National Post (National Edition)
In praise of shareholder capitalism.
IS THE LONG BATTLE AGAINST TURNING SHAREHOLDER CORPORATIONS INTO TOOLS OF `PUBLIC PURPOSE' NOW LOST?
THE IDEA THE ONLY RESPONSIBILITY A CORPORATION HAS IS WITH SHAREHOLDERS, THAT'S SIMPLY NOT TRUE, IT'S AN ABSOLUTE FARCE. THEY HAVE RESPONSIBILITY TO THEIR WORKERS, THEIR COMMUNITY, TO THEIR COUNTRY. THAT ISN'T A NEW OR RADICAL NOTION — JOE BIDEN
For several years now the World Economic Forum, host of the annual corporate celebrity bash known as the Davos Summit, has been a driving global force behind a move to overthrow market capitalism and profit-maximizing corporations and replace them with a new economic model called “stakeholder capitalism.” The WEF will be at it again next week.
In the words of Klaus Schwab, the 82-year-old German economist who founded the WEF in 1973, the existing corporate enterprise model, the shareholder version that has dominated much of the world's economic progress over the past century, needs to be replaced. “We need a change of mindset, moving from shortterm to long-term thinking, moving from shareholder capitalism to stakeholder responsibility. Environmental, social and good governance have to be a measured part of corporate and governmental accountability.”
With the U.S. government now under Democratic Party control, a reformation of capitalism appears to be underway. “It's way past time we put an end to the era of shareholder capitalism,” said Joe Biden when he outlined his platform last July. Killing the Keystone pipeline is certainly consistent with Biden's anti-capitalism vision.
An army of academics, consultants, executives and politicians is already on board the stakeholder movement. Big change is gonna come, it seems — even though the concept is filled with black holes and dubious methods.
Schwab claims to have invented the stakeholder concept as a replacement for the shareholder version of corporate purpose most often associated with Nobel economist Milton Friedman. But in fact Schwab's stakeholderism — which he describes in a new book published this week — has a long and messy history.
Schwab's real trick is to attach the word “capitalism” to stakeholder, and claim to have created a new model called stakeholder capitalism. But it is not capitalism. And there is nothing new in the stakeholder concept.
Stakeholderism has risen and collapsed many times over the past century, generally failing to overcome the until-now dominant idea — expressed as recently as 1997 by the U.S. Business Roundtable — that “the paramount duty of … directors” is to serve the interests of shareholders. That's capitalism.
The Roundtable, a power group of top corporate leaders now headed by Walmart CEO Doug McMillon, reversed itself in 2019 with a statement widely interpreted as abandonment of the shareholder model in favour of stakeholderism.
The WEF's campaign to replace the current corporate focus on markets and shareholders with greater attention to stakeholders has been front and centre at the organization's Davos summits for many years. It will be again next week when the WEF, unable to hold its 51st annual meeting in person in Davos due to COVID-19, instead stages a series of virtual sessions starring CEOs, politicians, NGOs and youth leaders to promote “the Great Reset” for a postCOVID planet.
Over the week of Jan. 25, the Davos Dialogues will aim to seize the COVID moment to remake the world economy. “It is essential for leaders from all walks of life to work together virtually for a more inclusive, cohesive and sustainable future as soon as possible in 2021.”
The stakeholder movement does not deny the success of the shareholder model, often described as part of the triumph of neo-liberalism. Over the past half century, shareholder capitalism — with profits as the prime corporate purpose — has boosted the world economy, moved billions of people out of poverty and raised living standards beyond what most imagined possible 50 years ago. Even the WEF concedes that the world made “unprecedented strides” in poverty reduction, increasing growth and fostering global trade.
If neo-liberal shareholderism has been such a success, why change? The claim is that corporations are not doing enough to fix social and other problems: climate change, inequality, poverty, diversity, obesity, culture gaps and so on.
The real core of the Great Reset strategy is to seize control of corporations and place the world's business enterprises under outside control, including greater manipulation by governments and NGOs. The objective is to take private-interest profit-making producers of goods and services and convert them into public institutions that will fulfil various other public purposes in the public interest. The labels for such activity are now familiar, including CSR (Corporate Social Responsibility), ESG (Environment, Social, and Governance), Impact investing, sustainability and the like.
Ending shareholder capitalism by merging private enterprise with government power is not a new idea. Anti-corporate populism has been around for decades, even centuries. It comes with a mixed ideological heritage.
In the United States, the idea that corporations should be organized for broader purposes under more direct government control reached a peak of sorts in the 1970s when Ralph Nader, consumer-activist and hero of American corporate-bashers, published Taming the Giant Corporation. Nader proposed a U.S. federal charter of major U.S. corporations “whereby a government gives the corporate entity existence and that entity, in return, agrees to serve the public interest.”
