What does real reform look like, and how can the pandemic entrench it? It appears that we’ve reached a tipping point in the shift towards stakeholder capitalism.
It appears that we’ve reached a tipping point in the shift towards stakeholder capitalism. It is no longer default for companies to maximize returns to shareholders — with limited regard for customers, employees, suppliers, and communities writ large.
Last May, the Business Roundtable (an association of nearly 200 major US corporations) released a new Statement of Purpose for a Corporation, wherein signatories committed to lead their companies for the benefit of all stakeholders. In December, the World Economic Forum updated its Davos Manifesto, restating the purpose of the company: “A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system.” Larry Fink, CEO of BlackRock, the world’s largest investor (with $7T in assets under management), stated in his January annual letter to CEOs, “each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.” Fink went so far as to ask BlackRock’s portfolio companies to publish disclosures on a wide range of sustainability and stakeholder issues by the end of the year.
Rejection of the shareholder primacy theory is now a bi-partisan concern in the US. Marco Rubio, chairman of the Senate Committee on Small Business and Entrepreneurship, released a report last year stating, “shareholder primacy theory is a driving cause behind the shift of American business away from the traditional role expected of it in our economy … tilting business decision-making towards returning money quickly and predictably to investors rather than building long-term corporate capabilities, reducing investment in research and innovation, and undervaluing American workers’ contribution to production.”
These are not the progressive, fringe actors who first began to advocate for stakeholders over shareholders. Rather, mainstays of capitalism in the US and abroad now support stakeholder capitalism. They do so, not because they feel it is the right thing to do for society,but because it has now become the right thing to do for business.
It is worth noting that the motivations of these actors are myriad. Business Roundtable members may be seeking to make incremental moves in order to stave off more stringent legislation. As the world’s largest asset manager, BlackRock cannot shield itself from the systemic risks posed by climate change. Rubio’s position is driven by his desire to bolster the American economy and improve its competitive position. Regardless of motive, these shifts are highly encouraging.
The model of shareholder value maximization notably bred money manager capitalism in the US, where companies optimize for short term returns and lobby the government to act in their favor. But, the debate between shareholder and stakeholder optimization isn’t a matter of what’s good for business vs. other aspects of society. Rather, the debate has become a matter of what’s good for the elite vs the rest, business included.
Historically, shareholder value maximization has been a leading driver of the rise of inequality in the United States over the past 40 years. It is truly staggering how much capital has been drawn out of companies and into the pockets of the very few. For example, through the growing practice of stock buybacks, many companies use profits to buy back stock and drive up share prices rather than to make long term investments in R&D and employees.
How can we take advantage of this turning of the tides in order to shift to a model of capitalism that is inclusive and sustainable? This would go far beyond stakeholder concerns as merely window dressing. The economic contraction from COVID creates a window for rapid reform. Governments will play a pivotal role in rebuilding their economies. That creates a profound opportunity to accelerate stakeholder capitalism.
Championing a new model for firms that benefit all stakeholders is one thing. Implementing is something else entirely. Truly realizing stakeholder capitalism means shifting power away from those who have much to lose. In many cases, these actors already have outsized influence on government.
The Business Roundtable statement, signed by many of America’s most prominent companies, should cause as much concern as celebration. Why? Because it has no teeth. Signing a statement with no real mechanism for accountability is stakeholder-washing at its finest. Rather than committing to report against a robust set of issues relevant to stakeholder concerns, signatories make public statements. You can see this clearly in the “leadership in action” page on Business Roundtable’s website, which describes programs members have implemented (such as employee retraining and corporate charitable giving). Initiatives like these aren’t nothing. But, without standardization or mechanisms for accountability, the Roundtable’s statement is far closer to PR than real change.
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