Stakeholder Capitalism and the Corporate KPI Cult

by
Thomas J. DiLorenzo
My articles My booksMy videos
Follow on:

In private business “[t]here is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.”—Ludwig von Mises, Bureaucracy, p. 46

In this quote from his classic 1944 book Bureaucracy, Mises explains why private, for-profit businesses need not, and should not, be bureaucratic and entangled in rules and regulations mandated from the top of an administrative hierarchy. Instead, they should, make the best use of decentralized “knowledge of time and place” to do their jobs. Mises’ admonition that the focus of capitalist enterprises is and should be to “make a profit” later became, in the hands of Chicago School economists, “maximize shareholder value.” This view is most widely associated with Milton Friedman and was accepted by American corporate management, for the most part, for many years. 

Then in 2018 Blackrock CEO Larry Fink, who managed $6 trillion in corporate assets at the time, publicly insisted that corporate executives should focus on “stakeholders” (i.e., virtually everyone connected in any way with a corporation) instead of shareholders. This was followed in August of 2019 by 200 CEOs of major corporations issuing a declaration that maximizing shareholder value was no longer their paramount goal; adding value to all “stakeholders” was.

At the time, George Reisman wrote on the Mises Wire that this showed that “many CEOs know so little about economics that they don’t know that in a free market producing for the profit of their stockholders in and of itself implies producing for the benefit of everyone.” A successful, profitable business in a free competitive market will have customers who have benefited more than they have spent; workers will be paid more than they can make elsewhere; there will be prosperous towns and cities; and it benefits all “stakeholders” generally. 

What is so significant about the CEO declaration, wrote Reisman, is that “it shows to what extent America’s intellectual heritage of the right to pursue happiness (which includes the pursuit of profits) has rotted away and been replaced by a mentality ripe for socialism” (emphasis added). He then says that we must keep in mind that “as the arbitrary power of the state has grown, businessmen have been put in a position more and more resembling that of hostages held by terrorists.”

What he meant by that is that the regulatory powers of the state have grown so enormously (see the annual publication of the Competitive Enterprise Institute entitled “Ten-Thousand Commandments”) that business people are forced to spend a large portion of every work day following government rules and regulations instead of being productive, just as Mises warned of. Regulators are “the terrorists” and business people are “the hostages.” Moreover, wrote Reisman, “they are at the point where they attempt to anticipate the wishes of their masters and seek to gratify their masters without being ordered” by the regulatory “masters.” This is why the CEOs issued the declaration: To announce to the state that they will voluntarily adopt all of the socialist controls and regulations that the state would like to force on them. Call it de facto socialism.

Hence we see bankers imposing racial quotas on their mortgage lending for fear of being prosecuted under the Community Reinvestment Act and branded as racists; or automakers imposing on themselves more stringent mileage regulations than the government currently has in place for fear of being seen as “obstructionists” in the future; and the most predominant by far, the imposition of race and gender quotas for hiring and promotions under the guise of “diversity, equity, and inclusion.” All of these things will score you positive KPI points at any American corporation. 

Prior to 2019 many corporations had shunned Mises’ admonition about instructing subordinates to just “make a profit,” or even “maximize shareholder value,” and evaluated them with a jumble of “key performance indicators” (KPIs) instead. These “indicators” quickly included myriad nebulous “stakeholder” goals and public relations announcements. Writing in Forbes about “Why KPIs Don’t Work,” management consultant and author Steve Denning wrote of how corporations had adopted a “maze of obfuscations relating to the mix of PR-type goals that are talked about for public consumption . . .” 

An enduring problem with KPIs is, as Denning points out, that many of the indicators “lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work to the eventual customers.” The result is that employees themselves tend to develop KPIs that simply show that more make- work is being done but do not prove that performance or customer service has improved. KPIs, says Denning, “measure the speed of the bureaucracy” created by them but “are inversely proportional to actual productivity.” Mises would agree. 

“Like hamsters in a running wheel, the staff are working harder but not much more is getting done.” It is reminiscent of the stories of how the Soviet Union tried to play capitalism with various mandates such as orders to produce so many tons of nails annually to accommodate the next five-year house building plan. Factory managers determined that the easiest way to do that was to produce very heavy nails, heavy enough to split two-by-fours!

Worse yet, the lack of improved performance caused by the KPIs typically leads upper management to respond “by offering a blizzard of KPIs in an effort to prove how productive they are.” KPIs are therefore “God’s gift to bureaucracy” according to Denning. They “help perpetuate it and create endless justifications for it. It is work, feeding on work, and creating more work, while serving no external purpose.” 

Denning concludes by suggesting that companies should just concentrate on “creating value for customers,” which is another way of saying “just make a profit” instead of creating a gigantic bureaucratic monstrosity. One wonders if he has read Mises’ Bureaucracy, like Senator Ted Cruz recently admitted he had done. 

In another article entitled “Don’t Fix Bureaucracy, Kill It,” Denning recalls the Genentech Corporation, which has over 100,000 employees, every one of which is required to work up a KPI list. Very few of the items on the lists, writes Denning, “had anything to do with delivering value to customers.” 

Nonprofit organizations and government agencies have also adopted KPIs but these problems are, if anything, bound to be even more severe there. As with corporations, they are likely to be used to show that a lot of busy work has been done even if the busy work does nothing to fulfill the mission of the organization.

There are easy metrics to use by all types of organizations that fall under the KPI definition and can be helpful if not essential. But what has been going on in American corporations is Reisman’s “mentality ripe for socialism” run amok by anticipating more and more government mandates, controls, and regulations with self-imposed mandates, controls, and regulations. It all sounds like de facto socialist central planning, doesn’t it?

Become a 2025 Member!