(iStock) iStockSUMMING UP
Who Will Call the Shots in Stakeholder Capitalism?
At one time in my checkered academic career I studied, researched, and published papers about interorganizational management. Specifically, I was interested in measuring the benefits of integrated strategies in channels of distribution (more transparency across multiple organizations in inventory management, lower inventory to sales ratios, fewer stockouts, etc.). Just as important was the question of who could lead the effort. Not surprisingly, it came down to the party with the greatest economic leverage.
Interorganizational management in a channel of distribution is a complex matter. But it doesn’t hold a candle to the complexity of stakeholder capitalism, as suggested by responses to this month’s column on the subject. Reading them, it’s easy to conclude that there is no one entity, including CEOs, that has enough leverage to practice it.
Boards of directors play an important role in championing the cause of stakeholders of all kinds. DF in AZ put it this way: “If a company promises a fundamental shift towards shareholder capitalism but doesn’t show any progress towards that goal it is patently obvious that no real commitment was made by the board of directors.”
The public sector bears some responsibility for fostering stakeholder capitalism. IndexLlc commented that “the real problem has been the inability and unwillingness of the public sector to rise to this challenge… CEOs and Boards act within a set of constraints, both direct and indirect… (For example) … (A) recent Labor Department proposed rule just reiterated that the duty of (ERISA retirement) plan fiduciaries is to maximize investment returns.”
Rather than hold CEOs responsible for the task, David Wittenberg suggests that they be encouraged to maximize profits, “Then have the boldness to levy taxes on the recipients of dividends to support the stakeholders you favor…” David Weaver reminded us of Prof. Bruce Scott’s belief that “Capitalism works, and works well, when it operates on ‘a level playing field’ that mitigates against excessive influence (by any stakeholder)… Scott believed that the role of government was to establish reasonable rules and to enforce them.”
Nongovernmental organizations bear some responsibility, too. As Jim W pointed out: “Delaware’s narrow charter that corporations be providers of shareholder value (has) enabled years of laissez faire democracy.” And of course, the Business Roundtable reinforced the climate for this discussion last year with its “Statement on the Purpose of a Corporation.”
If our research on interorganization management is any indication, organizations with the greatest leverage have to include large institutional investors. I was reminded of this when I read of David Swenson’s recent message to organizations managing Yale’s money under Swenson’s highly successful supervision. He told them that their performance would be judged on both financial and nonfinancial performance. Specifically, one example of the latter would be “their progress increasing their investment staffs’ diversity.”
All of this may lead us to agree with Leo Vagho when he said: “To expect corporate leaders to solely advance a society for stakeholder capitalism is not realistic… this requires leadership from all sectors… this is about long-term change.” EA Hardin added that “it is far too soon to draw conclusions about … whether … CEOs can lead us into a reimagined state.”
In the meantime, we’re left with the question of who will call the shots in stakeholder capitalism. Do you agree with Vagho and Hardin? What do you think?
Reference:
Juliet Chung and Dawn Lim, “Yale’s David Swenson Puts Money Managers on Notice About Diversity,” The Wall Street Journal, October 23, 2020, wsj.com
Original post
The Business Roundtable, comprising 181 corporate leaders, issued last year its “Statement on the Purpose of a Corporation,” regarded by some as a repudiation of the notion that a business is run primarily for its shareholders.
It was an endorsement of a tenet known as stakeholder capitalism, where the purpose of a business is seen as benefitting all of its stakeholders—customers, employees, and communities as well as shareholders. Some saw it as a tipping point for corporate governance. Others saw it as a public relations move.
Lest proponents of stakeholder capitalism celebrate too soon, a new study of recent corporate behavior in more than 600 organizations in the United States and Europe, financed by the Ford Foundation, concludes that since the inception of the COVID-19 pandemic, the adoption of the Statement “has failed to deliver fundamental shifts in corporate purpose in a moment of grave crisis when enlightened purpose should be paramount.”
While lauding the work of several organizations, its authors cited examples from Amazon, Salesforce.com, and Marriott International to bolster the conclusion that, under stress, leaders still turn to the same old priorities associated with short-term shareholder value.
"Under stress, leaders still turn to the same old priorities associated with short-term shareholder value."
Critics of the study have suggested that it was conducted too soon after adoption of the Statement. For example, Salesforce CEO Marc Benioff suggested that the Statement was intended to foster long-term change. Other Statement supporters argued that short-term moves such as layoffs, interpreted by some as running counter to the Statement’s ideals, were balanced by concern for the long-term survival of the organization so important to other employees able to keep their jobs.
In the midst of this debate, Harvard economist N. Gregory Mankiw addressed again the question framed so eloquently 70 years ago by Milton Friedman in his famous article, “The Social Responsibility of Business Is to Increase Its Profits.” (Incidentally, Friedman made no reference to either short- or long-term profitability in the article.) Mankiw wrote recently that we may be expecting too much of corporate boards and CEOs if we put primary responsibility for stakeholder capitalism in their hands. Incentives influenced by market-based competition nudge them toward short-term optimums regardless of their good intentions.
Mankiw concludes that it is unrealistic to place responsibility for such things as the rule of law, property rights, the environment, and the more equal distribution of wealth in the hands of those guiding for-profit public corporations. That’s the role of public servants. As he puts it, “the world needs people to look out for the broad well-being of society. But those people are not corporate executives. They are elected leaders who are competent and trustworthy.”
Is Milton Friedman’s philosophy an invitation, ironicaslly, to more active public governance? Is stakeholder capitalism in the wrong hands? What do you think?
References:
Business Roundtable, Purpose of a Corporation: One Year Later , Businessroundtable.org, accessed September 28, 2020.
Peter S. Goodman, Stakeholder Capitalism Falters in Study , The New York Times, September 22, 2020, pp. B1 and B4.
N. Gregory Mankiw, A Balancing Act Many C.E.O.s Can’t Do , The New York Times, July 26, 2020, p. BU.
Bronagh Ward, Vittoria Bufalari, Mark Tulay, Sara E. Murphy, Richa Joshi, Nick Cohn Martin, COVID-19 and Inequality: A Test of Corporate Purpose , KKS Advisors and The Test of Corporate Purpose, September 23, 2020, accessed September 28, 2020.
