Can Capitalism Save Itself?

This week marks the fifth anniversary of the Business Roundtable’s decision to update its charter of the organization for CEOs to “lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.” Given the increased dissatisfaction with big business and capitalism and growing threats of more regulation from both the right and the left in the US, progress on creating a more sustainable form of capitalism remains in doubt, despite the efforts of a growing number of organizations and increasing disclosure requirements in Europe and Canada.

By Bruce Bolger

Does Addressing the Needs of Stakeholders Hurt Shareholders?
The Academic World Catches On; Investors Take Note
How Stakeholder Capitalism Got Swept Up in Politics
What’s at Stake for Business

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For the first time in generations in the US, big business is under attack from both political parties. After beginning to go after hidden fees, President Joe Biden’s Federal Trade Commission is seeking to make it easier for consumers to cancel subscriptions and gain access to customer service representatives under new “time is money rules.” Kamela Harris promises to address price gouging and raise taxes on businesses, while J.D. Vance has come out in support of labor, higher tariffs, and more anti-trust enforcement to protect workers.

The growing attacks on big business come as no surprise: 68% of Americans don’t like big business, according to a 2023 Pew Survey. Another Pew survey conducted in 2022 found that only 57% viewed capitalism favorably, down 8% from the previous study in 2019.

Does Addressing the Needs of Stakeholders Hurt Shareholders?

Does it have to be this way? Is government regulation required or can the free market promote change from within? In the early 1980s, a young student at the University of Virginia, R. Edward Freeman, postulated that capitalism could indeed reward both investors and enhance society. His theory was based on a simple premise. “The interest of shareholders is dependent on how well you deal with customers and suppliers and employees and communities. I'd even venture to say the amount of money you can make is a function of how you deal with those other stakeholders.”

He outlined this theory in Strategic Management: A Stakeholder Approach, published in 1984 and still in print. Freeman’s work has had a major influence on entrepreneurs such as John Mackey of Whole Foods and Kip Tindell, founder and former CEO of The Container Store, who recently called Freeman the “father of stakeholder capitalism.” Both launched their organizations on stakeholder theory principles: having a clear purpose, goals, objectives and values to harmonize the interests of all stakeholders, including investors, in a way that can benefit society as well. No one was talking about the need for government action.

The concept of reform through stakeholder theory continued to gain ground in the 2000s without notable pushback. In 2004, a group of over a dozen leading financial institutions were tasked by the United Nations to recommend strategies to foster a more sustainable approach to value creation. The report, Who Cares Wins, which gave rise to the term ESG, states, “The institutions endorsing this report are convinced that in a more globalized, interconnected and competitive world the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully.” Since then, more than 20,000 businesses and 3,600 organizations have embraced the principles of this report.

These same values drove the creation of B-Lab in 2006, a not-for-profit organization offering certification for a company’s “practices and outputs across five categories: governance, workers, community, the environment, and customers.” B-Lab says there currently are over 9,000 Certified B Corporations in more than 102 countries and over 162 industries. In 2007, Conscious Capitalism was launched by Whole Foods Founder Mackey to promote similar ideals. It now has 21 chapters in the US and abroad and will soon be launching a membership model. Later, in 2014, Just Capital was founded by hedge fund investor Paul Tudor Jones to promote stakeholder management principles and now ranks 1,000 Russell Index companies on their stakeholder management practices.

In the late 2000s, stakeholder management principles even became formalized into corporate law with the creation of the benefits corporation statutes, first passed in Maryland, with no serious opposition from the left or the right. Companies incorporated in this manner do so specifically because they are required to consider the impact of their decisions not only on shareholders but also on employees, customers, the community, and local and global environment. Today, 37 states and territories have such statutes, almost equally split between those under Democratic and Republican leadership.

The Academic World Catches On; Investors Take Note

The academic world has gradually come along. In 2011 Michael E. Porter of Harvard Business School and Mark Kramer, co-founder of a philanthropic group, published Creating Shared Value in the Harvard Business Review espousing similar principles. Just three years ago, a former executive of Mars founded an organization known as Economics of Mutuality, based on these same stakeholder management principles. It has funded the creation of an education program at the Said School of Business at Oxford University. Two years ago, Yale University’s business school launched the center for Stakeholder Management and Innovation. Recently, Harvard’s Institute for Business in Global Society held a day-long session on stakeholder theory. Today, the Strategic Management Association of academics has a thriving Stakeholder Strategy Interest Group conducting research and teaching students on this new approach to business in schools around the world.

During the 2010s, the investment community began to take note. Research by Alex Edmans of the London Business School found the companies designated as “Great Places to Work” consistently outperformed the S&P 500 over 28 years. From 2012 to 2018, a mock ETF (Exchange-Traded-Fund created by the analytics firm McBassi Inc. for the Enterprise Engagement Alliance, outperformed the S&P 500 by over 37%. The JUST Capital ETF], based on its own ranking system with similar principles, has outperformed its benchmark, the Russell 1,000, by 13.8% since its inception in 2014. The Harbor Capital HAPI fund, based on similar principles, has outperformed the S&P 500 in its first two years.

How Stakeholder Capitalism Got Swept Up in Politics

The concept of stakeholder theory remained uncontroversial and under the radar screen until August 2019, when the Business Roundtable embraced these principles in its declaration that its members “should deliver long-term value to all of their stakeholders – customers, employees, suppliers, the communities in which they operate, and shareholders.”

Instead of firing up a popular movement, this pronouncement got swept up into the general anti-ESG (environmental, social governance) backlash, leading to denouncements from all sides. Lucien Bebchuk, a legal scholar at Harvard Law School, formally criticized these efforts as diverting the interests of shareholders toward causes unrelated to an organization's needs and worse yet hypocrisy. Peter S. Goodman, the New York Times economics reporter, questioned the sincerity of such efforts in his book, Davos Men—How Billionaires Devoured the World.

The result of the blowback? A completely non-partisan, practical approach to enhance business suddenly became politicized as an enemy of shareholder capitalism. An organic effort to reform capitalism in a similar manner to the way total quality management enhanced manufacturing in the late 1900s suddenly became conflated with “woke.”

What’s at Stake for Business

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A failure to reform capitalism from within will only lead to more government action. While it remains unknown who will win the next US election or what actions the winners will take, other countries are passing stakeholder disclosure laws that will increasingly affect the largest US companies in the coming years, whether they like it or not. Vast new European Union disclosure requirements known as the Corporate Sustainability Reporting Directive require organizations with more than 250 employees or $44 million in sales in the EU to make detailed, audited disclosures on the risks and opportunities created for all stakeholders and the environment. A new anti-greenwashing law in Canada requires companies to validate all claims related to how they manage their environmental, social and governance, under risk of big fines for failure to comply. And the pressures from investors, consumers, and employees, and communities for more humane and sustainable business practices continues to grow due in part to the ability of social media to expose bad practices.

Will capitalism be given a chance to renew itself through free market forces as R. Edward Freeman envisaged, or will the task be left to government through increased regulation and disclosures? The notion that organizations can optimize returns for shareholders at the expense of customers, employees, supply chain and distribution partners, and the environment is facing the greatest threat yet--from shareholders, stakeholders, and government.

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