Nader's plans, pursued through the 1970s, failed to gain acceptance, mainly because his concept was effectively rebutted by an active and effective band of critics.
One of Nader's early foes was the Hoover Institution's Robert Hessen, who in 1978 wrote In Defense of the Corporation. Hessen outlined the first principles behind the capitalist model. Corporate organizers, he wrote, “have a natural right to form a corporation by contract for their own benefit, welfare, and mutual self-interest. It is the only theory of corporations that is faithful to the facts and philosophically consistent with the moral and legal principles of a free society.”
The most effective force against Nader was Nobel economist Milton Friedman, whose famous 1970 essay, The Social Responsibility of Business is to Increase its Profits, overshadowed Nader's aggressive attempt to push Washington to bring in a federal charter.
Imposing social and other responsibilities on corporate executives, said Friedman, would be “fundamentally subversive” to the foundations of the very market economy that has delivered prosperity and rising living standards. When a corporate executive begins imposing taxes on shareholders and consumers to spend for social purposes “he becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise.”
Friedman's defence of shareholderism ultimately defeated Nader's call for national stakeholderism. But the latest moves to expand the corporate mandate and purpose go even further. Nader's call for a U.S. government “federal charter” for corporations was revived in 2018 by Massachusetts Sen. Elizabeth Warren. She proposed an Accountable Capitalism Act that would force American corporations with more than $1 billion in annual revenue to obtain a federal charter from a new Office of United States Corporations at the Department of Commerce. Corporate directors would be obligated to consider the interests of all corporate stakeholders, “including employees, customers, shareholders, and the communities in which the company operates.”
In his platform speech last July, Biden sounded like Klaus Schwab. “The idea the only responsibility a corporation has is with shareholders, that's simply not true, it's an absolute farce. They have responsibility to their workers, their community, to their country. That isn't a new or radical notion, these are basic values and principles that helped build this nation in the first instance.”
Biden is a bit of player at the WEF. When he addressed the elite Davosians in 2017, Schwab laid on the praise. Biden is also an enthusiastic backer of the WEF's Great Reset agenda and Build Back Better initiatives, which involve “future-proofing capitalism” — as if it were possible to “future-proof” anything.
If Biden and Schwab are on the same page, what exactly is on that page?
When he founded the WEF in 1973, Schwab wrote the original Davos Manifesto aimed at urging corporate managers to reject shareholders and embrace a larger role as promoters of societal priorities. With that Davos Manifesto, the WEF now claims, “Stakeholder capitalism was born.”
Not quite. University of Calgary economist Randall Morck, editor of A History of Corporate Governance Around the World, sets the origins of legalized stakeholderism in Germany and the passage of the National Socialist government's Shareholder Law of 1937. The law, writes Morck, “freed corporate managers and directors of their specific fiduciary duty to shareholders and substituted a general duty to all stakeholders.”
A paper in the 1938 issue of The American Economic Review described the new German corporate model as an application of the leading ideas of the German government at the time. The objectives of the law included “protection of the interests of the public, employee and company by granting the state broad powers of intervention.” All forms of economic activity must observe the principle of “public welfare before individual gain.”
Beyond Germany, during the early years of the 20th century, many theorists and corporate executives embraced stakeholderism.
In the 1930s, Robert E. Wood, the CEO of Sears, listed four parties to any business in order of their importance: “customers, employees, community, and stockholders.” In a famous 1932 Harvard Law Review paper — “For whom are corporate managers trustees?” — Merrick Dodd proposed broadening managerial responsibility beyond shareholders. Dodd's views failed to catch on.
The current effort to “put an end to the era of shareholder capitalism,” as Biden said, aims to undo the free-market foundations of shareholder capitalism.
Klaus Schwab spells it out in recent declarations in which he cravenly uses the COVID-19 pandemic as a justification for an attack on “neo-liberalism” — and on Milton Friedman. “We must move on from neo-liberalism in the post-COVID era,” says Schwab. We need to abandon the “sacred cows,” such as “free-market fundamentalism,” that have eroded worker rights and the environment, spawned inequality, and fostered the development of giant corporate monopolies. We need to reconsider our commitment to “capitalism,” writes Schwab, and redefine the role of corporations.
Schwab misrepresents Friedman by implying that the Nobel economist held a narrow, mean-spirited view of corporate purpose. The “business of business is business,” he quotes Friedman. In fact, Friedman defended the responsibility of corporate managers to protect the interests of customers and employees, within the laws and customs of society. He warned against managers who engaged in activities that ran counter to the interests of customers and employees. “How much cost,” asked Friedman, is a corporate executive “justified in imposing on his stockholders, customers and employees for this social purpose?”
