The European Roots of Ideology

The term “ideology” comes from 18th-century France. It was coined by Antoine Destutt de Tracy, manager of the newly founded Institut de France. De Tracy intended a neutral meaning as a science of ideas. Ideology represented something “very sensible,” de Tracy insisted, “since it supposes nothing doubtful or unknown.” It was, in fact, both positive and useful in that it took into account the “practical consequences” of knowledge.¹²

As we shall see, de Tracy's definition of ideology comes remarkably close to William James’ conceptualization of pragmatism. So, how did the term ideology attract such a negative connotation as a distortion of reality? Why is it something that leaders are told to steer clear of if they want to be effective problem solvers and decision makers?

The shift away from a neutral definition of ideology occurred immediately, led by Napoleon. De Tracy and his cohorts, advocates of free expression and representative government, called for Napoleon to be unseated. The French emperor returned the favor by denouncing the avowedly liberal idéologues. By 1867, just over seven decades after de Tracy's coinage, the term was adopted by Friedrich Engels and Karl Marx to denote an expression of bourgeois class interests rather than a neutral science of ideas.

Marx viewed the defining tension of any and all societies as arising from class conflict. For Marx and Engels, ideological leaders promoted a false consciousness: a cloaking of real interests in an attempt by the ruling bourgeoisie to convince – deceive, really – the subordinate proletariat class to abandon their own betterment.¹³ Class, power, ideology, and deception now became thoroughly intertwined; clearly a departure from the original intent of de Tracy.

Europeans defined and reshaped the concept of ideology. Pragmatism, a concept deeply rooted in American soil, rejected ideology altogether.

The American Roots of Pragmatism

For leaders to be pragmatic means what, exactly? The Columbia Encyclopedia defines pragmatism as a “method of philosophy” – note the use of the term method – “in which the truth of a proposition is measured by its correspondence with experimental results and by its practical outcome.” Like de Tracy and the original idéologues, pragmatists had little use for speculation and debate on questions “that have no application and have no verifiable answers.”¹⁴ Pragmatists sought verifiable truth.

The founding of pragmatism is generally ascribed to American philosopher William James and a series of lectures delivered in 1907. In his second talk, James addressed what he referred to as the “pragmatic method.” Practical consequences were basic to understanding the value of any and all ideas, he insisted. “What difference would it practically make if this notion rather than that notion was true?” he asked. “Whenever a dispute is serious, we ought to be able to show some practical difference that must follow from one side or the other's being right.”¹⁵

For James, pragmatism was a method for identifying the “practical difference” of ideas. Pragmatism did not, he stated, “stand for any results. It is a method only.”¹⁶ This was a point James made often. Pragmatism “has no dogmas, and no doctrines save its method.” No dogmas, no doctrines. The goal of the pragmatic method was to arrive at a usable and verifiable truth.

It is at this point, the insistence upon a material reality against which concepts can be tested, that pragmatism and ideology circle back on themselves and prove to be far less antithetical than might first be thought. Marx believed in the existence of an objective, discoverable reality, one that could be freed from bias and interpretation. William James believed the same. Both pragmatists and ideologues maintained that there exists a reality that “actually is.”

But truth is not the same to everyone. It is rather, in the colorful phrase of Friedrich Nietzsche, a “mobile army of metaphors, metonyms [a misleading figure of speech] and anthropomorphisms – in short, a sum of human relations.”¹⁷ No methodology or claim of truth can be considered nonideological. The definition of reality, even in its pragmatic sense, is a statement of ideology.

Rather than thinking about ideology solely in terms of false consciousness, it is more useful to start by defining ideology in its broadest sense to be a belief system. Not all belief systems are ideologies. What makes a belief system ideological is that it offers coherence and internal consistency. Nor are ideologies necessarily rigid. Some are, for sure. Fascism, for instance, presumes authoritarianism.¹⁸ Pragmatism may be a perfect example of a less rigid ideology. Still, all claims of truth are inherently ideological in assumptions about a preferred world.¹⁹ Pragmatists as well as ideologues claim a truth; in the case of pragmatists, the assertion is that they have discovered “the only road to parades”; a normative methodology for arriving at truth.

Let's bring this analysis back to leadership as exercised in a business setting. Recall James’ admonition that pragmatism stands for method and not for any particular result. That description hardly applies to business leaders who indisputably work to achieve desired ends. The question to be asked is how to understand, define, and measure results. Who gets to determine the desired ends of the business? These questions place us firmly in the realm of leadership and corporate ideology.

