – morally – to be broken in some
cases.20
The line of argument Stone lays out here is the one I plan to pursue; but as Stone has
stated the argument, the libertarian has no reason to be moved by it. It’s no news to the
libertarian that some laws, and some contractual obligations, are not morally binding.
Libertarians believe that the proper function of law is to protect individual rights; laws
that fulfill this function deserve to be obeyed, while laws that violate these rights enjoy
no such authority. Likewise, contracts should be enforced so long as fulfilling the
contract does not involve the violation of libertarian rights; a contract to violate such
rights is not morally binding and merits no legal protection. But on the libertarian view,
although people have negative rights not to be aggressed against, no one has positive
rights to be benefited or assisted (except insofar as such rights are granted through
contractual agreement). Thus a corporation’s stakeholders have no right against the
corporation that their interests be considered in its decisions, and so corporate managers
Christopher D. Stone, “Why Shouldn’t Corporations Be Morally Responsible?,” p. 434, in James E.
White, ed., Contemporary Moral Problems, 5th ed. (St. Paul: Wadsworth, 1997), pp. 433-37.
20
Stakeholder theory for libertarians – 9/04 – p. 11
violate no right of stakeholders by disregarding their interests. Hence a contractual
agreement to maximize shareholder revenue regardless of the impact on stakeholders
violates no rights and so, it would seem, is binding.
The Shareholder Argument might seem to follow directly from the basic assumptions
of libertarianism, as follows:
1. We have negative rights not to be aggressed against in our persons and property,
and we have no positive rights to benevolence from others, except insofar as such
positive rights are the product of contractual agreement. (The basic thesis of
libertarianism.)
2. Corporate managers have made no contractual agreement to benefit their
stakeholders.
3. Therefore, stakeholders have negative rights not to be aggressed against in their
persons or property, but no positive rights to benevolent treatment from corporate
managers. (1, 2)
4. Therefore, so long as corporate managers refrain from aggression against
stakeholders’ persons or property, they violate no right of stakeholders in otherwise
failing to take stakeholder interests into account in their decisions. (3)
5. If doing X does not violate Y’s rights, then undertaking and abiding by a
contractual obligation to do X does not violate Y’s rights either.
6. Therefore, so long as corporate managers refrain from aggression against
stakeholders’ persons or property, they violate no right of stakeholders in
undertaking and abiding by a contractual obligation that requires otherwise failing
to take stakeholder interests into account in their decisions. (4, 5)
7. If a contract violates no rights, then it is morally permissible to enforce it.
8. If a contract is not morally binding, then the contractor has a right to break it.
9. If a contractor has a right to break a contract, then one cannot enforce the
contract without violating the contractor’s rights.
10. Therefore, if a contract is not morally binding, then one cannot enforce the
contract without violating the contractor’s rights. (8, 9)
11. If one cannot enforce a contract without violating the contractor’s rights, then it
is not morally permissible to enforce it.
Stakeholder theory for libertarians – 9/04 – p. 12
12. Therefore, if a contract is not morally binding, then it is not morally permissible
to enforce it. (10, 11)
13. Therefore, if a contract violates no rights, then that contract is morally binding.
(7, 12)
14. Therefore, so long as corporate managers refrain from aggression against
stakeholders’ persons or property, a contract requiring them otherwise to fail to
take stakeholder interests into account in their decisions is morally binding. (6, 13)
While the premises of this argument are not uncontroversial, most libertarians are
committed to accepting them. Therefore, a libertarian could legitimately think that a
version of the Shareholder Argument has been formulated that is sensitive to Stone’s
points about the limits of contractual obligation. Unless substantiated by a broader
critique of the libertarian principles underlying, e.g., premises (1), (5), and (7), Stone’s
version of the Prior-Obligation Response will not be compelling to the libertarian.
So must the defender of stakeholder theory shoulder the burden of refuting
libertarianism as a whole in order to reply to the Shareholder Argument? No, for the
problem with the argument just given does not lie in its libertarian premises.
It’s clear from step (13) that something must have gone wrong with the argument.
Step (13) says that if a contract violates no rights, then it is morally binding. If step (13)
is true, then at least one of the following claims must be true, since (13) entails their
disjunction:
13a.
