saw a funny tweet the other day that essentially said: 2022 is our third try at getting 2020 right.
As we enter 2022, I’ll make a wild prediction: we’re not going back to early 2020 or what might be called “bP” (before Pandemic). Although we are collectively experiencing a deep and ongoing global health crisis and, in many cases, socio-economic trauma, there is room to feel modest hope for meaningful focused change - and shifting forms of capitalism may have something to do with it.
Before the Pandemic we failed to urgently address big systemic risks that have been brewing for a while. Maybe, as some have said, it took a shock to the global system to wake us up to the gathering systemic and often interconnected storms of climate, pandemics, cyber insecurity, social injustice, and more. Realigning market dynamics to address these ongoing crises and shifting notions of corporate purpose seem to be part of this unfolding story.
Shareholder, State and Stakeholder Capitalism
Underneath these systemic crises lies another reality: the dominant form of capitalism over the past half century – Milton Friedman’s “Shareholder Capitalism” where the shareholder is king/queen and short-term profits are everything - is under assault.
This prevalent form of capitalism has been variously blamed for causing, exacerbating, contributing to and/or being unhelpful in, addressing the aforementioned existential challenges. Such accusations are most evident in the debate about the oil and gas industry’s role in worsening the climate crisis while knowing full well for decades of the devastating consequences of too much CO2 to earth’s atmosphere.
“State Capitalism” is another long-standing form of capitalism:
“… an economic system in which private capitalism is modified by a varying degree of government ownership and control.” Merriam Webster.
Or as I would put it: a system where a more/less authoritarian political state controls the economy but allows for some free market activity. The second largest economy in the world – China - has the most prominent form of State Capitalism. Even there, however, the Pandemic plus other dramatic policy changes in the socio-economic and political realms under President Xi are impacting its form of State Capitalism into something potentially quite different from what it was – and the pandemic and climate crisis have something to do with this too.
Enter “Stakeholder Capitalism”:
“a form of capitalism in which companies do not only optimize short-term profits for shareholders, but seek long term value creation, by taking into account the needs of all their stakeholders, and society at large.” – World Economic Forum. Klaus Schwabe.
Stakeholder Capitalism at the company level means that management and the board are focusing not only on the best interests of their shareholders but also of other key stakeholders like employees, customers, suppliers, and communities.
Subsumed under this stakeholder model are two things:
- that shareholders gain greater financial and reputational value through a broader stakeholder approach
- a longer-term mindset (instead of quarterly earnings “shortermism”) creates more sustainable and resilient value creation
To paraphrase Howard Schultz the founder of Starbucks – employees are the most important stakeholders, and a happy employee means a happy customer which translates into better and more sustainable value creation.
Stakeholders and the ESGT Tsunami
ESG (the shorthand for environment, society, and governance) or what I call ESGT (plus technology) is part and parcel of the rise of Stakeholder Capitalism especially over the past 2 years, as key ESGT issues at companies (health, safety, diversity, inclusion, governance, cybersecurity)have been dramatically revealed, accentuated, and accelerated by the Pandemic.
Examples from the still unfolding Pandemic period of why pure Shareholder Capitalism won’t cut it anymore and why a multi-stakeholder approach will create greater resilience, longevity and value protection and creation abound:
- Cyber Insecurity. The private sector is not equipped to deal with the onslaught of nation state, criminal and underworld sponsored cyberattacks, most notably ransomware. Without the help of governments, private business is lost on this front. This requires business to consider government agencies as a key stakeholder to protect other key stakeholders of the business – especially employees and customers.
- Market Dynamics. During the Pandemic it became brutally clear that companies by themselves would not be able to withstand or even survive the economic, market and supply chain shocks alone without government intervention to protect a variety of social goods (healthcare, wage protection, worker safety, food supply, personal protective equipment, etc.) and by implication their key stakeholders (shareholders, employees, and customers).
- Crisis Healthcare. Without government intervention through incentives, investment and/or direct public private collaboration, we would not have witnessed the velocity and success of vaccine development both nationally and internationally.
Quo Vadis Stakeholder Capitalism?
So where is Stakeholder Capitalism heading? Is it a fad, a distraction, the real deal or something more significant?
The Figure below provides a high level, typologized view of the topic from the standpoint of where an individual corporation or other type of entity might sit based on two major considerations: (1) who the actual primary beneficiaries of a company’s results (or proclaimed beneficiaries in the case of greenwashing companies) are and (2) what the actual strategic drivers of the company/entity are: mostly profits, mostly purpose or a mix of both.
FIGURE
Below – from least to most likely – are four scenarios on the fate of Stakeholder Capitalism over the next couple of years.