The Corporate Ideology Debate

Capitalism, like any other form of organized economic activity, is deeply ideological. As a system, it rests on its own set of self-justifying assumptions. Its basic tenets reflect the mindset of 17th-century British social philosopher John Locke. The sanctity of private property was central to this ideology, and it was the recognition of that sanctity that ensured the protection of an individual's rights as well as his (and only later her) fulfillment and self-respect. Competition – what Adam Smith would, nearly a century after Locke, refer to as the invisible hand – provided the mechanism for regulation. The state played a strictly limited role.²⁶

Even within a capitalist system, executives face ideological choices. That choice amounts to a corporate ideology. Business organizations operating within a noncapitalist ideology – e.g., socialism – would need to develop a corporate ideology as well.²⁷ As George Lodge noted, Americans more readily acknowledge the ideology of socialism than the ideology of capitalism.²⁸ We know there is a choice within capitalism because we know there is a debate, and a long-standing debate at that, over the efficacy of the various ideological options.

During the 1990s, Al Dunlap's “stakeholders are rubbish” ideology may have seemed extreme. Nonetheless, his perspective became the dominant corporate ideology in the United States. “The idea that business strategies should be judged by the economic value they create for shareholders is well accepted in the business community,” Alfred Rappaport wrote. “After all, to suggest that companies be operated in the best interests of its owners is hardly controversial.”²⁹

“Hardly controversial” can be taken to mean “prevailing.” By 2001, the argument was being made that the shareholder primacy position was so noncontroversial, so widely accepted, that the ideological debate was essentially over. In “The End of History for Corporate Law” (an echo of the then popular “end of history” thesis), Henry Hansmann and Reinier Kraakman insisted that a “broad normative consensus” had emerged that “shareholders alone are the parties to whom corporate managers should be accountable.”³⁰

The “broad normative consensus” to which Hansmann and Kraakman referred was not universal, however. It has been contested for much of the 20th century, the debate finding its roots on the pages of the Harvard Law Review in the early years of the Great Depression. It was a contest played out in legalistic terms between two renowned corporate lawyers.³¹ On one side stood Columbia University Law Professor Adolf Berle, and on the other, Harvard Law School Professor E. Merrick Dodd. At the time, Berle was completing his co-authored (with Gardiner Means) Modern Corporation and Private Property.³²

One of the first attempts to take full account of the evolution of the new public corporation and the role of management in leading these entities, Berle and Means noted the separation of ownership from management that had been evolving since the turn of the new century. Business was no longer owned and operated by the same person, family, or small group. Now, investors contributed, and thus risked, their own capital to a firm over which they could exercise no direct control. In large publicly held corporations, it was up to managers to make decisions on behalf of the shareholders.

In his article, Berle focused more explicitly on the primacy of shareholder interests. All powers granted to the corporation and the managers of that corporation were “at all times exercisable only for the ratable [i.e., quantifiable] benefit of shareholders.”³³ The task of business leaders, then, was clear and precise: serve the financial interests of shareholders.

In a subsequent issue of the Harvard Law Review, Dodd joined the debate. Managers of public companies were obliged to pursue goals that went beyond making money for shareholders. Leadership was responsible for providing secure jobs for employees, quality products for consumers, and contributions to the broader society. This was a corporate ideology aligned more with United Natural Food's Steve Spinner than with Al Dunlap.

Corporations served shareholders, yes, but also employees, consumers, and the broader society. “The business corporation,” Dodd argued, is “an economic institution which has a social service as well as a profit-making function.”³⁴ For Berle, corporate managers were trustees for the interests of investors; for Dodd, it was the “broader community” which embraced employees and customers whose interests must be served by the corporation. This, presented in legal-speak, was the shareholder primacy versus stakeholder plurality ideological debate.

Berle's belief that, first and foremost, corporate leaders were obliged to pursue the interests of shareholders dominates contemporary discourse. It was Dodd's view, however, that originally won the day. Remember, these articles appeared in the context of the Great Depression and at the dawning of the New Deal. Even after the New Deal ebbed, however, stakeholder plurality prevailed. In 1940, George E. Bates, then editor of the Harvard Business Review, wrote a piece that surveyed the responsibilities of a public corporation's board of directors.³⁵ Shareholders did not receive a single mention!

