"Stakeholder capitalism" takes decisions that should be democratic out of the hands of the people. In order for CEOs to pursue the interests of "stakeholders," they must decide which stakeholders to prioritize over others. Should companies charge consumers higher prices for goods if it helps stave off climate change? Should they infringe on users' expectations of privacy if it pleases the Communist Party of China? Whether to prioritize the interests of employees, the environment, the U.S. government or a foreign government is a normative judgment--one that belongs to America's citizenry at large, not to a small group of unelected corporate elites. I made this argument in February, and subsequently others have made similar points.

This raises the question of how to hold corporate leaders accountable when they take unilateral social action in the name of "stakeholders." No one has yet offered a solution to this dilemma that would be persuasive to liberals and conservatives alike. Here's one that might work.

The best critique of the Friedman doctrine is this: corporations did not exist in the state of nature. The corporation is a creation of state law and confers great benefits to shareholders--including, above all, the gift of limited liability. Limited liability means that the shareholders of a company cannot be sued for the actions of the company. This is the shield that allows the Sackler family to remain multibillionaires while their wholly owned company Purdue Pharma goes bankrupt--a hefty price that society consciously pays to incentivize innovation and the aggregation of capital.

Thoughtful critics of classical shareholder capitalism argue that this great gift of limited shareholder liability is part of an implicit social contract--in return, corporations are obliged to look after not only their shareholders, but society as well. That was the unspoken grand bargain at the birth of the corporation. As BlackRock CEO and stakeholder capitalism enthusiast Larry Fink puts it, "companies need to earn their social license to operate every day."

Friedman glossed over this point in his famous essay ("a corporation is an artificial person and in this sense may have artificial responsibilities"), but did not engage with it. His activist-shareholder and private equity disciples do not engage with it either. Proponents of free-market capitalism have historically rejected the idea of an implicit social contract, but fail to offer an alternate account for the creation of limited liability other than to facilitate investment into corporations.

But corporate law did not codify shareholder primacy simply to protect shareholders from management. It did so to protect American democracy from managers and shareholders alike. The creation of the limited-liability corporation was a potent tool to not only unlock productivity in the private sector, but also to curb corporate power that could influence other spheres of society beyond the market. By limiting the focus of corporate boards to shareholders' financial interests alone, corporate law confines the sphere of influence of corporations.