Stakeholder Capitalism: How to create a kinder, caring economy

In his new book, Prof Klaus Schwab has described the importance of the ‘middle path’.

The clash between communism and capitalism, which followed the post-war era, could be felt across the world. During this cold war, an iron curtain secluded the former USSR and its partners from the almost unbridled capitalism in US, UK and Western Europe. Champions of both systems derided each other while extolling the virtues of their economic faith.

The iron curtain fell, USSR disintegrated and capitalism surged ahead. Even China adopted and pursued its own version of capitalism.

Now, 75 years after the war and 30 years after Ussrsupported communism ended, it appears that capitalism wasn’t what we were promised. Capitalism has turned out to be as harmful as socialist and communist doctrines, some would say.

While one system chose socialist, welfare goals of equality, the other system chased profit maximization, universal wealth generation and an ever-growing appetite for consumption.

This is then the time to reflect on the middle path. A path where stakeholders are more important than shareholders. Where social benefit maximization is goal and not just profit enhancement.

Between the extremes there is the now the space for stakeholder capitalism.

A concept which Prof Klaus Schwab, Founder and Executive Chairman of World Economic Forum began to describe about 50 years ago. In his new book named after the theme, Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet, Prof Schwab has described the importance of the middle path. Written with co-author Peter Vanham, the book frames the relevance of softer capitalism in the post Covid world. “The COVID-19 public health crisis is just one event that demonstrates that not everyone gets the same chances in life. Those with more money, better connections, or more impressive ZIP codes were affected by COVID at far lower rates; they were more likely to be able to work from home, leave densely populated areas, and get better medical care if they did get infected,” the authors say.

The 75 years of post war period brought stability, economic growth and wealth to most parts of the world. Science and technology could address and attack key challenges facing humanity. Prosperity and open market systems opened tremendous opportunities for entrepreneurs and professionals. Global trade and investment created positive linkages between countries.

However, for all its success, runaway capitalism didn’t deliver all that it promised. While the 2008 financial crisis symbolized the risks of overriding greed, it did not lead to a change in business practices.

Often accused of promoting billionaires at Davos, WEF’S Founder is unequivocal in his views on the nasty underbelly of capitalist behaviour as seen in recent decades. “On the one hand, we have rarely been as well off as we are today. We live in a time of relative peace and absolute wealth. Compared with previous generations, many of us live long and mostly healthy lives. On the other hand, our world and civil society are plagued by maddening inequality and dangerous unsustainability,” says Prof Schwab plainly.

What is the way ahead then? What can we learn from the crisis of 2008 and of Covid19? Who are the stakeholders?

The book identifies four stakeholders who must collaborate as equal partners for the larger good.

1. Governments (of countries, states, and local communities, consisting of representatives of the people and having the legal authority in a region or place);

2. Civil society (in its broadest sense, from unions to NGOS, from schools and universities to action groups, and from religious organizations to sports clubs);

3. Companies (constituting the private sector, whether freelancers, micro enterprises, small and mediumsized enterprises, or large multinational companies); and

4. The International Community (consisting of international organizations such as the UN, the World Trade Organization, or the OECD, as well as regional organizations such as the European Union or ASEAN).

There is of course the divide between the developed and the developing world. While inequality has risen in rich and poor countries, the reality is that most developing countries have kept social welfare as their main focus. While reforms opened up economies like India, governments kept a sharp eye out for welfare measures. Private competitive forces were unleashed but were also tethered to social responsibilities by law.

Such countries have been closer to the ideal of stakeholder capitalism than those in the developed world. However, there has been rising pressure on them to adopt the excessive consumption ways of the West. It is time to reverse this.

“More and more people are questioning even how useful it is to pursue growth as an indicator of progress. According to the Global Footprint Network, 1969 was the last time the global economy didn’t “overspend” nature’s resources for the planet. Fifty years on, our ecological footprint is greater than ever, as we use up more than 1.75 times the resources the world can replenish,” say Schwab and Vanham. An important course correction is needed if lessons are to be learnt. Responsible consumption which benefits large parts of society is essential to address inequality and sustainability. In the post Covid world, countries have to collaborate and not compete.

This then is the agenda for global leaders who meet every January in Davos. It is time to reset priorities and plan for a better world. The West taught the world to consume. The East can help the world to conserve. People and planet have to be priorities, not just profits. Pranjal Sharma is the author of India Automated