Pushpika has studied how we can identify stakeholders with legitimate claims on an organization.   Can you explain the main findings on your scholarship in this area? How do we know who is in and who is out?

Pushpika explained that she takes the view that stakeholder identification should be inclusive.  In addition to transactional partners, there may be secondary partners (such as community members) and even the natural environment that have claims on a corporation.

So how do we draw the boundary?  It’s quite case specific, Pushpika says.  She sees no singular criterion.  It depends on managerial judgment, including the moral compass of the individual and the corporation’s purpose.   The manager must consider risks and the demands of other stakeholders such as employees that the corporation stay true to purpose.

Pushpika added that this is why we can’t give managerial jobs to robots.  We need to retain managerial judgement.   This judgement will also reflect the input of teams of executives, regulators, customers, and of course employees – each of whom may demand vigilance on the part of management in staying true to purpose.

This of course raises a question about what constitutes property rights.  For example, if I own a home in a community that is affected by, say, increased pollution after a company builds a new plant in a nearby city, do those property rights make me a stakeholder?

Pushpika explained the differences between residual rights, residual control rights, control rights, and property rights.   She began by asking us to consider what happens when you buy a car.  You can do a lot with the car, of course, and this is because you have residual control rights, although those rights are bounded by regulations and by any contracts you write, such as when you rent out or lease the car to someone else.   The ways you use the car are also bound by human rights and affected by product safety rights, for example.  But generally you can use the car to go where you want and when you want.

Control rights may extend beyond residuality.   You can, as this example illustrates, resell the car, thereby ceding residual control over it to someone else.

In shareholder corporations, residual benefits of the corporation’s activities goes to shareholders.   The shareholders only get paid after everyone else gets paid.  The shareholders are the last to eat.  This means that they must bear risk. 

Residual control + residual benefits = power.   The shareholder primacy environment in which we live today pushes the shareholder-primacy firm to take risks that have led to a very high level of residual benefits for shareholders.   Pushpika also noted that some of the residual control rights of shareholders are ceded to managers, Directors, etc.   

We then got to talking about shareholder primacy.   Anita confessed that, when she was in Business School, the prevailing view was that shareholders could receive some but not all of the benefits that come from risk-taking through dividends.  The general idea was that leaving too much free cash flow in a company would encourage managerial wastefulness and risk-taking beyond the interests of shareholders.  

Pushpika responded by acknowledging that this perspective is still relevant, but that there’s a lot of gray space that has evolved over time.   It’s easy for shareholders to mitigate risk by selling shares with a click of a button, and by exercising the limitation on liability that arises from ownership of corporate stock.    The situation is very different for an employee, who can’t easily walk away from a job.

Pushpika described a project that she is doing with a PhD student in law, Nena von der Horst, on the history of laws governing the distribution of profits primarily in the Netherlands.  This study is exposing the historical conversations and debates that arose around these issues.

The conversation also linked to questions of corporate purpose.

The logic of profit distribution is related to the stated purpose of the corporation.   When managers act in ways that are not aligned with the company’s purported purpose in creating value, then stakeholders from every corner start to object, sometimes quite vociferously.   Employees quit, customers stop buying, and the media may cover the firm as inconsistent.  Managers are disciplined by these forces to stay true to the stated purpose of their organizations.

Anita asked Pushpika how a rebalancing toward greater commitment to purpose in shareholder corporations can occur.  

Pushpika drew our attention to steward ownership models such as at the New York Times, Novo Nordisk and Ikea.  In this model, the majority of shares are held in a trust or foundation, and dividends are used for charitable purposes.   These frameworks amplify the pressure on managers to stay true to purpose.

What makes Pushpika optimistic?

The mainstreaming of these ideas about purpose makes Pushpika excited that we are making real progress.  She thanked Anita, and we talked a little bit about the leadership of our friend (and Pushpika’s colleague), Professor J.W. Stoelhorst, who has championed the transition in the profession toward a more fulsome and thoughtful perspective on stakeholder engagement.