Stakeholder Capitalism Won’t Provide Needed Answers to fix Capitalism’s Flaws

Stakeholder capitalism is today’s fad to replace shareholder capitalism. But is it the correct cure? In the survey we designed and commissioned in August 2020, 65% of 145 responses showed that the central issue with capitalism isn’t the system, per se. It is flawed people driving it—more on the survey later.

To millennials and other youths, capitalism evokes exploitation, greed, oppression, privilege, and many negatives, which taint every firm. Several business leaders’ behaviors affirm those notions. But more notable is the youths’ awareness of the origin of capitalism, which rose out of feudalism. Landed gentry, knowing more profits existed in manufacturing and commerce, shifted resources from the land. But workers remained tools for owners’ gain.

Capitalism’s Evolution

Stakeholder Capitalism or Shareholder Capitalism: The Golden Rule Must Apply
Stakeholder Capitalism or Shareholder Capitalism: The Golden Rule Must Apply

Adam Smith came along early in capitalism’s evolution and posited division of labor, causing managers to view people as cogs, no different from materials in the production process. Others such as Frederick Winslow Taylor and Max Weber introduced management doctrines to lift productivity without valuing workers’ wellbeing as vital to the firm’s success. 

Meanwhile, society developed and business became rooted in the economic advancement and wealth generation of many countries. Today, the negative stigma associated with capitalism sticks to business because so many leaders look out for themselves and not the best interests of their firms.

To be sure, greed, selfishness, and narcissism prevail in business. CEOs exhibit these traits as they focus on next quarter’s results to hike share prices and their bonuses. These attitudes set the tone for firms to exalt the bottom line. But fury in North America over income inequality, systemic racism, misogyny, propelled a notable minority of firms to introduce fairness in their operating practices such as hiring, training, compensation, and career planning. Meanwhile, the pandemic showcased several firms putting people’s welfare ahead of profits. Newsweek’s July 10-17 issue presented 50 such firms and their contributions, including Apple, Coca Cola, Netflix, Starbucks, Uber.

Capitalism Survey Results

Reverting to the our survey: We developed nine questions and commissioned a survey of 200 people in the USA with 145 responses:

  1. Age: 
    1. 40% age 24-39 
    2. 33% age 40-55
  2. Gender: 
    1. 51% male
    2. 49% female
  3. Household Income: 
    1. 21% over $100,000 
    2. 24% between $50,000-$99,000
    3. 55% below $49,000

1. What is capitalism (Respondents had to choose one answer):

32% – A system that allows the economy to perform optimally 

28% – A system designed to exploit workers

22% – A system that enables the rich to rule over the poor 

2. Capitalism practiced in North America today (Choose each that applies):

53% – Causes income equality

49% – Creates Jobs 

41% – Expands the economy

3. Benefits of Capitalism to Society (Choose each that applies):

48% – Provides major choices of goods and services at reasonable prices

42% – Promotes financial and economic freedoms

38% – Improves productivity and efficiency in the economy 

4. Main Problems with Capitalist System (Choose each that applies):

65% – Businesses with selfish executives who treat lower employees like they are not humans

63% – Governments that collude with businesses to further individual politician’s interests 

39% – Unions whose leadership look out for themselves and cozy up with politicians

5. How would you reform capitalism (Respondents had to choose one)

23% – Require businesses to provide living wages as the minimum payment to employees

18% – Change the emphasis from businesses maximizing profit to developing equal opportunities for all

11% – Prevent politicians and former senior government officials from obtaining government contracts directly or indirectly after leaving office

10% – Prevent governments from giving (corporate welfare) money (“incentives”) to individual businesses e.g. to open specific plants 

6. What’s the purpose of business (Choose each that applies):

33% – To make as much profit as possible

24% – To create jobs and provide meaningful employment for people

20% – To provide goods and services to society at a reasonable price while respecting human rights and protecting the environment

7. How would you reform or improve businesses (Choose each that applies):

56% – Create more accountability of owners and executives

50% – Hold individual CEOs personally responsible for criminal acts (such as reporting false earnings) of their firms

39% – Require executives to repay bonuses when fired or resigned because of illegal acts on their watch

38% – Mandate a maximum ratio between the highest and lowest paid employee

31% – Prohibit firms from buying back their shares unless each worker is being paid at least a living wage consistently

31% – Mandate that  all workers receive a share of the firm’s profit

24% – At least one non-executive, non-union worker should be on the board of directors

8. What’s an acceptable profit for a business (Choose each that applies):

54% – One that generates enough funds to reinvest in the business

36% – Sufficient funds to pay dividends to the shareholders for risking their investments in the business

33% – Enough funds to cover the firm’s cost of capital

9. Should workers be required to join unions where one exists in a company for that worker’s group?

60% – No

40% – Yes

Stakeholder Capitalism Isn’t The Answer

Each business, public, private, small, large, or government-owned provides goods and services for a clientele. And people run them irrespective of their ownership structure. Maybe that’s why the survey results show capitalism isn’t the issue. It’s the way people operate businesses that needs to change. 

Stakeholder Capitalism posits that firms should focus on meeting needs of stakeholders — employees, customers, suppliers, shareholders — not shareholders alone as in shareholder capitalism. Whether stakeholder or shareholder capitalism, or government owned, unless executives shift their approach and practice the Golden Rule (Matthew 7:12) — do to others what you would like them do to you — nothing will change. 

