“Under capitalism, man exploits man. Under communism, it’s just the opposite.”— John Kenneth Galbraith
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”— John Maynard Keynes
“The great and abiding lesson of American history, particularly the cold war, is that the engine of capitalism, the individual, is mightier than any collective.”— Rand Paul
“Doing well is the result of doing good. That’s what capitalism is all about.”— Ralph Waldo Emerson
“The challenge for capitalism is that the things that breed trust also breed the environment for fraud.”— James Surowiecki
“Western capitalism is a looting mechanism. It loots labor. It loots the environment, and with the transpacific and transatlantic ‘partnerships,’ it will loot the sovereign law of countries.”— Paul Craig Roberts
“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”— Winston Churchill
“Capitalism is being attacked not because it is inefficient or misgoverned but because it is cynical. And indeed a society based on the assertion that private vices become public benefits cannot endure, no matter how impeccable its logic, no matter how great its benefits.”— Peter Drucker
Common good capitalism, also known as stakeholder capitalism, seems to have become a huge management issue. Shareholders have been challenged by powerful new environmental, social, and [corporate] governance (ESG) interests, making managing much tougher. The result may simply be chaos, or a “garbage can model” for managing. Or maybe a lot of good. Or perhaps all three?
You know all about this, right? Well, I sure didn’t until I started doing some digging. This has become a very big deal, globally, in big business and big governments. I thought that this was just another management fad invented by people who don’t have real jobs producing and selling real things.
It doesn’t help a bit that Klaus Schwab’s World Economic Forum (WEF) is deeply mixed up in all of this. Normally this would be a serious red flag, but there is some serious potential for at least a few good outcomes.
What is “capitalism”?
Good place to start, I think, since many people don’t have a clue about the real meaning. Here is what Wikipedia has to say (emphasis added):
“Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private property, property rights recognition, voluntary exchange, and wage labor. In a capitalist market economy, decision-making and investments are determined by owners of wealth, property, or ability to maneuver capital or production ability in capital and financial markets—whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.”
“Economists, historians, political economists and sociologists have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free-market capitalism, anarcho-capitalism, state capitalism and welfare capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition and state-sanctioned social policies. The degree of competition in markets and the role of intervention and regulation as well as the scope of state ownership vary across different models of capitalism. The extent to which different markets are free and the rules defining private property are matters of politics and policy. Most of the existing capitalist economies are mixed economies that combine elements of free markets with state intervention and in some cases economic planning.”
“Market economies have existed under many forms of government and in many different times, places and cultures. Modern capitalist societies developed in Western Europe in a process that led to the Industrial Revolution. Capitalist systems with varying degrees of direct government intervention have since become dominant in the Western world and continue to spread. Economic growth is a characteristic tendency of capitalist economies.”
Got that? Well, I beg to differ with Wikipedia.
Hmmm. Most big corporations, capitalist corporations, have millions of stockholders. They are by definition publicly-owned. Privately-owned businesses are typically much smaller and owned almost entirely by a founding family or descendants. An example of a big capitalist business:
Tesla: Publicly-owned and traded on NASDAQ. Cofounder Elon Musk owns about 17% of the roughly 1 billion shares outstanding. Ownership is roughly split between institutional investors (40%), retail (mutual fund) holders (40%), and company executives (including Elon) at about 20%. All these are capitalists in a more general and realistic sense of the term.
Operated for profit?
How dare they? Maybe they dare because without a profit, they don’t survive. Managing a business without a strong profit motive is a recipe for failure. The only organizations that operate without a strong profit motive are government and specially-organized non-profits.
This of course doesn’t mean that businesses can’t have major elements of purpose beyond the essential one of sustained profitability. My guess is that the majority of major businesses and even most small businesses have such purposes. More on this below.
Another serious hmmm. Businesses nearly always require capital – aka money – to get started. Starting a business can consume millions of dollars (and even lots of billions today). Last time I checked, capital money doesn’t grow on trees. Only government can grow without capital. It has taxes instead. You and I provide this government growth capital. Anyone who has ever started a business is aware, often painfully, of the ongoing need for growth capital and the difficulties in raising it. My experience for sure.
So, let’s see I have this right: Capitalists require capital to start and operate their businesses. This must be accumulated somehow – net profits, borrowings, ownership share sales. Some portion certainly ends up in the pockets of the capitalist owners via dividends and other stockholder benefits but this is constrained by the operating needs of the business.
