Stakeholder Capitalism

“The social responsibility of business is to increase its profits.”

Milton Friedman

Milton Friedman’s free market capitalism has prevailed since post-WWII neoliberalism played out in the 70’s, but there are recent signs that its ideological lock on economic policy may be waning — in part because of social responsibility initiatives gaining traction among its most ardent supporters.

 “What kind of capitalism do we want?” asks Klaus Schwab,  founder and chair of the World Economic Forum (WEF), “That may be the defining question of our era. If we want to sustain our economic system for future generations, we must answer it correctly.”

“Generally speaking, we have three models to choose from.

“The first is shareholder capitalism, embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximise its profits.

The second model is state capitalism, which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China.

“The third option has the most to recommend it. Stakeholder capitalism positions private corporations as trustees of society, and is the best response to today’s social and environmental problems.

“Shareholder capitalism first gained ground in the United States in the 1970s, and expanded its influence globally in the following decades. During its heyday, hundreds of millions of people prospered as profit-seeking companies unlocked new markets and created new jobs.

“But that wasn’t the whole story. Advocates of shareholder capitalism had neglected the fact that a publicly listed corporation is not just a profit-seeking entity but also a social organism. Together with pressures to boost short-term results, the single-minded focus on profits caused shareholder capitalism to become increasingly disconnected from the real economy. Many realise this form of capitalism is no longer sustainable.”

Economic System We Select Defines Our Future. Mail & Guardian (Dec. 6, 2019)

“Stakeholder capitalism” relies on “corporations as trustees of society” to restore the Public’s place in economic policy. It’s not a new idea, but the WEF has set the tone for its reconsideration under the terms of a Davos Manifesto issued ahead of its upcoming annual January conclave of heads of nation-states and corporation nation-states in Davos, Switzerland. Some of the “Western corporations” that will be in attendance have already signaled a willingness to consider making the shift. Schwab continues:

“Now others are finally coming to the ‘stakeholder’ table. The US Business Roundtable, the country’s most influential business lobby group, announced this year that it would formally embrace stakeholder capitalism. And investing that considers its effects is rising to prominence as more investors look for ways to link environmental and societal benefits to financial returns.”

This is from the Business Roundtable’s website:

Statement on the Purpose of a Corporation

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

Here’s the Statement as a Pdf

The Davos Manifesto and BRT Statement contemplate massive change in a world where “A company can have the right principles on paper but, at times, lose sight of what serving multiple stakeholders really means.” Is the Business Roundtable Statement Just Empty Rhetoric? Harvard Business Review (August 30, 2019). The article provides an excellence survey of thorny issues, as does Shareholder Value Is No Longer Everything, Top C.E.O.s Say, New York Times (August 19, 2019), which begins by noting the radical departure the Statement makes from Milton Friedman’s free market capitalism.

“[The BRT Statement] was an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs — the philosophy that has held sway on Wall Street and in the boardroom for 50 years. Milton Friedman, the University of Chicago economist who is the doctrine’s most revered figure, famously wrote in The New York Times in 1970 that ‘the social responsibility of business is to increase its profits.’”

Stakeholder capitalism is fraught with challenges, but its consideration appears to be a necessary first step in a reckoning on the big picture impact of current capitalism.

“Ray Dalio, the billionaire co-chairman of the investment firm Bridgewater Associates, warned in April that America faced a ‘national emergency’ in capitalism’s failure to benefit more people, and he pronounced the American Dream lost.”

How the Elites Lost Their Grip: in 2019 — America’s 1% behaved badly  and helped bring about a reckoning with capitalism, Time Magazine (Dec. 2-9, 2019).

We’ll look more at that reckoning next time.

Author: Kevin Rhodes

Kevin Rhodes draws insight and perspective from his prior career in law, business, and consulting, from his studies in economics, psychology, neuroscience, entrepreneurship, and technology, and from personal life experience.

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