Boards Of Directors: Stakeholder Capitalism Needs You

The model for success we have been following for decades is setting us up for catastrophic failure. It is time to choose—not whether capitalism is the foundation of widespread prosperity and progress (it is), but rather about what kind of capitalism America should adopt moving forward.

There’s a moment in every institution when it comes under glare of the spotlight. You don’t necessarily choose the time. But you wake up one morning and you’re blinded by the sense of exposure.

The business world today is standing in that spotlight. And, that light is revealing how the model for success we have been following for decades is setting us up for catastrophic failure. It is time to choose. It is time to decide. At stake is not only our business success but the continuation of our democratic way of life.

What should not be up for debate is capitalism itself as the foundation of widespread prosperity and progress. In some 80 years of history, capitalism has proven to be the world’s most miraculous driving force for growth and prosperity. Our choice today is not whether we need to abandon capitalism, but rather about what kind of capitalism America must adopt moving forward. We clearly must reject the Chinese totalitarian counterfeit of it. And we’re long overdue to reject the last 40 years of single stakeholder capitalism: our devotion to shareholder primacy. We can no longer create value to reward one beneficiary at the expense of all the other critical business stakeholders.

Maximizing short-term shareholder value has been the rule of business enterprise for nearly half a century. Tragically, it has also become one of the central drivers of our existing business and societal crisis. Over the past 40 years, America became the developed world’s leader in income inequality, while, at the same time, this country has become one of the most socially immobile societies in the developed world. Most of us are locked into our ranks and classes now with fewer and fewer opportunities to make our lives better—and only enough, or not quite enough, income to pay our bills. Meanwhile the top third of our earners are rapidly getting wealthier. This economic and social inequality has contributed to the way our educational system fails the vast majority of our children (we lag behind half of all developed nations), our longevity rates and healthy outcomes for way too many Americans are subpar, and the daily existence for the vast majority of Americans compared to the top 30% of us is devastating. Covid-19 laid bare much of this reality. The pain, suffering, and disproportionate mortality rates during this pandemic fell squarely on our marginalized populations.

In business we’ve seen competitors like China catch up and show themselves well on the way to surpassing our economic leadership. They think thirty years into the future. We think ahead to the next quarterly report. As a result, we’ve alienated our workers from their companies. At most large organizations, workers are disengaged from the organization’s mission. Shareholder primacy has led to long-term decreases in productivity, innovation, basic research, as well as investment in R&D and capital expansion. Of course, there are exceptions in our country which help make the case for change. A bit about that in a moment.

So here we are. We can change, or we can continue the 40-year failed experiment in shareholder primacy.  This failure was preceded by 40 years of multi-stakeholder capitalism which made America the most dominant nation in the world from 1945 to 1982 which was marked by a robust thriving middle-class.

Here is where you, as a director of a public company at this crucial moment, must help promote a better form of capitalism. As board members, you are the ultimate deciders. You have many governance and performance responsibilities to consider. Among the very top priorities, you shape the strategic direction and purpose of the corporation. Of course, management and the CEOs are vital in developing the strategy, but it is you who have the final say. You decide.

The shareholders are not the owners of the company. Shareholders are and always must be vital stakeholders, but you and your judgments get to make the choices. And if you choose to punt, well, that’s a decision too. There is no escape.

The reality of what has been emerging is clear: the current version of capitalism is both destructive and unsustainable, given today’s socioeconomic reality and our lack of business competitiveness for the future. Only a multi-stakeholder holder vision of capitalism can meet tomorrow’s business and societal demands.

Stakeholder capitalism and all of its multiple stakeholders (customers, workers, shareholders, vendors/suppliers, the corporation itself, communities, and the planet) must be served to provide the corporation’s sustained success and its shareholders increased long-term value.

Here is how one of America’s legal giants, Martin Lipton, summarized the purpose of a capitalist enterprise:

“The objective and purpose of a corporation . . . requires consideration of, and regular engagement with, all the stakeholders . . . critical to the success (shareholders, employees, customers, suppliers, communities and society at large) as determined by the corporation and its board of directors.”

Here’s a specific example of how one group of stakeholders, the employees, have been devalued. Today’s workers are generally seen as a cost base, to be squeezed. Workers operate in a transactional relationship with corporations. If a cheaper alternative is available, companies will grab it. As a result, more than half of today’s workers are psychologically disconnected from their companies. And some 14% are so alienated, they will deliberately work against the interests of their companies, when given the chance. By contrast, in a stakeholder capitalism world, workers are a leverageable asset. When treated with respect and dignity, they increase productivity and innovation. They will also be rewarded by sharing in the incremental value produced. But here’s the key. In the process, companies tap into the power and drive of America’s dormant entrepreneurial muscle and spirit. You will unleash that spirit by being respectful and generous and loyalty and by offering the opportunity for workers to share in the value their companies create.

In one company after another, the adoption of multi-stakeholder governance sparks continuous innovation and productivity. Today, companies like Microsoft, Delta, Costco, MasterCard, Home Depot, and hundreds of others are practicing stakeholder capitalism and their results offer proof that it works. Just Capital, the not-for-profit organization advocating justice in business, find these companies and others produce superior financial results while also conducted their business in a fair and just way.

Multi-stakeholder capitalism is the only organizational paradigm which can produce the essentially inclusive prosperity America needs today. Addressing inequality is critical. Beyond that, business must address the racial and gender diversity as well as a commitment to workers training and retraining. Not only because it’s the morally right thing to do, but because it produces superior results.

Our democratic way of life demands that people must earn fair and just wages. Together with assistance from government, a move toward better education and a lift for our marginalized communities are the cornerstone solutions to maintain a thriving democracy.

Imagine how 180 million productive and well rewarded workers could catapult this nation back into the sort of world leadership we enjoyed half a century ago. Boards of directors must take charge and actively, wisely do their jobs by pushing for these principles in the companies they guide. The time to do that, good people, is now.