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Why Not Try Stakeholder Capitalism?
Bringing human nature into the boardroom.
Posted August 16, 2011
Modern capitalist business firms often resemble Feudal aristocracies, with power being concentrated at the top and only the property owners (nowadays called shareholders) being allowed to have a voice (theoretically) in the organization's government. Thus the term "shareholder capitalism."
Aristocracies of the past justified their property rights (and their wealth and power) with the assertion of natural (class) superiority and "noblesse oblige" - a responsibility to protect and care for the rest of the citizenry. Modern capitalists justify their property ownership claims on the risks they take with their capital and their role as entrepreneurs who create new business ventures, coupled with a claim that the "invisible hand" of a competitive free market (after Adam Smith in The Wealth of Nations) will ensure that the benefits "trickle down" to everyone else.
Nobody can gainsay the phenomenal success that capitalism has achieved over the past 200 years, although capitalists certainly can't take all the credit for the progress we have made. Science and technology, not-for-profit organizations, and even governments have also played a role. Moreover, the benefits have not always trickled down. Some European capitalist countries, like Denmark, Norway, the Netherlands, Sweden and Germany, have achieved a reasonably equitable distribution of wealth and have been able to provide a generous safety net for their citizens. In the U.S., on the other hand, the gap between the rich and the poor is the widest by far in the entire industrialized world and our safety net is full of holes.
Consider the example of Walmart, now the world's largest corporation in terms of annual income (some $258 billion last year), with about 8,900 stores and 2 million employees. Walmart achieved its great success as a discount chain in part by paying its employees only slightly above the minimum wage for many years and providing no health benefits. (Its employees had to rely on Medicaid for their health care, in effect a government subsidy.) Currently it pays an average of $10.78 per hour for full time workers, which is still well below the poverty line, and many new hires and part-time workers are still at the minimum wage level. Health benefits are still skimpy. Meanwhile, the Walton family has amassed a fortune estimated at $90 billion, equivalent to the total annual income of the bottom 140 million American workers combined, while the current Walmart CEO earns a staggering 900 times as much as the average worker.
Nor is Walmart unusual. For every Google or Microsoft that provides its employees with a cornucopia of benefits, there are many more businesses in our country that have seriously short changed their workers. A few statistics tell the story: The top 1 percent of income earners take home almost one-quarter of the total national income each year and the top 10 percent take home almost half. When it comes to total wealth, the top 20 percent own 87.2 percent and the bottom 80 percent hold the other 12.8 percent. Our Gini Index number, an international comparison of the relative gap between the rich and the poor in any given society, places us at a high of 46, up where the C.I.A. sees a risk of civil disorder and domestic violence. Sweden's index number, by contrast, is 23.
Nevertheless, the shareholder capitalism model has long been promoted by mainstream economists based on the simplistic assumption that human motivation can be boiled down to the rational pursuit of self-interest (Homo economics). Thus, Milton Friedman, the influential Nobel Prize winning (conservative) economist at the University of Chicago, many years ago asserted that "the social responsibility of business is to increase its profits." Capitalist enterprises must focus single-mindedly on increasing "shareholder value." Any other social values are "pure and unadulterated socialism," and anyone who preaches social responsibility is a "puppet" of "those who seek to undermine a free society."
However, there is another model, called "stakeholder capitalism," that is better aligned with what we have learned about human nature. It is also more democratic and is arguably a more effective form of corporate governance. In a debate some years ago between Friedman and two well-known corporate CEO's, John Mackey of Whole Foods (who practices stakeholder capitalism) and T.J. Rodgers of Cypress Semiconductors (who is a hard-nosed autocrat), here is how Mackey presented the case:
"I'm a businessman and a freemarket libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of a business is to maximize profits. But that's not the purpose for other stakeholders - for customers, employees, suppliers, and the community. Each of those groups will define the purpose of a business in terms of its own needs and desires, and each perspective is valid and legitimate...At Whole Foods, we measure our success by how much value we create for all six of our important stakeholders...It is the function of the company leadership to develop solutions that continually work for the common good...The shareholders of a public company own their stock voluntarily. If they don't agree with the philosophy of the business, they can always sell their investment..."
Mackey continued: "Economists would be well served to read [Adam] Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as [material] self-interest. For many people they are more important." As evidence for the superiority of the stakeholder model of capitalism, Mackey pointed out that, among all the Fortune 500 food retailers (including Walmart), his company had the highest profits as a percentage of sales, the highest return on invested capital, the highest sales per square foot of floor space, and the highest growth rate.
Mackey's claims for stakeholder capitalism were buttressed in the current issue of the Harvard Business Review, where Harvard Law School professor Yochai Benkler, in an article entitled "The Unselfish Gene," advanced the thesis that people are far more cooperative (on the whole) than is portrayed in the selfish actor model of mainstream economics (and business school orthodoxy). However, cooperation depends on "behaving fairly, acting generously, caring about [your] group or team, and [behaving] like decent people who reciprocate kindness with kindness." Citing some of the many recent studies that support his thesis, Benkler then offers seven "ideas" for building cooperative systems, notably including "fairness" and "reciprocity." "People care about having a fair share of whatever benefits their cooperation produces." As Mackey put it, the stakeholder model taps into "more powerful motivations than self-interest alone."
So will stakeholder capitalism become the wave of the future? Mackey says "wait and see."
(You'll find a more extended discussion of stakeholder capitalism in my book, The Fair Society. My thanks to Ron White for pointing me to the Reason debate.)
