Shareholder Vs. Stakeholder Capitalism: Let the Free Market Decide
By Bruce Bolger40 Years of History
The Return of Greed Is Good?
Should the Government Control Fund Managers?
Shareholder Capitalists are in trouble, and they know it. This explains why its leading proponents have launched an all-out attack on ESG (Environment, Social, and Governance) investing.
Shareholder Capitalism is on the decline because it’s losing the battle both in public opinion and in the free market: investors, employees, and consumers are the primary drivers of the movement, not labor unions. Stakeholder Capitalism is simply better business, so let the free market decide.
People on all sides of the political spectrum are fed up with a system that extracts wealth from people and the earth to line the pockets of a few. The Shareholder Capitalists are lashing out against ESG, increasingly known as Stakeholder Capitalism, as if it’s robbing from shareholders to give to the poor, when in fact it’s about creating wealth through people and the environment instead of extracting it and running away.
Few people may have heard yet of the emerging Stakeholder Capitalism movement being increasingly debated in the business media, but surveys by the JUST Capital advocacy group find that large majorities of both Republicans and Democrats do agree on something: they prefer a capitalism that enhances returns for investors by creating value for customers, employees, distribution and supply chain partners, communities, and the environment.
40 Years of History
Contrary to assertions by opponents, the theory behind Stakeholder Capitalism goes back nearly 40 years or more in the business and academic world and has nothing to do with “woke” or “fig leaf” capitalism. It’s based on a field known as Stakeholder Engagement or Stakeholder Management that was not invented in 2019 when the Business Roundtable business group stated that organizations need to address the needs of all stakeholders, which put the spotlight on the field and thereby stirred up the opposition and resulting distortions from both extremes of the political spectrum.
Stakeholder Capitalism is anything but Democratic Socialism or “woke” and has no roots in politics. It is a pragmatic approach to capitalism based on the simple premise developed by R. Edward Freeman, a University of Virgina Darden Business School professor in the book “Strategic Management-A Stakeholder Approach,” first published in 1984, that organizations that are ethical and address the needs of all stakeholders—customers, employees, supply chain and distribution partners and communities in a healthy environment— will generally outperform and provide more benefits for society and the environment than those that focus solely on the short-term needs of shareholders. Global warming and BLM weren’t even on the horizon when this field emerged. The focus is not on compelling public companies to do good. The focus is on transparent disclosure of practices so that investors and other stakeholders can make more informed decisions.
Multiple academic and business research studies about the stock price performance of companies with high levels of stakeholder engagement and sound environmental practices support the logical premise that having highly committed customers, employees, supply chain and distribution partners, and communities living in a healthy environment is good for business.
This is what has the Shareholder Capitalists so scared that they are saying and taking actions that contradict the premise of the free-market system they profess to defend.
The Return of Greed Is Good?
As reported in the Wall Street Journal recently, successful healthcare entrepreneur and investment manager Vivek Ramaswamy says: “Chevron’s board should publicly commit to evaluating all projects on financially measurable return on investment without regard to extralegal social pressure.” In other words, he wants Chevron and all the oil companies to pump more oil now and as much as they can. There is nothing novel in Ramaswamy’s recommendations. It is the approach to business made famous by the notion of “Greed is Good” in the last century, and look what it has wrought.
Significantly, Ramaswamy does not explain how return on investment should be measured for whom, what time frame, what purpose, and how. Does he mean the calculation is for investors who want the highest possible short-term return by extracting wealth wherever possible from the earth and people and quickly move on before facing the damage, or investors who prefer sustainable long-term returns based on creating value with less long-term risk?
He offers no specific time frame for measuring ROI: except that it is short term, nor does he mention any collateral damage. Can the short-term returns be at the expense of risking worker safety, productivity and quality, the health and safety of consumers and communities, the climate, regulatory and legal challenges, increased taxpayer costs to cover health care for underpaid employees, or long-term clean-up costs, like the billions BP shareholders who are paying for a super fund site along the riverbanks in our town created 30 years ago?
Is Ramaswamy certain that generating quick returns by exhausting our oil fields as fast as possible is a better long-term investment than creating sustainable wealth that gradually weans the world of fossil fuels that just happen to produce smog and dangerous air whether or not there is global warming.
