Stone criticized Friedman for placing shareholders at the top of the chain of command in the company structure. Friedman believes that shareholders are the ‘principals’ and the directors are the ‘agents.’ The former dictate their wishes to the latter and therefore can force directors to spend the company’s money according to their desires. Stone argues that this is not the case and in reality, the process of decision-making remains largely out of reach of the shareholders.
Stone’s criticism of Friedman’s ideas seems to be based on excellent knowledge of companies’ inner system of relationships. He uses examples of companies in the US that demonstrate his position. However, each company is different, and occasionally shareholders can lobby for their desire to become a company’s priority when they are unanimous in their wishes. One of the ways to do so is to vote ‘financially’ by driving the price of shares to a minimum by selling them in mass amounts. That could indicate that shareholders are in disagreement with the current course that the company management is taking. The more delicate approach here would be to threaten to sell a large portion of the shares if the demands are not met. In Credit Suisse, for instance, there is a practice of shareholder recommendations that gives them additional leverage. In 2008, Merrill Lynch shareholders approved the acquisition of their company by the Bank of America. That fact indicates that shareholders’ decisions in major financial questions are significant.
The situation with Dow that Stone described is one of many. It does not justify the conclusion that each and every company acts according to Dow’s paradigm. Each company’s real management structure, decision making, and inner relations between senior management and shareholders are often private matters. People can make assumptions only on the information that is publically available. That is why the suggestion that one model is right and the other is wrong without supporting that observation with a large amount of statistical data is unreasonable. Even in that case, the researcher may be biased and gather data that supports only his or her position, disregarding any counterexamples.
Jeff Smith, a professor in Babcock Graduate School of Management, argues that both shareholder theory and stakeholder theories are normative and describe only the ideal situation. That is their essential flaw. Proponents of stakeholder theory such as Stone forget that in reality, the director-shareholder relationships can be influenced by multiple factors like personal connections, antipathy, depth of knowledge of the company’s affairs, the charisma of the negotiators, and so on.
To my mind, Stone’s criticism of Friedman’s arguments is reasonable, but lacks a broader view. That there are examples of various corporations with the different management styles that have been proposed suggests that there is still no universal answer to this ongoing controversy. Legally, courts usually make decisions in favor of the board of directors, stating that they are answerable to the corporation instead of individual shareholders. However, the case of Enron Corporation, where 7.2 billion was awarded to deceived investors, might indicate that justice can also protect investors in arguments with the board of directors.
I would rather abstain from claiming that one style of corporate governance is dominant over the other without having enough statistical data. Above that, there is still little known about each company’s inner relations in the higher circles beyond the information the companies present to the public themselves. Organizational decision-making processes in reality can be unique and common patterns cannot always properly explain them.