Just as bankers insisted on netting bonuses for themselves when the recession they created was still causing mayhem in the global economy, BP has announced that it will “go ahead with a $10bn shareholder payout” even as the oil from Deepwater Horizon continues to spill and spread. The organizing math of markets is to earn rewards from investing in smart risks. But for large companies, payout is becoming a given regardless of whether or not the bets executives make pan out. As economist Joseph Stiglitz notes, the rules of the market now make it easy for companies to privatize profits while socializing the costs from mistakes or failure.
Since markets and autopilot CEO’s like BP’s Tony Hayward only respect the rights of shareholders, the solution is to make victims of corporate malfeasance or incompetence owners as well – what I call “Mistakeholders.” This would involve assigning equity to victims that corresponds in value with the losses they have been forced to bear from risks not of their own choosing, that have gone askew. President Obama admitted that the oil spill is “brutally unfair” on Gulf residents. Granting mistakeholders shares ues the market’s own logic and strengths to tangibly addresses this unfairness.
For the last decade companies have acknowledged responsibilities to stakeholders, but the reality of fiduciary duty remains fuzzy. Management scholars are still debating whether it makes sense for managers, as “agents” of owners, to dilute their focus by addressing needs or expectations of groups that are outside the equity clique. Usually stakeholders include employees, interest groups, communities, or representatives of issues such as labour conditions in sweatshops, or threats to the natural environment.
Existing Stakeholder theory is in my view fundamentally flawed because, while executives are increasingly pressured to acknowledge that these other groups bear hazards from their operations, there is no legal pressure to respond to anyone other than shareholders. Hence why stakeholder relations are often handled as subset of public affairs or social responsibility departments. For all their stakes, stakeholders in reality have very few tangible rights.
Some will say that the proper channel for negotiating these costs is the legal system, however what has come to light during the BP fiasco is that local victims in Alaska are still waiting for payout from Exxon Mobil for its oil spill 20 years ago. The delay is not from the courts being insouciant. Rather, like other corporations facing similar class-actions suits, Exxon has used its hefty legal resources to wear down opponents, and water-down settlement payments through endless appeals. It turns out that the environmental damage in Alaska has not gone away. And the victims are still being victimized; now by the legal hoop-jumping that delays any fair settlement. Here is the proof that even when stakeholders have a moral claim on a company for its mistakes, this in no way guarantees any legal claim on the enterprise.
Mistakeholder shares provide several other benefits. Management scholars are making the case for what is called “fourth generation governance.” As is also clear from the recent financial crisis, the current formulation of self-regulating corporate governance supervised by some type of government regulation, is inadequate. Companies operate globally, which means that they are no longer bound by any one jurisdiction. More regulation – like we had with Sarbanes-Oxley after Enron – is not in itself a solution. Fourth-generation governance envisions a dynamic and hybrid system of checks and balances, involving international institutions, corporate representatives, government and local regulators, and formal considerations from we sectors or groups that have typically designated as stakeholders. Mistakeholder theory would be another node in that new generation framework for making equity more accountable. Assigning shares to victims in a value equivalent to their loss helps bring interest groups from the periphery of governance, where they can still be ignored, to ownership, where they must be served.
Mistakeholder shares would also correct that most frustrating aberration in management relating to accountability. Just as pension funds have aggregated contributions from their members to create huge investment pools with powerful leverage, the potential size of the Mistakeholder funds would demand the same serious regard from directors and executives. And, just as pension funds have used their clout to improve governance, wrestle seats on the Board, and upgrade corporate performance, it is in the interest of Mistakeholders to also hold their company’s executives feet-to-the-performance-fire, since the recovery of losses hinges on achieving consistent and sustainable profits.
By no means a complete solution, Mistakeholder theory begins to reverse the tendency of companies to disregard, or take less seriously, obligations that do not directly benefit shareholders, because it elevates those who have suffered a cost for that disregard to part of the ownership group. It also uses the best of what business does, which is innovate, find new efficiencies, and develop new markets, for profit – to the benefit of the all those who by choice or by default are now owners.
(Photo: Carolyn Cole / Los Angeles Times)
Tags: equity for damages, governance reform, mistakeholder theory, stakeholder theory, victims rights
This entry was posted on Saturday, June 5th, 2010 at 5:39 am and is filed under Ethics Lab. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