Least Likely - The “Greedy Greenwashers” Scenario
Stakeholder Capitalism is no different from Shareholder Capitalism and is just a passing fad full of greenwashers and the typical market signs of greed and fear – whether in the equity or bond markets or in the raft of ESG service providers and other hangers-on that are trying to turn a quick buck. An eloquent proponent of this position is Tariq Fancy, ex-BlackRock sustainability chief.
Less Likely - The “Jury is Out” Scenario
Stakeholder Capitalism is incipient and its long-term survival as an important form of capitalism is uncertain. Not enough corporations and large businesses have fully embraced the concepts pioneered by the likes of Paul Polman at Unilever and other leading companies like Nike, Patagonia, and Microsoft. The jury is out.
“According to a Stanford University study based on a survey of over 200 CEOs and CFOs of companies in the S&P 1500 Index, most executives believe they are already doing a satisfactory job of incorporating stakeholder concerns into their corporate planning and not receiving sufficient recognition.” – Investopedia.
Likely - The “Seismic Change” Scenario
Stakeholder Capitalism is but a bridge to a whole new way of doing business - leading to an entirely new form of economic activity that is fundamentally different from pre-Milton Friedman Shareholder Capitalism and WEF sponsored Stakeholder Capitalism where profit is secondary to purpose and purpose will become the primary strategic driver. It could lead to something beyond capitalism that I am calling the Regenerative Economic Ecosystem where purpose and a multi-stakeholder beneficiary approach (aligned with key ESG and SDG themes) are the only things that matter, and profits are not only secondary but ploughed right back into regenerative and circular economy projects. It’s a turbocharged nonprofit non-capitalistic ecosystem focused on solving the biggest ESG/SDG challenges. The still under development Platform for Social Impact in Puerto Rico would be just such an example.
Most Likely – The “It’s Here to Stay” Scenario
The rise of Stakeholder Capitalism is well under way – especially evident in Europe but also in the US and elsewhere (Asia) especially buoyed by the biggest asset managers in the world (BlackRock, State Street, Vanguard) and increasingly regulators. It is here to stay and likely to become one of the predominant forms of capitalism over the next few years, continuing to develop and flourish in direct alignment with the UN SDGs, emerging climate and ESG reporting frameworks and requirements as well as unrelenting demographic and existential pressures.
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Quo Vadis Stakeholder Capitalism? Scenarios and Projections
Photo by Jon Tyson via Unsplash.
January 13, 2022
Shareholder and state capitalist systems are under pressure to change amid the climate and pandemic crises. Stakeholder capitalism has a chance to address some ills of previous systems, particularly in meeting ESG and SDG challenges, writes GEC Risk Advisory CEO Andrea Bonime-Blanc.
I
saw a funny tweet the other day that essentially said: 2022 is our third try at getting 2020 right.
As we enter 2022, I’ll make a wild prediction: we’re not going back to early 2020 or what might be called “bP” (before Pandemic). Although we are collectively experiencing a deep and ongoing global health crisis and, in many cases, socio-economic trauma, there is room to feel modest hope for meaningful focused change - and shifting forms of capitalism may have something to do with it.
Before the Pandemic we failed to urgently address big systemic risks that have been brewing for a while. Maybe, as some have said, it took a shock to the global system to wake us up to the gathering systemic and often interconnected storms of climate, pandemics, cyber insecurity, social injustice, and more. Realigning market dynamics to address these ongoing crises and shifting notions of corporate purpose seem to be part of this unfolding story.
Shareholder, State and Stakeholder Capitalism
Underneath these systemic crises lies another reality: the dominant form of capitalism over the past half century – Milton Friedman’s “Shareholder Capitalism” where the shareholder is king/queen and short-term profits are everything - is under assault.
This prevalent form of capitalism has been variously blamed for causing, exacerbating, contributing to and/or being unhelpful in, addressing the aforementioned existential challenges. Such accusations are most evident in the debate about the oil and gas industry’s role in worsening the climate crisis while knowing full well for decades of the devastating consequences of too much CO2 to earth’s atmosphere.
“State Capitalism” is another long-standing form of capitalism:
“… an economic system in which private capitalism is modified by a varying degree of government ownership and control.” Merriam Webster.
Or as I would put it: a system where a more/less authoritarian political state controls the economy but allows for some free market activity. The second largest economy in the world – China - has the most prominent form of State Capitalism. Even there, however, the Pandemic plus other dramatic policy changes in the socio-economic and political realms under President Xi are impacting its form of State Capitalism into something potentially quite different from what it was – and the pandemic and climate crisis have something to do with this too.
Enter “Stakeholder Capitalism”:
“a form of capitalism in which companies do not only optimize short-term profits for shareholders, but seek long term value creation, by taking into account the needs of all their stakeholders, and society at large.” – World Economic Forum. Klaus Schwabe.
