Stakeholder capitalism and ESG's road to socialism

This week, the World Economic Forum planned to hold its annual meeting in Davos. Thanks to Omicron, however, we've received a sixmonth reprieve from lectures by elite “global leaders” and the collectivist policies they promulgate. This year's meeting, now deferred to mid-year, will focus on how to accelerate “stakeholder capitalism” and its cousin ESG (short for “environmental, social and governance”), two related movements that diminish economic freedom, which is the key to prosperity, and push us closer to a new brand of socialism.

What do these two terms actually mean? The definitions are fluid by design but, broadly speaking, “stakeholder capitalism” means businesses should not focus purely on maximizing returns to owners but rather use their companies' resources to solve social problems, thus maximizing benefits to various “stakeholders” (i.e., their employees, customers, suppliers, communities and countries). ESG is an even more nebulous concept relating to a wide range of causes from climate policies to “diversity” initiatives. There are more than 600 ESG reporting frameworks in use today, many of which conflict with one another.

The vague nature of the ESG framework raises a number of fundamental questions. Which social and stakeholder “ends” to maximize? How should business leaders and boards of directors balance all the causes and interests of different stakeholders? And how do boards of directors evaluate how effectively CEOs are maximizing social or stakeholder welfare, since the preferences and demands of stakeholders often conflict? A sufficiently imaginative CEO can claim almost anything creates stakeholder value for at least some group.

Economic freedom and market forces already address most of the issues raised by proponents of ESG and stakeholder capitalism. Any successful business, small or large, must account for the interests of its employees, customers, investors and the communities where it operates. Businesses that fail to do so are not as successful or get weeded out in competitive environments.

This is one of the great virtues of capitalism that proponents of stakeholder capitalism often overlook.

Adam Smith, the 18th century philosopher and founder of modern economics, noted the benefit that individuals acting in their own self-interest can have on society. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” he wrote, “but from their regard to their own interest.” Simply put, businesses and entrepreneurs can only succeed by benefiting their customers — unless, that is, they are granted special privileges by government.

The quality of food and level of service we receive from our favourite restaurant are not the result of a kind act by its owner but rather of the owner's pursuit of success. By caring for their employees (by paying competitive wages and benefits) and their communities (via sponsorships and other local initiatives), businesses and entrepreneurs set the foundation for success, which depends on satisfying customer wants and needs.

But what is true for small business is also true for Kevin Johnson at Starbucks, Satya Nadella at Microsoft, Tim Cook at Apple and any other successful business leader. Their firms can only achieve sustainable success by providing customers with great products and services at a price they're willing to pay. And if they do that, they are likely to maximize the value of their owners' shares. Incidentally, many of these “owners” are pension funds investing the savings of regular workers.

If we as a society want better social outcomes, including greater economic growth, better living standards, more happiness, greater income mobility and better environmental outcomes, then, as the research clearly shows, we should primarily rely on markets to make economic decisions. In short, we need more capitalism, which relies on the bottom-up forces of workers, entrepreneurs, investors, business owners and families making decisions about where to invest their labour, savings and entrepreneurial energies. Top-down regulations dictated by unaccountable politicians, bureaucrats and interest groups will not get us the things we want. Decentralized voluntary action will.

It's worth remembering that ESG and stakeholder capitalism are really nothing new. They used to be called “corporate social responsibility” (CSR) and Milton Friedman warned against it 50 years ago. “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,” he wrote. “If businessmen are civil servants rather than the employees of their stockholders then in a democracy they will, sooner or later, be chosen by the public techniques of election and appointment.”

Words that couldn't be truer today.

The ESG and stakeholder capitalism movements will ultimately see governments, unelected bodies such as the Canadian Securities Administrators and special-interest organizations like former Bank of England governor Mark Carney's Glasgow Financial Alliance for Net Zero pressure, and if necessary, force businesses to choose the “appropriate” ends to achieve. In many ways, these movements are simply different approaches to socialism. Instead of governments owning the factors of production and seizing the commanding heights of the economy, ESG and stakeholder capitalism use the regulatory state to control businesses for their own political and special-interest ends.

At a time when global elites are justifying mass social change in the name of public health and a more “equitable” future, it's time to recognize the socialist nature of their arguments and the inevitable stagnation and increased poverty even a kinder, gentler socialism would impose on citizens wherever it takes root.

BUSINESSES AND ENTREPRENEURS CAN ONLY SUCCEED BY BENEFITING THEIR CUSTOMERS.