We live in discordant times. A few business schools are offering courses that teach the fundamentals of stakeholder capitalism now, and that’s wonderful. At the same time, many critics refer to it as socialist economics or woke capitalism. What we’ve got here, to borrow from Cool Hand Luke, is a failure to communicate. Most opposition is founded on a shallow understanding of stakeholder capitalism. It isn’t opposed to profit. When it is done well, it increases profits, so even Milton Friedman would approve if he were shown how it has yielded amazing results a few short years after its adoption in many companies that embrace it.
Stakeholder capitalism embodies a wisdom as old as Henry Ford on creating a thriving market for highly profitable products and services in a way that’s mindful of the long-term future of the economy and society. In other words, it understands that no company is an island. Without a thriving society where the many have some discretionary spending, the economy will not have the elasticity to grow, and profits will suffer. It’s that simple: the natural world has to thrive, the working and middle class, ditto, and communities, the nation and the globe all need to prosper. If they don’t, the market for products and services won’t grow.
When you put a product up for sale, it’s like planting a seed: if it falls on rocks and dirt, or into a marsh, it won’t take root and grow. The society surrounding a company needs to be healthy and happy enough to simply provide demand for a new product. And buyers need to be affluent enough to buy it. Henry Ford paid his workers far more than the going rate for labor because he wanted them to have enough money in the bank to buy his cars. He could easily have paid them less; they would have continued doing their jobs. But he didn’t, and his company grew as a result. Companies able to nurture the lives of their employees and suppliers and customers, as well as the prosperity of their communities, will make big profits.
This long-term profitability is what stakeholder capitalism enables.
This is a model from the most successful capitalism practiced by CEOs like George Eastman and Joseph Wilson when America ruled the world economically in the 60s and 70s. Yet many think it’s a way of turning companies away from the profit motive toward moralistic social issues: income inequality, climate change, philanthropic initiatives, etc. In their view, stakeholder capitalism and ESG are just Trojan horses for a regimented, socialist leveling of competitive differentiation. They think it wants to eliminate all inequities and redistribute profits, moving profits from shareholders’ pockets into workers’ paychecks. None of this is built into the stakeholder primacy model.
Many see it that way because that is, to some degree, how many are mistakenly advocating for it. A recent piece in the New York TimesNYT
is just one example of this vision of ESG and stakeholder principles as a way to discredit capitalism. The article describes how some business schools are teaching ESG—which is short for leadership responsible to the Environment, Society and principles of Good Governance.
In the piece, a Harvard professor chalks onto his blackboard as a soft condemnation of private enterprise: capitalism, scarcity, inequality. The terms are meant to be interchangeable. In the professor’s suggestion, capitalism depends on scarcity. It doesn’t. High prices depend on scarcity, but not profit—which can be even larger with high volume and lower prices. Profit depends on abundance: abundance of both supply and demand. The piece sums up the current skepticism about capitalism in these business school courses:
It says that today’s business school students are also learning about corporate social obligations and how to rethink capitalism, a curriculum shift at elite institutions that reflects a change in corporate culture. Political leaders on the left and right are calling for business leaders to reconsider their societal responsibilities. On the left, they argue that business must play some role in confronting daunting global threats — a warming planet and a fragile democracy. On the right, they chastise executives for distracting from profits by talking politics.
What’s being misconstrued is the political dimension in stakeholder capitalism. In reality, it’s entirely pragmatic, not political. Stakeholder capitalism is a paradigm that looks, as China used to think during its growth years, to the long-term future rather than the next financial quarter. The goal is to make every company a firm that Warren Buffett would want to buy: a blue-chip engine of earnings that has a future with no sell-by date. Stakeholder capitalism grows a company into one that no one would want to sell because it’s become a wellspring for everyone: customers who enjoy the pricing, employees who thrive on the wages, a company that becomes best in class and can reinvent itself for tomorrow, with shareholders who see above-average dividends and earnings.
Anyone who has done any research into this remarkable version of capitalism knows how the results have been proven again and again at Costco, Home Depot, IntelINTC
, MicrosoftMSFT
, MastercardMA
, Google, Delta, and dozens of other companies that have become household names as well as smaller, less known ones like C.H.I Overhead Doors. It works in companies of any size.
What irks some is that it shifts the focus away from short-term increases in profits, from quarter to quarter, and instead advises leadership to invest patiently in employees and research and communities, with dedication to principles that build trust and motivation among all the constituents—workers, suppliers, and customers alike—so that the company goes through a transition that yields bigger and more significant results with each year after the start of that transformation. This is the only stumbling block: it requires a withdrawal, for some time from the compulsion to show surprising results every financial quarter at the expense of employee engagement, greater R & D, investment for surplus products and the like. This early transition feels daunting and triggers fears about putting a lid on profitability.
The recent New York Times piece was a good overview of how business schools are shifting toward this new sense of responsibility in business: “Top-ranked business schools are stepping into the political arena. Harvard started its Institute for the Study of Business in Global Society in recent months. Nearly half of the Yale School of Management’s core curriculum is devoted to E.S.G. Next fall, the Wharton School of the University of Pennsylvania will start offering M.B.A. majors in diversity, equity and inclusion, and environmental, social and governance factors for business.”
That sounds ominous to some who see ESG and think socialism. Yet stakeholder capitalism is just as much about a corporation’s obligation to itself and its shareholders—over the long term. This is what is being missed in this insistence on decoupling social prosperity from corporation profits. They are intricately inter-dependent: you can’t have one without the other on a sustained basis.
Stakeholder capitalists are actually interested in making more money than ever by enhancing people’s lives in more universal ways—and that’s why they are stakeholder capitalists. They are simply wiser about making more profit, both in the short term and in the long term value creation. There is no actual divide between higher profits and social responsibility: large earnings depend on an improving world. That’s all it amounts to. The new capitalism is simply a smarter and eventually more lucrative version of capitalism than what has prevailed over the past four decades and which created the dangerous social instability that confronts us today.
The rewards take a little time, that’s all. To borrow a truism from gardening, anyone who has ever planted a bush or a tree knows that three stages follow planting. In the first year, they sleep, in the second, they creep, and in the third, they leap. It can take a new leadership culture a bit of time to leap when it’s transplanted into companies struggling under short-term principles. But the goal is to make them thrive as they never have before, not to turn a firm into a good, well-behaved citizen simply. Being good for everyone isn’t the objective, but it’s an inevitable byproduct of the higher profitability that results.
