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.

Economic Inequality Statistics

My research on economic inequality consistently turns up three key points:

  1. since the 80’s, there has been an ever-widening gap in incomes and capital ownership between the rich and poor,
  2. the gap has been growing at an accelerating rate, especially since the year 2000, and
  3. this phenomenon is worldwide.

So what?

As I’ve mentioned before, many U.S. economists and policy-makers greet those findings either with indifference or as a clarion call to defend endangered capitalism, while their international counterparts find them alarming. We’re talking about them here because it turns out that economic inequality has a lot to do with happiness and meaning at work. (Stay with me — we’ll get there, we’re just taking the scenic route.)

We all know that it’s easy to mold statistics to fit opinions — here’s a neurologist’s take on Why People Can’t Agree on Basic Facts. Any stats we look at here will have been pre-sorted, pre-analyzed, and pre-interpreted. My goal today is to provide a sampling of statistics from a variety of global sources — starting with a quote about how the new global super-rich are a bunch of economic data curve busters, which makes finding honest data even harder.

plutocrats“The skew toward the very top is so pronounced that you can’t understand overall economic growth figures without taking it into account. As in a school whose improved test scores are due largely to the stellar performance of a few students, the surging fortunes at the very top can mask stagnation lower down the income distribution.

“Consider America’s economic recovery in 2009-2010. Overall incomes in that period grew by 2.3 percent — tepid growth, to be sure, but a lot stronger than you might have guessed from the general gloom of the period. Look more closely at the data, though… and it turns out that average Americans were right to doubt the economic comeback. That’s because for 99 percent of Americans, incomes increased by 0.2 percent. Meanwhile, the incomes of the top I percent jumped by 11.6 percent.”

Plutocrats:  The Rise of the New Global Super Rich and the Fall of Everyone Else (2012), by Canadian journalist and politician Chrystia Freeland.

kwak“Across the developed world, vast fortunes are again ascendant. In the United States, the top 1 percent take home a larger share of total income than at any time except the late 1920’s. The total wealth of the world’s billionaires has quadrupled in the past two decades (even when the definition of “billionaire” is adjusted for inflation).

“In the 1950’s, a typical CEO of a large company took home as much money as twenty average employees; today he makes as much as two hundred workers.”

Economism (2017), by UConn law professor James Kwak.

the wealth of humans“In 2014, the inflation-adjusted income of the typical American household was just 7 per cent higher than it was in 1979. By contrast, the income of a household in the 95th percentile of the income distribution grew 45 per cent over that period.”

The Wealth of Humans:  Work, Power, and Status in the Twenty-First Century (2016), by Ryan Avent,  a thoroughly Anglicized American who works as a senior editor and economic columnist for The Economist.

the fourth industrial“[C]ompare Detroit in 1990… with Silicon Valley in 2014. In 1990, the three biggest companies in Detroit had a combined market capitalization of $36 billion, revenues of $250 billion, and 1.2 million employees. In 2014, the three biggest companies in Silicon Valley had a considerably higher market capitalization ($1.09 trillion), generated roughly the same revenues ($247 billion), but with about 10 times fewer employees (137,000).”

The Fourth Industrial Revolution (2016), by German engineer and economist Klaus Schwab, Founder and Chairman of the World Economic Forum.

Prior to the 2017 World Economic Forum annual meeting of world leaders, U.K.-based Oxfam International issued a report that offers a fascinating slant on Schwab’s comments. According to the report:

“Eight men now control as much wealth as the world’s poorest 3.6 billion people… The men — Bill Gates, Warren Buffett, Carlos Slim, Jeff Bezos, Mark Zuckerberg, Amancio Ortega, Larry Ellison and Michael Bloomberg — are collectively worth $426 billion.”

As reported by CNN.

“By contrast, half the planet’s population, some 3.6 billion people, have a combined wealth of $409 billion.”

As reported by The Mirror Online (the U.K.’s “intelligent tabloid”).

Not only are the Elite Eight collectively worth more than the lower half of the world’s entire population, each individual member of the group is worth more than the combined market capitalization of Detroit’s three largest companies 27 years ago. The Mirror also noted this about the study:

“The report found that between 1988 and 2011 the incomes of the poorest 10% increased by just $65, while the incomes of the richest 1% grew by $11,800 – 182 times as much.”

A couple years ago, Credit Suisse’s Global Wealth Report 2015 reported that half of the world’s assets were controlled by the top 1% of the global population, while the lower half owned less than 1%.

There’s plenty more where all of that came from. In fact, there’s such an abundance of global data and opinion on the topic that, if nothing else, it’s probably safe to conclude that economic inequality either really is a problem or, even if it’s not, a whole lot of people around the world sure seem to think it is.

We’ll continue our economic inquiries next time.