As late as 1960, nearly three decades after the Berle/Dodd debate, Arch Patton, a McKinsey consultant, reflected Dodd's perspective. In “How to Apprise Executive Performance,” Patton listed a number of metrics to consider, all of which related to internal performance, including improving delivery schedules and reducing waste. Unthinkable by today's standards, measuring the impact on shareholder wealth was not mentioned.³⁶

The domination of stakeholder plurality did not last. Perhaps the most significant argument in favor of shareholder primacy since Berle's piece appeared in, of all places, a Sunday New York Times Magazine article.

Shareholder Primacy and Agency Theory

In the years between Berle and Mead's Modern Corporation and Private Property and the publication of Milton Friedman's 1970 Times’ essay, “The Social Responsibility of Business Is to Increase Its Profits,” James Burnham focused attention on what he referred to as a “managerial revolution.” The large public corporation had given rise to a new “dominant class,” managers, with the capacity to exercise control over the dynamics of the business. In his 1941 Managerial Revolution, Burnham expressed no doubt, indeed warned against, the likelihood that this managerial class would exercise its control on behalf of self-serving rather than general interests.³⁷

Friedman's essay echoed Burnham's insistence that managerial self-interests had to be reined in on behalf of the interests of shareholders. Friedman, the leading light of the University of Chicago's school of free-market economics, held that because shareholders “own” the corporation – a core assertion of stakeholder primacy ideology – executives needed to conduct business “in accordance with their [the shareholders] desires.”³⁸

As an economist, Friedman had no doubt about the nature of those shareholders desires: “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical customs.”³⁹ Friedman proposed a principal/agent relationship between shareholders and executives: “The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal.”⁴⁰ The “managerial class” that Burnham had identified nearly thirty years earlier needed to be kept focused on the interests of shareholders.

There was a factual flaw in the Friedman argument. Shareholders do not select corporate executives. They elect directors to the board and the board selects the CEO who hires other executives. Despite its flawed construct, Friedman's principal-agent position received an endorsement six years later in an influential article by economist Michael Jensen and business school dean William Meckling.⁴¹ Appearing in the Journal of Financial Economics, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” served as the major statement of what became known as agency theory.

In order to connect back to Adam Smith, the authors opened with an approving quote from his 1776 Wealth of Nations, insisting that executives were managers:

Being “rational,” at least in a pure economic sense of the word, executives would be motivated to enhance their own monetary advantage, even at the expense of the fiscal health of the shareholders. Not trusting leaders to subordinate their own (rational) interests to those of shareholders, Jensen and Meckling urged the construction of governance structures to monitor executives’ behaviors and incentivize alignment.

The implication for corporate leaders was profound. Agency theorists rejected unchecked human discretion in decision making on the part of executives because of its inherent tendency toward self-interest. Instead, the presumed neutrality of the market would separate effective from ineffective executive actions.⁴³ The task of the leader, as well as the metrics by which that leader would be evaluated, became clear: make decisions that rebounded to the best interests of the shareholders, the “owners” of the corporation.

The timing of the Jensen and Meckling piece could not have been more propitious for the advancement of shareholder primacy as the soon-to-be dominant corporate ideology. Over the next decade, a “perfect storm” of forces converged to reinforce the perspective. Frank Dobbin and Dirk Zorn noted:

The ascendency of shareholder primacy with its implications for leadership behavior was not, however, happenstance, not a reflection of a supposedly neutral market. Rather, shareholder primacy triumphed because of the self-interested efforts of a small group of actors.

By applying a social movement framework to the emergence of shareholder primacy, Gerald Davis and Tracy Thompson noted that the ideology was imposed on rather than developed by corporations or boards of directors.⁴⁵ The key players were:

• Individual and then institutional shareholder activists, regulators who allowed for banks to own equity and required private pension funds to play a more active role in investment enhancement.⁴⁶

• Consultants who peddled various metrics to define shareholder value.⁴⁷

• Professors at the nation's leading business schools who adopted agency theory and taught it as received truth to the next generation of executives.⁴⁸

• The popular press, which increasingly focused on the intricate measures of financial performance.⁴⁹

Legal doctrine evolved as well, increasingly embracing the shareholder primacy ideology.⁵⁰

Writing in Economy and Society, Robert Boyer assessed the profound impact of shareholder primacy (he referred to it as the “financialization” of business and society) on both corporations and the larger society.⁵¹ It was an impact felt profoundly by business leaders. Under the shareholder primacy regimen, executives “are forced to review most of their management techniques” in order “to take into account the shareholder requirement for level and stability of rate of return.”⁵² And although shareholder primacy remains dominant, it has always been a contested ideology.

