Here’s a letter to a Cafe Hayek reader:
Thanks for your e-mail in response to this post (and others) of mine opposing “stakeholder capitalism.”
While I don’t doubt that some corporations are mismanaged, I’m skeptical of your argument that many of them have been so poorly managed that they have become “zombies” and that the only reason they today have high capitalization is because of stock buybacks. Without a large number of investors willing to purchase and hold shares at the prevailing prices of those shares, I simply don’t see how those prices reflect anything other than investor expectations of the future performance of the companies.
For the same reason that I cannot permanently inflate the market value of, say, a decrepit 1997 Toyota Corolla by buying one for $100,000 – or by buying fleets of such used cars each at $100,000 – managers of a corporation cannot permanently inflate the market value of the collection of assets that is their firm by buying back a portion of that company at a price greater than it’s worth. This truth seems to me to be especially clear given that these stock buybacks are paid for with the company’s own cash.
But even if I’m mistaken in this matter – which I might well be – you miss my larger point, which is this: regardless of how well or poorly managers are at running their companies in ways that maximize share values, there’s every reason to believe that managers will be much less competent at running their companies in ways that adequately satisfy “stakeholder” interests. Not only is the definition of “stakeholder” inherently open-ended and ambiguous, even the most skilled managers have no way to know how to trade-off the well-being of one set of “stakeholders” for that of another set.
In short, the posts of mine to which you object are not mini-treatises on the perfection of American capital markets but, instead, expressions of grave doubt about the wisdom of charging corporate managers with the obligation to maximize the welfare of so-called “stakeholders” at the expense of shareholders.
Donald J. Boudreaux
Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030