In a new paper considering the two leading theories of corporate governance, shareholder theory and stakeholder theory, I argue that stakeholder theory is fatally flawed. Stakeholder theory holds that, in making business decisions, directors should consider the interests of all the corporation’s stakeholders, but, regardless of how narrowly or broadly the class of stakeholders is defined, virtually every possible business decision will benefit some stakeholders and harm others. The fatal problem is that stakeholder theory has never explained what it means to say that one business decision is any better or worse than any other. This essential omission is often papered over by saying that directors should do what is best for all stakeholders collectively or on balance or something else along those lines, but none of these expressions has in this context any clear meaning.

Suppose the decision before the board concerns whether to accept a cash takeover offer. Accepting the offer will affect various stakeholders differently. Shareholders who favor the proposal will benefit, getting what they take to be an attractive price for the shares; shareholders who oppose the offer will be harmed, being cashed out at what they take to be an inadequate price. Employees who lose their jobs will be harmed, but employees who are retained and have better opportunities for advancement will benefit. If the transaction reduces the creditworthiness of the company, existing bondholders will be harmed, unless, of course, the bonds include protective provisions that require that the bondholders be repaid immediately, in which case the bondholders may benefit. Similar things will be true for other groups of stakeholders. Given how each group of stakeholders will be affected, what does stakeholder theory say about whether the offer should be accepted or rejected? The answer is nothing at all. The essential problem is that, although stakeholder theory tells directors to consider the effects of a transaction on all stakeholders, the theory never says anything about how these effects tend to make one decision better or worse than another.

It is helpful to contrast stakeholder theory with shareholder theory. Under shareholder theory, one alternative is better than another if and only if it produces more value for shareholders. In the typical case, the directors will face a set of alternatives, each of which involves the corporation making certain investments (i.e., cash outflows) in the hopes of receiving certain returns (i.e., cash inflows). If we leave the problem at an intuitive level, it is impossible to say which alternative generates more value for shareholders or even what it means to say one alternative generates more value for shareholders, but shareholder theory does not leave these problems at the intuitive level. Rather, it has integrated the concepts of financial economics precisely to answer such questions. Applying those concepts, we can compute the net present value of each alternative, and once we know the net present value of all the alternatives, we know which produces the greatest value for shareholders. By using the concepts of financial economics, shareholder theory determines definitively, subject only to empirical uncertainty, which of any two alternatives is better and which of any set of alternatives is best. Stakeholder theory has never done anything analogous.

Although this problem with stakeholder theory is obvious, stakeholder theorists have never attempted to address it. The reason for this is fairly clear: The theory needs to be supplemented with additional normative assumptions that will tell us which alternatives available to the directors are better than others, and virtually any normative theory can be adapted to the task. It’s not that the problem has no solution; it’s that it has far too many.

One choice would be some form of utilitarianism or welfare economics: One business decision would be better than another if it produced greater utility or welfare for all stakeholders collectively. In fact, this option splinters into many separate options depending on one’s choice of social welfare function (see my separate paper on stakeholder theory and welfare economics). Another option would be a deontological version of stakeholder theory, with the directors applying the Kantian categorical imperative to discover which business decisions they should make. Then again, we could have an Aristotelian stakeholder theory, adapting the concepts of contemporary virtue theory in order to determine which business decisions are better than others. Or we could have a Thomistic, natural-law version of stakeholder theory, a Rawlsian version of stakeholder theory, a feminist version, a communist or fascist one, or even one based on critical race theory. Indeed, if we adopt a Chicago School account of normativity and assume shareholders are entitled to have the value of their investment maximized within the law, then stakeholder theory collapses back into shareholder theory.

Perhaps surprisingly, Edward Freeman, the leading academic stakeholder theorist, has come to precisely this same conclusion, concluding that there are as many versions of stakeholder theory as there are normative theories that may be used to give it definite content. While Freemen seems to see this as a virtue of the theory, I see it as a reductio ad absurdum of the theory. A theory that can mean anything means nothing.

Robert T. Miller is Allison and Dorothy Rouse Chair in Law at George Mason University’s Antonin Scalia Law School. This post is based on his recent article, “Shareholders and Stakeholders in Corporate Law,” available here.