A contract to do something immoral is morally binding.
13b.
There are no immoral acts other than rights violations.
13c. Immoral actions that do not violate rights become moral as soon as they
become the subject of a contract.
But none of these propositions can be accepted. (13a) is a contradiction in terms; if it is
wrong to do something, it cannot also be right to do it. (13b) is morally outrageous; and
while it is often attributed to libertarians, no libertarian known to me endorses it. (13c) is
the least objectionable of the trio, but it is simply not plausible; if X is immoral, then
signing a contract to do X cannot, it seems, have the magical power to make X moral
(except in the rare instance where the case against X’s permissibility just barely
Stakeholder theory for libertarians – 9/04 – p. 13
outweighs the case for it, and assuming a contractual obligation tips the scale the other
way).
If a contract requires morally impermissible conduct, then one has a moral
obligation not to enter the contract in the first place; if, regrettably, one has already
signed such a contract, it is one’s moral obligation to break it.
If step (13) is false, what has gone wrong in the earlier steps of the argument? I
suggest that even if all the premises of the argument are accepted as true, the notion of
enforcing a contract is used equivocally in premises (7) and (9), thus blocking the
inference to (13), which depends both on premise (7) and – via steps (10) and (12) – on
premise (9).
There are two ways of enforcing a contract:
specific performance, and money
damages. If I enter into a contract agreeing to do X, enforcement through specific
performance requires me to do X, whereas enforcement through money damages allows
me not to do X, requiring only that I financially compensate the other party to the
contract. Rothbardian libertarians argue that contracts over services should be treated
differently from contracts over goods, for the following reason. My rights over external
property are alienable; I can transfer ownership of goods to someone else before
transferring physical possession. If I do so via contract, forcing me to fulfill the contract
is simply forcing me to hand over to you what has already become your property. Even if
I shouldn’t have transferred title to you, once I do so I am bound to yield possession to
you as well, on pain of violating your property rights. (Hence contracts transferring
alienable goods do constitute a case where what was initially wrong to do becomes right
as a result of the contract.) So in the case of contracts over alienable goods, requiring
specific performance is perfectly legitimate. My right to exercise control over my own
actions is inalienable, however, and so the enforcement of service contracts cannot take
the form of specific performance; instead, such contracts are interpreted as agreeing to
surrender money (an alienable good) in the event of default.21 (Note that a contract to act
in such a way as to maximize shareholder revenue is of course a service contract.)
21
The foregoing analysis is based on Murray N. Rothbard, The Ethics of Liberty, chs. 12 and 19, and on
Randy E. Barnett, “Contract Remedies and Inalienable Rights,” Social Philosophy & Policy 4, no. 1
(Autumn 1986), pp. 186-95, <www.randybarnett.com/4socphilpol179.html>.
Stakeholder theory for libertarians – 9/04 – p. 14
In making this argument Rothbardians obviously part company with Nozick, who
rejects the concept of inalienable rights. But Rothbard’s version of libertarianism, while
less well-known outside the libertarian movement, is more influential among libertarians
themselves, and at any rate is in my judgment the more defensible version; so I shall feel
free to invoke the concept of inalienable rights.
Now let’s look again at premises (7) and (9):
7. If a contract violates no rights, then it is morally permissible to enforce it.
9. If a contractor has a right to break a contract, then one cannot enforce the
contract without violating the contractor’s rights.
When premise (7) speaks of enforcement, it can only mean enforcement by money
damages. After all, if one has contractually undertaken to commit an immoral (though
non-rights-violating) act X, it is morally mandatory – and so, a fortiori, morally
permissible – not to commit X.22 But it would be monstrous to compel someone to
commit an immoral act; hence there can be no question of enforcing such a contract
through specific performance. Hence (7) makes sense only if enforcement is understood
in terms of money damages. Premise (9), by contrast, should be understood as referring
to enforcement through specific performance. If I have a right not to do what I have
contracted to do, then compelling me to do it would violate my rights; but it does not
follow that forcing me to pay compensation to the other contractor would also violate my
rights.
How does all this apply to stakeholder theory? Well, since (13b) is false, there are
some things we shouldn’t do, even though doing them would violate no rights. Consider,
then, the following three principles:
Nonaggression Principle: Avoid invading anybody’s person or property.