Capitalists generally employ many workers as “wage labor”, which usually includes the salaried as well. Many of these capitalists are also shareholders via their investments in mutual funds and similar intermediaries. Their labor generates business profits that hopefully increase the value of their private shareholdings
This part of a definition of “capitalism” probably infers that employees should also receive, besides wages, a significant share of their employer’s net profits. Well, many businesses actually do just this – through oddly-named profit-sharing plans.
Another implicit inferred obligation may be that the “wage labor” is actually a “living wage”, whatever a “living wage” may be in reality. However, if an employee feels underpaid for this or any other personal reason, the employee is still entitled to quit and seek an higher-paid job. Assuming that they are so qualified.
“Capitalism” as a pejorative is not really about “capital”
Capital, for those of us who have saved it, raised it, and tried so hard to earn more of it, is simply money that we have not spent on things like food, shelter, and similar frivolities. Capital is investable money, typically gotten the hard way. Why might we invest this money? We want to build a business, try out a new idea, build some wealth for lean times or retirement.
Large businesses usually pursue growth as a major objective and growth requires capital. Very often, huge amounts of new capital investment over years. Where do they raise capital? From a wide variety of shareholders and lenders.
Folks who own shares (or debt instruments) of businesses, directly or indirectly, are capitalists. This includes huge numbers of government employees who have their pensions heavily if not wholly dependent on values and gains on their capital investments. Anyone who has a pension fund or invests via a mutual fund is among these capitalists. They want the value of these investments to grow.
But most of these capitalists also favor having businesses, including their employers, support society in ways beyond direct business purposes. Not as a forced obligation but as a social good: do well by doing good. This builds not just good public relations but actually is of major help to their communities and customers. Financial help as well as non-financial help.
Capitalists do have broader “obligations” to society
Since it seems likely that the majority of people employed in businesses are in fact capitalists, it is important to refocus the “capitalist” designation on what appears to be the real issue here. Businesses do have obligations beyond profitability and growth, even though these provide the facilitating resources for such broader social purposes. So, the real issue is:
How much does a business and its capitalist owners “owe” to “the rest of society”?
A great deal of the incentive to support local social organizations and efforts comes from executives and other employees who reside in these communities. As a one-time CFO, I can attest to the amazing amount of persuasive pressure that exists to provide all kinds of social support. And much of it is impossible, and not wise, to resist.
Think uniforms for two new Little League baseball teams. Items for a “good cause” raffle. Donation for a new scholarship. Volunteers for this or that. Endless.
These are not stated or formal obligations but simply what a business typically must do to maintain a healthy and visible community standing. These non-obligations can add up to serious money each year in many cases.
And then there are the growing political “obligations” to society
“Common good capitalism” (aka stakeholder good) – using the capitalist machinery and production for purposes besides building stockholder wealth – is becoming more important. These “obligations”, however, are increasingly driven by state, national, or even global interest groups.
In 2019, Senator Rubio stated that:
“Our challenge is not simply one of cyclical downturns or the wrong party being in charge. Our challenge is an economic order that is bad for America. It is bad economically because it is leaving too many people behind. And it is bad because it is inflicting tremendous damage on our families, our communities, and our society.”
“We are no longer a society where a bartender and a maid could own a home and raise four children like my parents did.”
Marco Rubio is a lawyer and politician. So far as I can determine, he has never held a real job in a business where you have to be profitable to survive. He is presently a professor in Florida teaching politics and international relations, which is just ex-officio politics.
Leaving too many people behind? An economic order that is bad for America? Rubio’s personal opinion seems to be the main basis for these fact-free statements. What he (and others like him) are really saying is that they want to mess with the economy and its businesses via politics so as to move forward with their agenda. Probably not much “common good” in any of this.
But such stakeholder capitalists have devised a much more powerful, grander way to get at this “common good”.
Environmental, Social, and Governance (ESG) requirements
Enough of this voluntary, community-based obligations, and good old PR stuff. Let’s get behind something with real teeth: ESG. The teeth here are rapidly-expanding and onerous ESG ratings schemes that are being used increasingly to drive investment decisions. Globally. Major corporations – initially.
So, what’s ESG in practice? Seems that everybody but me knows what ESG is. It is lots and lots of complex, costly, externally-driven stuff. Invented by politicians, special-interest groups, and other mischief-makers.
From the LexisNexis Practical Guidance Journal on: “How ESG and Social Movements are Affecting Corporate Governance”:
“What Is ESG? ESG refers to a broad set of considerations that may impact a company’s performance and its ability to execute its business strategy and create long-term value. Socially conscious stakeholders use ESG to measure the sustainability and societal impact of a company and its business activities. While ESG factors can affect a company’s bottom line directly, they can also affect a company’s reputation, and investors and business leaders are increasingly applying these nonfinancial factors in their analysis to identify the material risks and growth opportunities of a company.”