Serving the Interests of Multiple Stakeholders

In his 1932 article, Professor Dobb laid out his argument that the modern corporation was obligated to meet the needs of multiple groups. It was R. Edward Freeman who, in 1984, provided the label “stakeholder” to Dobb's interested parties. He then turned this insight into a “stakeholder theory of the firm.”⁵³

Freeman's idea can be stated rather simply: stakeholders were groups that could lay legitimate claim to the function and performance of a firm. Shareholders were included among stakeholders. But so were suppliers, customers, employees (both management and nonmanagement employees) and the host community.

The central question for Freeman was a “pure ideological” one: “For whose benefit and at whose expense should the firm be managed.”⁵⁴ Stakeholder plurality offered an alternative statement of corporate ideology that could shape leader behavior and decision making:

“The stakeholder concept,” Freeman insisted, “provides a new way of thinking about strategic management – that is, how a corporation can and should set and implement direction.”⁵⁶

I refer to this corporate ideology as stakeholder plurality, using pluralism in the sense of the denial of a single, elite, and undisputed source of power and influence.⁵⁷ Instead, competing groups (interest groups, in a political sense) vie for a distribution of rewards and benefits. System stability is achieved not through imposed order or forced consensus, but through a process of piloting among those varied and at times competing interests. In this sense, leadership became an act of navigation.

In stakeholder plurality, “the interests of all stakeholders are of intrinsic value,” wrote Thomas Donaldson and Lee Preston. “That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as shareholders.”⁵⁸ In a sharp contrast to stakeholder primacy, Donaldson and Preston held that under stakeholder plurality “there is no prima facie priority of one set of interests and benefits over another.”⁵⁹ Rejecting the ideological position of Adolf Berle, Milton Friedman, and Alfred Rappaport, stakeholder pluralists insisted that shareholders should not be granted preferred status.

For stakeholder pluralists, the tenets of Smith's invisible hand of unfettered economic interests no longer applied. Smith assumed, argued Robin Marris and Dennis Mueller, the existence of “atomistic competition, which in turn held that the system was decentralized and that no competitor was large relative to the others,” a precondition that was already under stress in 1776.⁶⁰ The ensuing Industrial Revolution changed the playing field significantly. Corporations had the heft and political clout to “internalize the benefits and externalize the costs of their actions.”⁶¹ Lower costs achieved through such time-honored devices as low labor wages and insufficient attention to health and welfare would simply be transferred to society at large. It was time, Freeman insisted, to recalibrate the ideology of corporations.

A vital distinction – and a key ideological building bloc – arose over the question of who owns the corporation. Shareholder primacy was built on the assertion that shareholders did, thus providing them with a unique claim on the attention of executive leadership. To advocates of stakeholder plurality, however, this was a legal fiction. Shareholders did not own the corporation. What shareholders owned were stocks; no more, no less.

Share ownership, to be sure, came with specific although limited contractual rights. Mainly, shareholders elected directors and, after passage of the Sarbanes-Oxley Act, engaged in nonbinding “say on pay” votes. “In this sense,” Lynn Stout wrote, “stockholders are not different from bondholders, suppliers, and employees. All have contractual relationships with the corporate entity.”⁶²

If not shareholders, who then owned the corporation? To whom were corporate leaders ultimately accountable? No one owned the firm, in the stakeholder plurality ideology. “Corporations are independent legal entities that own themselves, just as human beings own themselves,” said Stout.⁶³ The ultimate obligation of executives was to the corporation itself as a real entity, “an autonomous legal person.”⁶⁴ It was a social entity at that, one created and empowered by the state and bearing reciprocal responsibilities.⁶⁵

With shareholders removed as owners of the corporation, the fundamentals of agency theory changed dramatically. Donald Margotta insisted that Jensen and Meckling got the principal-agent relationship wrong by misidentifying the principal. Managers were agents, to be sure, but of the corporation itself, not of shareholders.⁶⁶ Steven Wallman pointed out that state laws recognize that corporations retain their own identity. Fiduciary responsibility demands that corporate directors consider the best interests of the corporation, a far different concept than the maximization of shareholder wealth.⁶⁷