Nonharm Principle: Avoid making anybody worse off.
22
The fact that a command to act wrongly must not be obeyed is itself sufficient grounds to reject the
legitimacy of slavery contracts; there is no way to rid oneself of the obligation to exercise one’s moral
judgment before obeying a command, and so no way to surrender authority over one’s decisions to another
person. See P. D. Jewell, By What Authority? Anarchism, the State and the Individual (Adelaide: Amada,
1989).
Stakeholder theory for libertarians – 9/04 – p. 15
Benevolence Principle: Avoid failing to help anybody in need.
Libertarians accept the Nonaggression Principle, and also regard it as the only principle
that may legitimately be enforced. But what about the other two principles? Commonsense morality speaks in their favour23 – though only so long as each is recognized as
being less strict than the one preceding it. The Nonharm Principle, for example, is both
broader and less strict than the distinctively libertarian Nonaggression Principle: broader,
because there are lots of ways of harming people that do not involve invading their
person or property; less strict, because exceptions to the prohibition on harm are easier to
justify than exceptions to the prohibition on aggression. Harm – i.e., making decisions
that have a negative impact on other people – is ubiquitous: if you marry person A or
accept a job from employer B, you’ll disappoint romantic admirer C or rival employer D;
a prohibition on harm as strict as that on aggression would thus be unworkable. Hence
“avoid” cannot here mean “avoid at all costs.” On the other hand, it is still easier to avoid
harming anybody than it is to help everyone that one might be able to help; hence the
Benevolence Principle is still less strict (i.e., allows still more exceptions) than the
Nonharm Principle. (Let’s say, not that these exceptions are cases where it is permissible
to violate the principles, but rather that they’re cases where the principles do not, after all,
require the conduct in question.)
Den Uyl writes that “corporations must act in ways that do not violate individual
rights”; such rights are Nozickian “side constraints” that “keep us between the bounds of
legitimacy.”24
Fair enough; but why assume that libertarian rights are the only
appropriate side constraints on corporate actions? I submit that managers should regard
their conduct as governed not just by the Nonaggression Principle, but by the other two
principles as well; a contract requiring managers to violate the Nonharm and
Benevolence Principles would thus not be morally binding. This does not mean that
23
Some libertarians are ethical egoists in the tradition of Ayn Rand, and so may suppose that they have
no reason to accept the Nonharm and Benevolence Principles. But Rand’s system arguably supports both
principles; see David Kelley, Unrugged Individualism: The Selfish Basis of Benevolence (Poughkeepsie:
Institute for Objectivist Studies, 1996). Ethical egoism requires only that moral principles have egocentric
grounds, not that they have egocentric content.
24
Den Uyl, p. 147.
Stakeholder theory for libertarians – 9/04 – p. 16
managers should throw profits to the winds in a costly orgy of altruism; but it does mean
that in making their decisions, managers should take into account the impact of those
decisions on other people’s interests – which is exactly what stakeholder theory says.
Given the core of truth in the Strategy Counter-Response, such a policy will not counsel a
great deal of deviation from straightforward profit-maximization; but it probably will
counsel some. We have a general obligation to consider the impact of our choices on
others, and signing a contract cannot relieve us of this obligation.
Unlike the Nonaggression Principle, whose application must be strictly rulegoverned, the application of the Nonharm and Benevolence Principles leaves a great deal
open to individual judgment and what Aristotle called “practical wisdom.”25 Still, some
general guidelines can be identified. Consider, for example, the issue of plant closings.