In the meantime, Republican governors in states like Texas, Florida, Louisiana, and others are so panicked they are prepared to turn their backs on the tradition of free markets for the sake of politics in their pressure to legally stop pension funds from considering ESG in their investment analyses. This flies in the face of basic free market principles and considerable research showing that organizations with a strategic focus on people and the environment outperform others. Why? Because they have higher levels of customer, employee, distribution and channel partner engagement and community support; less legal and litigation costs and are often more efficient because they re-use materials, utilize more modern equipment, and require less energy to run their businesses.
Should the Government Control Fund Managers?
None other than the Barron’s List of 100 Most Sustainable Companies has significantly outperformed the S&P 500 since its creation. Should pension fund managers be banned from investing their funds based on these principles even if they outperform the market?
Stakeholder Capitalism provides a simple solution to the debate: Let the free market decide.
Public and private equity companies can transparently state their purpose, values, and objectives, and specifically how they define their ESG criteria, methods, metrics, progress, and challenges, in a human capital report being published by increasing numbers of companies. In fact, these reports, already required of US public companies, may need to include more specific metrics under rules currently under development at the Securities & Exchange Commission. Then let investors and other stakeholders decide if they wish to invest in, buy from, work for, or welcome them into their communities.
If Ramaswamy and his like-minded Shareholder Capitalists are not happy, they can take their money elsewhere.
We all know the reason why Shareholder Capitalists are so scared of ESG and Stakeholder Capitalism.
Their opponent isn’t Democratic Socialism, the radical left, the government, politicians, or some other bogey man: it’s the free market.
Master the “S” of Environmental, Social, Governance (ESG), A.k.a. Stakeholder Capitalism
The Enterprise Engagement Alliance at TheEEA.org is the world’s first and only organization that focuses on outreach, certification and training, and advisory services to help organizations achieve their goals by fostering the proactive involvement of all stakeholders. This includes customers, employees, distribution and supply chain partners, and communities, or anyone connected to an organization’s success.
Training and Thought Leadership
- Founded in 2008, the Enterprise Engagement Alliance provides outreach, learning and certification in Enterprise Engagement, an implementation process for the “S” or Social of Stakeholder Capitalism and Human Capital Management and measurement of engagement across the organization.
- The Enterprise Engagement Alliance provides a training and certification program for business leaders, practitioners, and solution providers, as well as executive briefings and human capital gap analyses for senior leaders.
- The EEA produces an education program for CFOs for the CFO.University training program on Human Capital Management.
- Join the EEA to become a leader in the implementation of the “S” of ESG and Stakeholder Capitalism.
Engagement Digital Media and Marketplaces
- The ESM information portal and The Enterprise Engagement Advisors Network solution provider marketplace cover all aspects of stakeholder engagement, and the EEA information library lists dozens of resources.
- The RRN information portal and Brand Media Coalition marketplace address the use of brands for gifting, incentives, recognition, and promotions. The BMC information library provides information and research resources.
Video Learning
The EEA Human Capital Management and ROI of Engagement YouTube channel features a growing library of 30- to 60-minute panel discussions with leading experts in all areas of engagement and total rewards.
Books
- Enterprise Engagement for CEOs: The Little Blue Book for People-Centric Capitalists. A quick guide for CEOs.
- Enterprise Engagement: The Roadmap 5th Edition implementation guide. A comprehensive textbook for practitioners, academics, and students.
Enterprise Engagement Advisory Services
The Engagement Agency helps:
- Organizations of all types develop strategic Stakeholder Capitalism and Enterprise Engagement processes and human capital management and reporting strategies; conduct human capital gap analyses; design and implement strategic human capital management and reporting plans that address DEI (Diversity, Equity, and Inclusion), and assist with managed outsourcing of engagement products and services.
- Human resources, sales and marketing solution providers profit from the emerging discipline of human capital management and ROI of engagement through training and marketing services.
- Investors make sense of human capital reporting by public companies.
- Buyers and sellers of companies in the engagement space or business owners or buyers who seek to account for human capital in their mergers and acquistions.