Stakeholder Capitalism at the company level means that management and the board are focusing not only on the best interests of their shareholders but also of other key stakeholders like employees, customers, suppliers, and communities.
Subsumed under this stakeholder model are two things:
- that shareholders gain greater financial and reputational value through a broader stakeholder approach
- a longer-term mindset (instead of quarterly earnings “shortermism”) creates more sustainable and resilient value creation
To paraphrase Howard Schultz the founder of Starbucks – employees are the most important stakeholders, and a happy employee means a happy customer which translates into better and more sustainable value creation.
Stakeholders and the ESGT Tsunami
ESG (the shorthand for environment, society, and governance) or what I call ESGT (plus technology) is part and parcel of the rise of Stakeholder Capitalism especially over the past 2 years, as key ESGT issues at companies (health, safety, diversity, inclusion, governance, cybersecurity)have been dramatically revealed, accentuated, and accelerated by the Pandemic.
Examples from the still unfolding Pandemic period of why pure Shareholder Capitalism won’t cut it anymore and why a multi-stakeholder approach will create greater resilience, longevity and value protection and creation abound:
- Cyber Insecurity. The private sector is not equipped to deal with the onslaught of nation state, criminal and underworld sponsored cyberattacks, most notably ransomware. Without the help of governments, private business is lost on this front. This requires business to consider government agencies as a key stakeholder to protect other key stakeholders of the business – especially employees and customers.
- Market Dynamics. During the Pandemic it became brutally clear that companies by themselves would not be able to withstand or even survive the economic, market and supply chain shocks alone without government intervention to protect a variety of social goods (healthcare, wage protection, worker safety, food supply, personal protective equipment, etc.) and by implication their key stakeholders (shareholders, employees, and customers).
- Crisis Healthcare. Without government intervention through incentives, investment and/or direct public private collaboration, we would not have witnessed the velocity and success of vaccine development both nationally and internationally.
Quo Vadis Stakeholder Capitalism?
So where is Stakeholder Capitalism heading? Is it a fad, a distraction, the real deal or something more significant?
The Figure below provides a high level, typologized view of the topic from the standpoint of where an individual corporation or other type of entity might sit based on two major considerations: (1) who the actual primary beneficiaries of a company’s results (or proclaimed beneficiaries in the case of greenwashing companies) are and (2) what the actual strategic drivers of the company/entity are: mostly profits, mostly purpose or a mix of both.
FIGURE
Below – from least to most likely – are four scenarios on the fate of Stakeholder Capitalism over the next couple of years.
Least Likely - The “Greedy Greenwashers” Scenario
Stakeholder Capitalism is no different from Shareholder Capitalism and is just a passing fad full of greenwashers and the typical market signs of greed and fear – whether in the equity or bond markets or in the raft of ESG service providers and other hangers-on that are trying to turn a quick buck. An eloquent proponent of this position is Tariq Fancy, ex-BlackRock sustainability chief.
Less Likely - The “Jury is Out” Scenario
Stakeholder Capitalism is incipient and its long-term survival as an important form of capitalism is uncertain. Not enough corporations and large businesses have fully embraced the concepts pioneered by the likes of Paul Polman at Unilever and other leading companies like Nike, Patagonia, and Microsoft. The jury is out.
“According to a Stanford University study based on a survey of over 200 CEOs and CFOs of companies in the S&P 1500 Index, most executives believe they are already doing a satisfactory job of incorporating stakeholder concerns into their corporate planning and not receiving sufficient recognition.” – Investopedia.
Likely - The “Seismic Change” Scenario
Stakeholder Capitalism is but a bridge to a whole new way of doing business - leading to an entirely new form of economic activity that is fundamentally different from pre-Milton Friedman Shareholder Capitalism and WEF sponsored Stakeholder Capitalism where profit is secondary to purpose and purpose will become the primary strategic driver. It could lead to something beyond capitalism that I am calling the Regenerative Economic Ecosystem where purpose and a multi-stakeholder beneficiary approach (aligned with key ESG and SDG themes) are the only things that matter, and profits are not only secondary but ploughed right back into regenerative and circular economy projects. It’s a turbocharged nonprofit non-capitalistic ecosystem focused on solving the biggest ESG/SDG challenges. The still under development Platform for Social Impact in Puerto Rico would be just such an example.
Most Likely – The “It’s Here to Stay” Scenario
The rise of Stakeholder Capitalism is well under way – especially evident in Europe but also in the US and elsewhere (Asia) especially buoyed by the biggest asset managers in the world (BlackRock, State Street, Vanguard) and increasingly regulators. It is here to stay and likely to become one of the predominant forms of capitalism over the next few years, continuing to develop and flourish in direct alignment with the UN SDGs, emerging climate and ESG reporting frameworks and requirements as well as unrelenting demographic and existential pressures.