If corporate managers judge that closing a particular plant would boost profits, but at the
25
Since the Nonaggression Principle, unlike the other two, is to be legally enforced, its application must
be clear, precise, and predictable. The contrast between justice and benevolence is admirably expressed by
Adam Smith:
“The general rules of almost all the virtues, the general rules which determine what are
the offices of prudence, of charity, of generosity, of gratitude, of friendship, are in many
respects loose and inaccurate, admit of many exceptions, and require so many
modifications, that it is scarce possible to regulate our conduct entirely by a regard to
them. … If your friend lent you money in your distress, ought you to lend him money in
his? How much ought you to lend him? When ought you to lend him? Now, or tomorrow, or next month? And for how long a time? It is evident, that no general rule can
be laid down, by which a precise answer can, in all cases, be given to any of these
questions. … There is, however, one virtue of which the general rules determine with the
greatest exactness every external action which it requires. This virtue is justice. … If I
owe a man ten pounds, justice requires that I should precisely pay him ten pounds, either
at the time agreed upon, or when he demands it. What I ought to perform, how much I
ought to perform, when and where I ought to perform it, the whole nature and
circumstances of the action prescribed, are all of them precisely fixt and determined. …
The rules of justice may be compared to the rules of grammar; the rules of the other
virtues, to the rules which critics lay down for the attainment of what is sublime and
elegant in composition. The one, are precise, accurate, and indispensable. The other, are
loose, vague, and indeterminate, and present us rather with a general idea of the
perfection we ought to aim at, than afford us any certain and infallible directions for
acquiring it. A man may learn to write grammatically by rule, with the most absolute
infallibility; and so, perhaps, he may be taught to act justly. But there are no rules whose
observance will infallibly lead us to the attainment of elegance or sublimity in writing;
though there are some which may help us, in some measure, to correct and ascertain the
vague ideas which we might otherwise have entertained of those perfections. And there
are no rules by the knowledge of which we can infallibly be taught to act upon all
occasions with prudence, with just magnanimity, or proper beneficence: though there are
some which may enable us to correct and ascertain, in several respects, the imperfect
ideas which we might otherwise have entertained of those virtues.” (Adam Smith,
Theory of Moral Sentiments, Part III, Chapter 6.)
Stakeholder theory for libertarians – 9/04 – p. 17
cost of a devastating impact on the economy of the local community (a dilemma
popularized by Michael Moore’s film Roger & Me), what should the managers do? If the
Nonharm Principle were not binding, they should immediately close the plant without
further ado. If, on the other hand, the Nonharm Principle were as stringent as the
Nonaggression Principle, they should either not close the plant at all, or else, e.g., phase
out its closing extremely slowly, while assisting the employees in finding new jobs.26
Given that the Nonharm Principle is more binding than the first position allows, and less
stringent than the second position supposes, the proper course of conduct will presumably
lie somewhere in between. Corporations are not charitable institutions, and are under no
obligation to turn unprofitable plants into ongoing make-work programs. (Do workers
necessarily take their employers’ interests into account when deciding whether to quit?)
All the same, common decency requires giving employees fair notice and some chance to
adjust, before cutting off their sole source of income. Corporate managers should give
(not overriding weight but) some weight to stakeholder interests; this may be a weaker
guarantee than most stakeholder theorists would like, but it is more than the Shareholder
Argument would countenance.
As the No-Such-Preference Response points out, accepting a position as corporate
manager does not in fact involve any contractual promise to maximize shareholder
revenue. But suppose it did. Would it then be immoral to become a corporate manager?
To see why it would not, examine the following scenario. Suppose you’ve signed a
contract requiring you to transport several truckloads of goods from warehouse A to
warehouse B “as quickly as possible.” Now the quickest way to transport these goods
would be to drive across a vacant lot which, as it happens, you own. Driving your truck
back and forth across this lot would, however, destroy your grandmother’s flower garden.
This you have every right to do; the garden is on your property, not hers, and it is only as
a friendly favour, not any sort of contractual obligation, that you have allowed her to
plant her garden there.
Hence driving across the vacant lot would not violate the
Nonaggression principle; but it might well violate the Nonharm Principle. That is not to
say that it would necessarily do so; determining one’s duty in such a situation requires
See, for example, Joseph William Singer, “The Reliance Interest in Property,” Stanford Law Review 40
(1988), pp. 611, 614-63, 724-32.
26
Stakeholder theory for libertarians – 9/04 – p. 18
balancing various considerations and exercising wise judgment, not rigidly applying
some rule. But let’s suppose that, upon careful deliberation, it turns out that using the
quickest route would indeed violate the Nonharm Principle, and so a slower and more
roundabout route should be chosen instead. Does this mean that you must break your
contract (and pay money damages to the other party)?
