The world’s richest companies consider replacing the shareholder model with the stakeholder model. Are they right?
Which America do you live in?
The one with an economy that serves everyone, or the one in which many are left out?
How you answer that question may depend on where you fall on the political spectrum, but also on whether or not you are a part of the over 50% of Americans who are company shareholders.
From IRAs to retirement savings accounts to 401Ks; a majority of Americans have a financial stake in the success- or failure- of some of the worlds biggest companies and corporations.
For everyone else, the idea of retirement savings and stock investments is laughable; keeping the creditors at bay with a steady paycheck is the sobering reality. Many people in the U.S. are one illness, one minor accident, one routine calamity away from financial ruination and homelessness.
In America, some people have been served by the economist Milton Friedman’s assertion that the only moral duty of any company is generating return on stockholder investment; some people have not.
The result of this disconnect can be witnessed at any college campus across the country, where the disaffected youth of today are appalled by the poverty gap that has flourished in spite of technological advancements and social change movements.
They are right to be so. Some wealth may have trickled down, but far more wealth did not.
The backlash is being felt by the world’s biggest companies, as evidenced by a meeting this week of over 200 CEOs to discuss how changing social attitudes are challenging the old shareholder model.
In 2019, do companies have a commitment to all stakeholders, including the public trust?
This provocative question has been looming as the public has both embraced and rejected corporate virtue-signaling, mostly in the form of commercials but also in merchandising certain social movements like Pride Month.
Where it really matters- that is the company’s bottom line- companies have been slow to respond. But in the Information Age, there is no hiding information about the wealthiest people and corporations in the world; and no way of hiding practices that have rightly fallen into disfavor like sweat-shop labor and exploitative trading practices.
Merely wealthy people, or even the extremely wealthy, don’t need defending; amassing wealth in a free market system is a feature, not a bug.
The world’s wealthiest 1% are another matter: You don’t know these people. They don’t follow anyone you’re following. Nor are they uniquely evil, any more than Bill Gates is uniquely evil.
But the wealth disparity gap is actually much wider than anyone realizes. The wealth distribution in the world between the very wealthiest 1% and everyone else on Earth cannot be illustrated on this page.
If a bar graph showing the wealthiest 1% were the size of this page, the bar representing the next-wealthiest would be invisible to the human eye. If the next-wealthiest were represented by a bar the size of this page, the bar representing the top 1% would stretch the distance to the moon.
The world’s wealthiest companies have been strict adherents to the shareholder value paradigm since the Industrial Age, if not before; that a company’s highest morality is to deliver value for their investors, i.e. growing and stewarding that initial investment to generate returns.
And they have. For the shareholders.
But not just by playing the free market; by playing around it. American companies learned very quickly how to stack the deck in their favor, or they died out.
Companies learned they could influence everything from sweeping policies about what crops could be grown to what children are served in state-sponsored schools. It was the ultimate corporate hack; increasing profits through good old fashioned sales was soon only one arm of a profits-driven strategy.
Another arm became lobbying the federal government for tax breaks, subsidies, sweetheart regulation deals and favorable laws.
Why wouldn’t they: The world’s richest corporations considered their highest authority to be delivering huge returns to their shareholders. That this is unacceptable, and an affront to a free market economy, may have been slow in coming to the public forum. But it’s here now.
Are consumers really free to choose if a company has co-opted the government for the purposes of selling its product?
What about the would-be companies who don’t adopt this model?
Simple example: Big Food corporations. They exist to sell their products, not to serve public health. This is clear from the massive waistlines that have corresponded with massive profits once companies learned to chemically engineer junk food to be addictive.
Doesn’t this cross the line in a true free market economy? If consumer choice is cornerstone it does.
Food companies with a commitment to public health, not just shareholder profits, would have made healthy foods people enjoyed eating. Any short-term sales benefits from selling chemically addictive junk food to super-consumers until they died would be cancelled out later by the burden on public health caused by an obesity crisis.
It is possible that these discussions are too little too late, empty pre-emptive politics, reactionary to the rise of socialism, especially among the youth.
There certainly is no proven moral and practical superiority to serving stakeholders over stockholders. Critics of the idea point to a lack of measurable results, and an ill-defined stakeholder definition, as anathema to profitability.
It is perhaps better for the shareholders to demand returns on their investments, as defined by more than profits. But critics of the paradigm shift are right, too.
A company that fails serves nothing.
(contributing writer, Brooke Bell)