Machan's Musings - Stakeholder Nonsense
by Tibor R. Machan
Driving to my gym on the weekends I meet with zillions of motorcyclists on the road riding their variously modified and decorated Harleys and similar chops. There are a couple of hangouts — like Cook’s Corne r— where they gather Saturdays and Sundays, doing I have no idea what. All I encounter is the bikers going and coming and standing around chatting at the outdoors of the restaurant, as best as I can tell. Must be fun, they seem to be doing it everywhere — I saw groups of them riding in Germany, England, and Austria this summer. Talk about globalization!
Near Cook’s Corner, on both sides where the bikers approach the place, there are a couple of photographers during the weekend. A sign alerts the bikers to their presence, just in case they would like to get a shot of them riding their cool looking chops, alone, or with their significant other behind them. These photographers make a few bucks during the weekend, probably enough to help them a bit with their own budgetary needs.
However, Cook’s Corner, like so many other restaurants, isn’t a very steady business. A while ago it was up for sale and there have been rumors that it might just close, period. Also, the bikers might just abandon the place, should they find some better establishment at which they wish to gather and do whatever it is they do at such places. That would be the end of the local photographers’ weekend job.
Go down a few miles, to my gym, which has had so many changes of management that their policies, regarding guests and family and numerous other matters, have been yo-yoing about at a break-neck pace. I have been with them for two years and about 8 different management teams have come and gone. Whether it will stay in business is anyone’s guess, although the chain has opened another facility about 15 miles away, so it looks like they aren’t going belly up soon. Still, no one can be sure.
Next to the gym little shops have sprung up a barbershop, a nail and hair place, a cleaners, and a coffee house that seems to be an independent outfit — it’s called "Michael’s Coffee." In fact, there is now another fairly large establishment next to the gym, a sports medical center, including a chiropractor.
Now imagine that my gym went belly up. Suppose I and hundreds of other members discovered yoga or swing dancing as our way to keep fit and we all abandoned the joint. Not only would the gym close as a result, but all these adjacent businesses would also lose most of their customers.
By the tenets of contemporary business ethics, however, the gym isn’t responsible to satisfy the economic goals of its shareholders but must, as a matter of the law, consider the stake-holders' economic interests. The cleaner and barber and coffee house owner — they all have a stake in the gym’s continued presence. Even if the gym isn’t attracting enough customers to make it profitable, it may attract enough who will patronize these adjacent establishments. And for advocates of stake-holder theory, that suffices to force the gym to continue in business, even at a loss.
Some advocates of the stake-holder theory, even some free market champions, want it only to put people like those who own the gym on notice that they ought to keep in mind the side-effects of their business decisions. But this is definitely the minority. Those who invented the theory meant, without a doubt, to have the idea be enforced by law, not leave it merely to the good will of the major business involved.
But perhaps these folks will object: Your examples of stake-holder interest are small potatoes, compared to huge firms like General Motors or Wal-Mart closing shop. In such cases hundreds, even thousands of stake-holders will have to relocate, find new jobs, establish new businesses, etc. And that’s what's intolerable.
I disagree. That bike photographer and the barbershop owner matter just as much as would all the others who, in the more massive case of plant closing, would be affected. And so long as the gym’s owners have a right to close shop, to relocate and such, so do the owners of big businesses. It is the principle of the thing, not the numbers involved, that should matter here.
Finally, has anyone considered that one of the principles that stake-holder theory would violate, by making closing a shop illegal or highly regulated, is the right to freedom of association? How dare these folks propose that people in business may not disssociate themselves from potential customers? Don’t they realize that such a proposal is tantamount to advocating the enslavement of these business owners by those who have a stake in their business?
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