E. Merrick Dodd & the Rise and Fall of Corporate Stakeholder Theory

Modern stakeholder theory, born of the Great Depression and the writings of Merrick Dodd, has captured the enthusiasm and fervent support of numerous academic theorists and corporate practitioners throughout the decades. Its visceral appeal is unmistakable. Unfortunately, its popular appeal has vastly overstepped its ultimate viability. It is flawed in both its creation by Dodd and its ultimate application. Dodd’s subordination of the equity-holders through a time-based diminution of equity value is an unsupportable and inexplicable assault on fundamental property rights. It conflicts with such basic and fundamental concepts of property and incentives that it cannot be correct. And should this element of the Dodd thesis fail, Dodd’s whole approach must fall. His subordination of the equity holders then becomes a taking that has constitutional and practical problems and implications. But, more importantly, the corporate and investment world that Dodd recognized and attempted to reorder, has changed dramatically in the last eighty years. First, the road to shareholder profitability is built by stakeholder recognition and acceptance. Shareholder primacy and stakeholder protection are not mutually exclusive, but mutually dependent. Second, and more dramatic, the stakeholders are in reality no longer in conflict. With the rise of the large-scale retirement and pension funds, labor and the public are now the very equity investors with whom Dodd assumed such conflict. To adopt the stakeholder approach that Dodd espoused would diminish equity values and make it much more difficult to raise equity capital in the future. Stakeholder advocates neglect to consider the importance of periodic capital infusions into corporations to ensure long-term growth and success. Additionally, the changes in voting systems that corporate stakeholder theory may necessitate are highly problematic and ultimately unworkable. The public’s best hope is an active and vital corporate sector — and it is they who provide the capital to make the corporations in which they invest successful. The stakeholder approach, which diminishes equity value and availability, harms the very group it was designed to protect.