“Industry leaders have pushed hard to advance ESG initiatives. For example, in his 2019 Letter to CEOs, BlackRock, Inc.’s Chairman and Chief Executive Officer, Larry Fink, encouraged companies to develop ‘a clear embedment of your company’s purpose in your business model and corporate strategy.’ According to Fink, ‘Purpose is not the sole pursuit of profits but the animating force for achieving them’ and ‘profits and purpose are inextricably linked.’ Thus, companies that fulfill their purpose and responsibilities to stakeholders—including prioritizing board diversity, compensation that promotes stability, and environmental sustainability—reap rewards over the long term.”
“Likewise, in August 2019, the Business Roundtable issued a Statement on the Purpose of Corporation (Statement) signed by 181 CEOs, expressing ‘a fundamental commitment to all of our stakeholders,’ including employees, suppliers, and customers, and not just shareholders. Specifically, the Statement expressed a commitment to delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, and supporting the communities by embracing sustainable practices across businesses.”
And what is the “purpose” part (aka stakeholder benefits) that is expected? Well, below is a starter list that seems to expand daily.
ESG Ratings (aka Metrics)
More from the LexisNexis folks:
“Corporate Compliance. ESG disclosures, like other corporate disclosures, are subject to regulatory compliance. As such, companies must be careful to ensure their disclosures are accurate and complete. In addition, companies are struggling to deal with multiple reporting frameworks and inconsistencies across each regulation. Indeed, there are numerous ESG indexes (1,000+) that investors can use to assess how a company has addressed ESG. As discussed above, companies can be held to any number of these indexes depending on the preferences and standards established by different stakeholders, prompting many companies to comply with multiple ESG regulations.”
“For example, the Organization for Economic Co-operation and Development has published the Due Diligence Guidance for Responsible Business Conduct, which provides a framework for companies and stakeholders to understand and implement due diligence for responsible business conduct. Similarly, the Corporate Human Rights Benchmark ranks large companies based on their sustainability disclosures and provides a list of what those disclosures are. In addition, the Sustainability Accounting Standards Board provides industry-specific sustainability standards for 77 different industries.”
“On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement [emphasis added]. Per the SEC’s announcement, ‘the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct,’ ‘identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules,’ ‘analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies,’ ‘evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues,’ and ‘provide expertise and insight to teams working on ESG-related matters.’”
Sounds highly voluntary, yes? Or maybe well into the joyful realm of “do it or else”, where the “or else” part now has real teeth. Compliance with ESG reporting requirements is now mandatory for big businesses. Globally. Investors use ESG ratings increasingly these days in making investment decisions. Investors control capital availability and cost. Regulatory agencies have real enforcement powers.
The pushback against ESG and stakeholder rights has begun
Darlene McCormick Sanchez via The Epoch Times: “Texas Joins 18 States To Oppose Blackrock’s Woke Agenda”:
“In a letter to BlackRock CEO Larry Fink, 19 attorneys general, mainly from conservative states, challenged his company’s reliance on environmental, social, and governance criteria at the expense of investor returns.”
“Texas Attorney General Ken Paxton said in an Aug. 8 news release that ESG climate goals harm Texas’s oil and gas economy and state pension fund performance. The release said that BlackRock’s actions might also violate state and federal law.”
“BlackRock, the world’s largest asset manager, recently sent a letter to several states, claiming it has joined climate organizations merely for ‘dialogue’ and is focused solely on its fiduciary duty.”
“Arizona Attorney General Mark Brnovich led the charge in responding to the investment firm by pointing out inconsistencies and conflicts between BlackRock’s letter and its public statements and commitments.”
“According to a news release from Brnovich’s office, BlackRock’s focus goes beyond ‘dialogue.’ The descriptions on the company’s website include ensuring the world’s largest greenhouse gas emitters take necessary action on climate change and support the Paris Agreement.”
“Anyone purchasing a BlackRock fund is forced to support ESG, whether they like it or not, Brnovich alleged. Brnovich’s Aug. 4 letter said BlackRock’s actions raise anti-trust concerns and appear to intentionally restrain and harm the energy markets’ competitiveness.”
“’Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda. The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda,’ the letter states.”
Stakeholder “capitalism” just got real
This is all about power and who wins. Stakeholders (external to the business) or the now-regulated businesses? Management of the affected businesses just lost a whole bunch of power.
Sen. Rubio no longer has to pontificate on the joys of common good capitalism (now rebranded as stakeholder capitalism). Via the enormous regulatory maze in which we exist today, stakeholders are gaining significant management power and prerogatives.