The stakeholder plurality ideology fit well with a commitment within some elements of the corporate community to sustainability and the “triple bottom line”: an expression of the stakeholder plurality concept of corporate ideology that seeks an accounting of economic, environmental, and social outcomes.⁶⁸ “Corporate citizenship,” wrote David Cooperrider and Ronald Fry, “is about attention to multiple, external and internal stakeholders, and relating with them in ways that foster enduring and innovative partnerships.” For these authors, Freeman's stakeholder theory not only allowed but obliged business executives to navigate their organizations toward sustainability.⁶⁹

Pressure on business executives to address the social impact of their companies’ activities had been increasing since 1984, when an India-based subsidiary of Union Carbide experienced an environmental, social, and economic disaster. A chemical leak from its plant in Bhopal was widely considered to be the worst industrial catastrophe in history. It sparked a succession of international organizations, led by the United Nations, to seek an appropriate balance between the economic requirement for development and growth, social needs for human dignity and rights, and environmental needs for sustainability.⁷⁰

Another less dramatic turning point in the rising demand for corporate environmental responsibility occurred in 1993 when Paul Hawken, cofounder of Smith & Hawken's garden supply company, published The Ecology of Commerce. “Quite simply,” Hawken wrote, “our business practices are destroying life on earth.” Business had been handed a “blank check” to ignore its social responsibilities, but was also uniquely positioned to implement solutions. To forge a path forward, business leaders needed to follow a “third way” between promoting growth and enhancing the planet.⁷¹

Advocates of stakeholder plurality agreed that their ideology failed to provide a specific algorithm that can be used to apply to “day-to-day managerial decision-making.”⁷² However, neither was shareholder value a precisely defined term, they responded.⁷³ It was, rather, a “rhetoric which circulates widely and a thematic which can be variably invoked as cause, consequence or justification.”⁷⁴

Thomas Donaldson and Thomas Dunfree suggested that the basis for stakeholder plurality could be located not in any particular combination of metrics but rather in the intricacies of the “implicit understanding” that “bind industries, companies, and economic systems into moral communities.” The specific terms of this contract are flexible and up for regular reconsideration. However, the authors added, an ethical commitment to “hypernorms” – deep moral values resting on a sense of right and wrong, “grounded in consent,” and “buttressed by the rights of individual members to voice and exit” – defines the contours of the terms.⁷⁵

Donaldson and Dunfree asserted a universal set of principles that define ethical behavior. In their view, ethics – at last at a meta-level – transcends ideology. But the specifics by which ethical behavior is enacted will differ depending on prevailing ideology. That is a point made by George Lodge in the second issue of Journal of Business Ethics. There are universal moral proscriptions, he agreed, but “their application, definition and institutionalization provoke disagreement and vary according to time and place.” The definition of responsible behavior “is the product of definite social arrangements.”⁷⁶ Resistance to and questioning of an existing social order can also be ethical and will typically be embedded in an ideology at odds with the prevailing definitions of end goals.

That's a tricky balancing act between asserting universal moral principles and recognizing the impact of ideology on the enactment of those principles. Focus on leadership ethics became a much-addressed topic in the 1990s and then exploded in the early 21st century, driven in part by the highly publicized corporate scandals at companies including Enron, Arthur Andersen (those two were really the same scandal), Tyco, and WorldCom.⁷⁷

Much of the literature on ethical leadership placed its definition of ethical behavior firmly in the stakeholder plurality camp. Truly effective ethical leaders are motivated by a concern for “others,” argued Rabindra Kanungo and Manuel Mendonca in Ethical Dimensions of Leadership. In that view, “others” embraced a plurality of stakeholder interests.⁷⁸ But it was a bit of a reach to claim ethical concerns as the exclusive domain of stakeholder pluralists. Shareholder primacy advocates believed equally that they were embracing an ethical view of corporate responsibility. In his New York Times article, remember, Milton Friedman, agreed that “responsible” leaders were accountable to others. Within his ideology, others meant shareholders, not stakeholders.

What was unequivocal was that the duties and responsibilities of corporate leaders varied dramatically, depending on which corporate ideology those leaders embraced. The admonition to assume a pragmatic stance toward methodology and a consensus on facts ignored (or implicitly denied) this basic truth. All businesses operate within an ideological framework. The choices leaders make are significantly constrained by that ideology.