Society is crying out for a different approach than the Wall Street greed-infested way. Several firms and individuals are responding. These examples highlight people and organizations galvanizing support to amend, reform, or eradicate capitalism as practiced today:

    • Equal opportunity to all who have the potential to produce because that is both most fair and most productive 
    • Basic needs to those who are unable because that is humane and is fundamentally needed to have a good community.
    • A larger pie and be able to divide it well.

Commentary

Providing equal opportunity is a simple, humane decision that’s independent of the system. So is providing basic needs for employees. We do not need to reform the system. Instead, we need to observe the Golden Rule of doing unto others as we want them do to us. When we treat people fairly, they perform at their best and the “pie grows.”

  • The Business Roundtable of over 200 chief executives, including the leaders of Apple and JPMorgan Chase states that companies must move from shareholder capitalism and must invest in employees and deliver value to customers. 

Commentary:

They need concrete actions with accountability for inaction. Talk is cheap!

  • The Conscious Capitalism organization provides mid-market executives with innovative and inspiring experiences designed “to level-up their business operations and collectively demonstrate capitalism as a powerful force for good when practiced consciously.” 

Commentary:

Nice words, but not enough action. While the co-founder was CEO of Whole Foods the company paid $500,000 in New York State and $800,000 in California for mislabelling products. Although the practice went on for years the company held no one responsible. They weren’t walking the talk.

Commentary:

Government ownership and control isn’t the answer because of endemic government corruption and ineffectiveness. Enough data exist to show leaders in most governments are corrupt and wasteful. Still, societies must provide equal opportunities, eliminate discrimination, and allow access to cheaper health care (in the USA).  Ideas below, if implemented, will provide equal opportunities and the base for a more just society.

Conclusion: Stakeholder Capitalism With Accountability

Whether shareholder capitalism or stakeholder capitalism we must realize people run businesses, charities, churches, and its the people we must hold accountable. Organizational structures must address these vital matters. 

  1. Who holds the CEO and other executives accountable? 
  2. How effective is that process? 
  3. What recourse does the ordinary stakeholder have to appeal poor accountability decisions?

Having put the right people in place, these changes should produce the environment for a business to create equal opportunity for all, respect stakeholders (stakeholder capitalism), and treat them with dignity they deserve:

  1. Ombudsman for employees customers & suppliers
    1. Each public company should employ an independent ombudsman to handle employees, customers, suppliers’ disputes with the business to help the firm achieve its mission.  
    2. The ombudsman should train dispute resolution specialists to listen, gather facts, and mediate to help each party present its case and find fair, equitable, practical solutions.
  1. Ombudsman for shareholders
    1. Each Stock Exchange (Dow, TSX) should create a shareholders ombudsman’s office to handle complaints between firms listed on the stock exchange and shareholders. 
    2. Fact-based accusations should include but not limited to executive performance bonuses and share buybacks. Superficially, this seems highly subjective, but isn’t. Empirical data show CEOs earn huge bonuses for consistent poor performance. And CEOs get hefty severance packages after leaving the company for negligence. Shareholders should challenge these decisions made by friendly incestuous boards of directors.
  1. Ombudsman for companies not listed on stock exchanges 
    1. Trade associations, chambers of commerce, and similar groups should each set up an ombudsman’s office for the firms in their groups to handle employees, customers, suppliers’ disputes with businesses to help the firms achieve their missions with respect and dignity.
  1. Ban lobbyists. This function encourages corruption of politicians and business executives.
  1. Prevent unions from providing financial support to political parties. As well, outlaw closed shop and union shop agreements, and implement right-to-work laws, which exists in several states in the USA. In essence, don’t force workers to join unions, and pay dues. And don’t allow unions as the only source of new hires in a company. 
  1. Business is the shell, the only productive wealth generating vehicle in society. We should free it to produce goods and services at reasonable costs with employees treated as each of us would like to be treated. 
    1. Don’t tax the shell, it is the productive vehicle. 
    2. Tax people: employees, executives, dividends’ recipients. 
    3. Businesses should get no funds from government (no corporate welfare).
    4. Government should not bribe firms to build plants in specific areas and specific industries. 
    5. Government should create a level playing field by removing taxes from business; but tax funds used to buyback the company’s shares.  
    6. Today, not taxing companies won’t be popular because many businesses circumvent tax rules legally and pay no taxes. But in the long term, when governments do the things we suggest above, they will level the playing field and allow businesses to create value in the economy. 

Systemic racism and sexism is real, but society, including me, denied it for too long. Discrimination is inhumane and sub-optimizes value creation resulting in poor stewardship. Because racism and sexism are systemic, often we do not notice them. So, we must be vigilant, inter alia, in hiring, and career planning and execution. For instance, studies show online algorithms use people’s names to discriminate when hiring. And people use accents on the phone to discriminate. Now that we started a conversation about capitalism and business we must continue to listen and learn before we act. 

© Michel A. Bell

Michel A. Bell

Michel A. Bell is a former senior business executive, author of six books (including Business Simplified released in 2018), speaker, and adjunct professor of business administration at Briercrest College and Seminary. Michel is a Fellow of the Chartered Certified Accountants (UK), holds a Masters of Science in management degree from Massachusetts Institute of Technology and a Doctor of Business Administration honoris causa from Briercrest College and Seminary. He is founder and president of Managing God's Money.

6 thoughts to “Stakeholder Capitalism Won’t Provide Needed Answers to fix Capitalism’s Flaws”

  1. This is very timely and profoundly insightful as it is disturbing to witness what we have tolerated for so long.
    Can I use some of it in my presentation to the Medical authorities?
    Thank you for sharing.
    All the “important” people should read this.
    It is like a University course that is badly need.
    Ken

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