Stakeholders are now heavyweights in the management processes of major businesses worldwide. Folks with the business experience of Sen. Rubio. Just what you need, yes? Management may well be devolving by this means into what has been cleverly termed the “garbage can model”. See Related Reading for an explanation.
And you just knew that Klaus Schwab and the WEF are deep into this
From the World Economic Forum (WEF) just before the early-2020 COVID pandemic started: “Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution”:
“The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.”
“A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.”
“A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.”
Measuring ESG is really complex
As the Kenan Institute has very recently written, “ESG Measurement: A Surprisingly Complex Issue”. It is also highly manipulable.
In a study analyzing ESG rating data from six prominent ESG ratings agencies, ratings from different providers disagree substantially. The six agencies combined report 709 individual ESG indicators, where the indicators used vary substantially:
“Such divergence makes it difficult for investors and other stakeholders to evaluate the ESG performance of companies. This also imposes significant challenges for companies managing competing pressures from various stakeholder groups. How does a firm make inevitable trade-offs across categories that are valued differently by different clienteles? Do managers view ESG scores as a problem to be managed rather than as tool to solve social issues and mitigate climate change?”
More on this vitally important topic in the next post.
Common good capitalism, now rebranded as stakeholder capitalism, has the potential to do some very good things. Unfortunately, it is being usurped by politicians, government agencies, and myriad special-interest groups. Whatever potential it may have had, or possibly still has, is rapidly being buried by regulatory overreaching, now including ESG compliance.
- Consulting giant McKinsey & Co. weighs in with its article on “Putting stakeholder-capitalism into practice”:
“The real issue is the trade-offs between short-termism and long-termism. Eighty percent of CFOs tell us in surveys that they would reduce discretionary spending on potentially high-NPV [net present value] activities like R&D and marketing to achieve short-term earnings targets. They are literally sacrificing the long term for the short term. Yet research shows companies that think long-term—meaning five to seven years ahead—substantially outperform, achieving 47 percent higher revenue growth over a 15-year period, for example.”
“Stakeholder and shareholder interests do align in the long term. If you have happy employees, collaborative suppliers, satisfied regulators, and devoted consumers, then they will help you deliver higher benefits over a longer-term period. It is hard to satisfy everybody in the short term; you may have to make trade-offs, for example, between purpose and profit. But in the long term, we don’t believe this trade-off exists.”
“The crystalizing concept here is purpose-driven ESG. Companies wondering how to deliver on the long-term stakeholder goals should start by asking the questions, ‘What is our purpose? What would the world lose if our company disappeared?’ If you are a bank and you don’t exist tomorrow, could other banks provide your products and services, or is there some differentiating benefit you bring that can shape your strategy, inspire your people, and steer the company at critical moments?”
- Organized anarchy (aka “garbage can model”) is how corporate management today seems to be evolving. According to Wikipedia: “Garbage can model”:
“The garbage can model (also known as garbage can process, or garbage can theory) describes the chaotic reality of organizational decision making in an organized anarchy. The model originated in the 1972 seminal paper, A Garbage Can Model of Organizational Choice, written by Michael D. Cohen, James G. March, and Johan P. Olsen.”
“Organized anarchies are organizations, or decision situations (also known as choice opportunities), characterized by problematic preferences, unclear technology, and fluid participation. While some organizations (such as public, educational, and illegitimate organizations) are more frequently characterized by these traits of organized anarchy, the traits can be partially descriptive of any organization, part of the time.”
“Within this context, of an organized anarchy view of organizational decision making, the garbage can model symbolizes the choice-opportunity/decision-situation (for example: a meeting where ideas are discussed and decided on) as a ‘garbage can‘ that participants are chaotically dumping problems and solutions into, as they are being generated. The ‘garbage can’ term’s significance is best understood by considering the manner in which items in a trash can are organized, which is a messy, chaotic mix. The model portrays problems, solutions, and participants/decision-makers as three independent “streams” that are each generated separately, and flow disconnected from each other. These three streams only meet when the fourth stream of choice opportunity arises, as a garbage can, for the streams to flow into. The mix of garbage (streams) in a single can (choice opportunity) depends on the mix of cans available, on the labels attached to each can, and on what garbage is currently being generated. The mix of garbage in a single can also depend on the speed at which the garbage is collected and removed from the scene, for example, how long before problems, solutions, and/or participants move on to other choice opportunities, or, depending on how long the current choice opportunity remains available. This anarchic view of decision making contrasts with traditional decision theory.”