With Friedman established as the neo-liberal arch villain, Schwab goes on to outline his not-so-liberal alternative. “We need to break down the silos that keep these domains separate, and start to build institutional platforms for public-private co-operation.”
PRESENTED WITH A MULTITUDE OF OBJECTIVES, THE DECISION-MAKER ENDS UP FOCUSING ON NONE. THUS, WITH NO WAY TO KEEP SCORE, STAKEHOLDER THEORY LEAVES TOP CORPORATE MANAGERS UNACCOUNTABLE FOR THEIR ACTIONS.
— RANDALL MORCK
In his new book officially published next week — Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet — Schwab lists the four key power sectors that would sit at the corporate governance table: governments, civil society, corporations, and such international organizations as the United Nations. In that model, shareholders are likely to end up standing in line behind stakeholders — and stateholders.
Shareholders are already taking a back seat. Corporate managers today fund the arts, finance political parties, give to charities, declare their climate-change activism and set up multimillion-dollar foundations that sponsor radical environmentalism.
Supporters of the stakeholder movement include major institutional investors, accounting organizations, agencies and giant consultancies seeking to cash in on the corporate need for advice.
In The Case for Stakeholder Capitalism, McKinsey & Company advised companies to start by reforming their boards by appointing directors drawn from “non-profit leaders, local government officials or consumer groups.” Another McKinsey Global Institute report, Rethinking the Future of American Capitalism, lists growing inequality, a declining middle class, weakening infrastructure, climate change and other problems amplified by COVID-19 — all supposedly to be tackled directly by corporate directors and managers in their new role as unelected powercrats.
Canada's top government-based pension plans, from the Canada Pension Plan Investment Board to the Ontario Teachers' Pension Plan — the country's largest shareholders — are now backing the stakeholder movement. They want to know “how companies identify and address issues such as diversity and inclusion, human capital, and climate change” along with “social inequity, systemic racism and environmental threats.”
Global stakeholder advocate and climate watchdog Mark Carney is one of the leaders trying to rope the international investment community into imposing non-profit objectives on the companies they invest in. Carney recently called on central bankers to give institutional shareholders “the ammunition they need to impose their moral sentiments on the managers of their assets.”
Corporations, it seems, are now to become conveyors of the moral sentiments of government pension managers and central bankers.
Overhanging the stakeholder juggernaut is the total absence of any method to measure the performance of stakeholder governance. Randall Morck at the University of Calgary argues that loading multiple social and political responsibilities — ones that properly belong to government — on to corporate executives and boards would likely lead to gross distortions in corporate decision-making at the expense of shareholders. “Presented with a multitude of objectives, the decision-maker ends up focusing on none. Thus, with no way to keep score, stakeholder theory leaves top corporate managers unaccountable for their actions.”
In other words, what can bankers, food processors, retail executives and pension managers really know that gives them the confidence and authority to spend shareholders' money — and make policy decisions on such subjects as climate change, poverty, inequality, pollution issues, the arts and carbon sequestration?
Efforts are underway to craft metrics and standards that would make it possible for institutions, corporations and governments to measure the benefits of stakeholderism. Nothing exists to date. Oxford University's Karthik Ramanna, writing in the Financial Times this week, said corporate spending on environmental and social programs essentially now takes place in an accounting and reporting vacuum. “ESG accounting needs to cut through the greenwash.” For example, she said, Nestlé recently announced spending of US$5 billion to hit net-zero carbon emissions by 2050. Nestlé, said Ramanna, should be able to clearly state what value it expects to generate from the spending — but there are no standards to measure such things.
Which takes us to another stakeholder critique.
Two Harvard law professors, Lucian Bebchuk and Roberto Tallarita, recently described what they refer to as “The Illusory Promise of Stakeholder Governance.” Stakeholderism, they conclude, “would insulate corporate leaders from shareholder pressures and make them less accountable.”
Even more bluntly, Bebchuk and Tallarita argue that the rise in support for stakeholderism among corporate leaders and their advisers “is motivated, at least in part, by a desire to obtain insulation from hedge fund activists and institutional investors. In other words, they seek to advance managerialism by putting it in stakeholder's clothing.”
The result would be detrimental to shareholders and the economy. It would also, they add, undermine the achievement of stakeholder objectives. “For those interested in addressing corporate externalities and protecting corporate stakeholders, embracing stakeholderism would be counterproductive.”
Scholarship on the purpose of corporations dates back centuries, but the current prevalence of “stakeholder capitalism” theory in law, economics and politics is an affront to fundamental principles. How can they call it “capitalism” when the result would be the destruction of capitalism as we know it? Call it what it is: Stateholderism. That seems to be the plan.