The tech world was shaken by the recent news that Elon Musk, the world’s richest man, had bought up nearly one of every 10 Twitter shares. This was followed almost instantly by his promotion to the corporate board, where he promised “significant changes.” The previous week he had asked his followers if they thought Twitter adhered “rigorously” to principles of free speech. He had, it seems, also talked to the principals of the right-leaning news satire site The Babylon Bee, which was suspended from Twitter in controversial circumstances.
While it remains to be seen what Musk will do with his newfound power over what he called the “de facto public square,” his actions serve as an important reminder of how capital markets work. Two lessons in particular can be drawn.
First, shareholder trumps stakeholder. Many of the actions that Twitter has been most criticized for in its approach to suspending users stem from the idea that company management needs to pay special attention to stakeholders. This idea, which dates back to the 1930s, posits that companies have a duty to society beyond delivering value to their shareholders. So, a company is doing its corporate duty if, for example, it uses its assets to promote values that it believes will make the world a better place. This seems to have been behind the banning of the Bee, which was making fun of a transgender woman. Of course, promoting this value in the way it did seems to be at odds with Twitter’s mission, which is “to give everyone the power to create and share ideas and information instantly without barriers.”
The alternative view, which is regularly accepted by the courts, is that delivering value to shareholders in the form of profits is the company’s prime role, which enables it to act as an agent of economic progress (the late David Henderson expounded on this idea at length in his CEI study, The Role of Business in the Modern World.) In this model, which is how the corporation evolved, corporate management needs to pay more attention to the desires of shareholders rather than stakeholders (it should go without saying that the corporation that ignores stakeholders entirely will ignore its customers, suppliers, regulators and so on and will probably go bust). Musk’s stock purchase seems to have asserted the primacy of shareholders in this debate.
Second, the threat of takeover is a significant discipline on corporate management. Any company that seeks to please stakeholders over shareholders (you can, of course, please both) is essentially thumbing its nose at its owners, the people who have actually invested the most in the business. Managers are insulting their employers, in other words. If they cannot persuade their employers that what they are doing is right for them, then those employers can sell the business to parties who will act against the managers. The biggest threat in this regard is takeover. New owners will almost always mean new managers. To protect their livelihoods, managers need to be aware of this threat.
That is how capitalism works. Twitter, it seems, strayed from its mission, threatening the firm’s value. A new investor came in who is likely to impose new discipline on the company management. No new regulations were needed, despite all the sound and fury recently emanating from Capitol Hill and the Federal Trade Commission (FTC). Market discipline works more quickly and more effectively than political action.
However, we should be concerned that lawmakers and regulators want to dilute the power of these market forces. Those political actors are threatening to impose a form of stakeholder primacy through a series of regulations surrounding diversity and environmental aspects of business. Both Congress and the FTC are also exploring ways to limit mergers and acquisitions—in other words, limiting the threat of takeover. Both of these actions would dilute the power of shareholders and increase the power of corporate management. Given that many of the complaints that are motivating these potential changes have to do with the actions of management, they would seem somewhat shortsighted.
In other words, when it comes to solving the problems you might perceive with corporate America, look not to Hawley, Warren, or Khan, but to the likes of Musk.