Whose Company Is It Anyway?

This one is easyit's the shareholders

Who is a company for--not legally speaking, but philosophically? Some people say it belongs to the shareholders, others to its employees. Still others say a company exists for its customers' sake. What do you think? -- Tomohiro Horibe, Saitama, JapanA company is for its shareholders. They own it. They control it. That's the way it is, and the way it should be.

Don't take our bluntness wrong; your question is hardly a no-brainer. In fact, it's at the heart of an ongoing public policy debate about corporate ownership, or more broadly put, about "voice."

The voice debate is complex and contentious--we can hear the Political Correctness Police revving their engines right now! The reason is that so many activist groups make the case for a say in company policy. Labor leaders, for instance, will tell you that businesses can't run without their people, yet they earn far less than executives. Shouldn't workers get a bigger piece of the action to correct that inequity? Elected officials will talk about a company's toll on local residents--clogged traffic, pollution, and depressed housing values. Shouldn't the community get some form of reparations for damage done? Social activists cite the responsibility of the strong and powerful to help the weak and less fortunate. Shouldn't a company honor that moral code?Yes, yes, and yes--in principle.But the problem is that many of those voices, however legitimate, have hidden agendas that often have little to do with the reality of what a company does.

Union organizers routinely denounce companies, regardless of their actual labor practices, as part of a never-ending campaign to increase membership and fatten coffers. As for politicians, vilifying what appears to be a big, rich enemy can be a fast way to generate publicity even if the object of the attack happens to be creating jobs and pouring tax receipts into the community. Social activists often target companies to draw attention to and raise money for their causes on the cheap: One or two professional protesters can easily create a shareholder-meeting fracas and a little fodder for the media.

Given all the agendas swirling around, companies can wind up in a real mess if they start reacting to the varied stakeholders who claim a piece of the company. That doesn't mean they shouldn't listen to these groups. Companies live or die because of engaged employees and satisfied customers. Obviously, both have to be heard. Finally, companies reside in communities, are part of society, and must accept the responsibilities of good citizenship.

Capitalism, with its shareholder owners, reinforces all that. Why? Because capitalism is based on the principle that shareholders want their companies to be profitable over the long haul. And sustained profitability leads to the exact outcomes we just mentioned: satisfied customers, engaged employees, thriving communities, and healthy societies.

CAPITALISM'S CRITICS like to point out that some companies don't give a whit about capitalism's fundamental principle. They argue that management wants maximum returns today. Forget 10 years from now. And so companies squeeze the life out of their employees or destroy the environment (or commit any number of other social crimes) to get fat profits fast. To compound matters, detractors say, many companies pay executives ridiculous sums to deliver short-term results, or even worse, lousy performance. Human greed, they say, is a mighty flaw in the capitalist system.

Another increasingly prominent criticism of capitalism concerns shareholders who buy stock and flip it. It is said that this constituency, comprised largely of investment funds of every stripe, couldn't care less about long-term growth and profitability.

But quick-hit investors don't just rile activists. Companies denounce them, too: Witness the current debate over whether there should be a defined holding period before voting rights are granted. A holding period may indeed quiet some criticism on this particular front, but there will always be agenda-driven groups who rant against capitalism.

Sure, capitalism has its shortcomings. It also has plenty of virtues, one of which is that those same critics, with their stated and veiled agendas have their voices heard in the marketplace and (loud and clear) in the media. But voice is not ownership. It is influence.

Ultimately, the legal and philosophical answers to your question are one and the same. A company exists to serve the people who elect the board of directors, which, in turn, picks the management that drives the company. It is for its owners.

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