Not necessarily. It depends how one should reasonably interpret the phrase “as
quickly as possible.” Suppose the quickest route had been, not over your own property,
but over someone else’s; should the contract be interpreted as requiring trespass in the
violation of the Nonaggression Principle? Surely not; if a contract can plausibly be
interpreted in two ways, one of which involves violating somebody’s rights and the other
doesn’t, it seems reasonable (especially for Rothbardians, who tend to be neo-Spoonerites
in matters of legal interpretation) to interpret it in the second way.27 After all, signing a
contract gives one a prima facie obligation to perform it, and thus a prima facie
obligation to interpret it in such a way that one can perform it, consistent with one’s other
obligations. But in that case, the same principle should apply not just to rights-violations
but to moral wrongs in general. In the absence of an explicit contractual obligation
requiring immoral conduct, the default approach should be to interpret a contract as being
consistent with the totality of one’s moral obligations – and hence, in the present case, to
interpret “as quickly as possible” to include moral constraints among the limits of
This approach coheres admirably with 19th-century libertarian legal theorist Lysander Spooner’s
maxim that laws should be interpreted in a manner favourable to liberty and justice whenever it is possible
to do so:
“[N]o terms, except those that are plenary, express, explicit, distinct, unequivocal, and to
which no other meaning can be given, are legally competent to authorize or sanction
anything contrary to natural right. … The rule of law is materially different as to the
terms necessary to legalize and sanction anything contrary to natural right, and those
necessary to legalize things that are consistent with natural right. The latter may be
sanctioned by natural implication and inference; the former only by inevitable
implication, or by language that is full, definite, express, explicit, unequivocal, and whose
unavoidable import is to sanction the specific wrong intended.” (Lysander Spooner, The
Unconstitutionality of Slavery, pp. 58-59, in Charles Shively, ed., The Collected Works of
Lysander Spooner, Vol. 4 (Weston MA: M&S Press, 1971), available online at
<www.lysanderspooner.org/bib_new.htm>.)
For discussion see Randy E. Barnett, “Was Slavery Unconstitutional Before the Thirteenth Amendment?
Lysander Spooner’s Theory of Interpretation,” Pacific Law Journal 28 (1997), pp. 977-1015, available
online at: <www.bu.edu/rbarnett/PUB1_1.htm>.
27
Stakeholder theory for libertarians – 9/04 – p. 19
possibility. Only if a contract cannot reasonably be so interpreted should it be broken
(with money damages) – or not entered into in the first place.28
In the same way, even if corporate managers are interpreted as having undertaken a
contractual obligation to maximize shareholder revenue, such maximization should be
understood as constrained not only by the Nonaggression Principle, but also by the (less
stringent) Nonharm Principle, as well as the (still less stringent) Benevolence Principle.
The Nonharm Principle will presumably be relevant more often than the Benevolence
Principle. After all, if I fail to act benevolently with the resources you have entrusted to
me, I can still act benevolently with my own resources and on my own time – so my need
to act benevolently with your resources is not pressing. But if I use your resources in
such a way as to cause harm to somebody, I cannot then clear my moral slate simply by
using my resources in a nonharmful manner. Benevolence is ordinarily an “imperfect
duty,” i.e., one whose occasion of performance is up to the agent’s choice; moral
deliberation will forbid specific acts of harm far more often than it will mandate specific
acts of benevolence. Nevertheless, circumstances do sometimes render a specific act of
benevolence morally mandatory; if a person is drowning right in front of me, but I’m on a
company errand, I can’t legitimately pass her by with the promise that I’ll make it up to
the universe later by doing other good deeds on my own time
In conclusion, concern for the interests of stakeholders deserves to play some role in
corporate deliberations. The precise form and extent of this concern will vary with
context and cannot be laid down in advance; still less can it be mandated by law. But the
fact that a certain course of action would negatively impact stakeholder interests is
always relevant (whether or not it is decisive) as a criticism of corporate policy. Hence
we have arrived at a version of stakeholder theory that the Rothbardian libertarian has
good reason to accept – and which she can accept without sacrificing any libertarian
principle.
28
By contrast, as David Gordon points out to me, if a contract requires only the payment of a bond in
case one fails to perform action X, then action X can be interpreted as an immoral action consistently with
one’s obligation to abide by the terms of the contract.
Stakeholder theory for libertarians – 9/04 – p. 20