Stakeholder Capitalism: Creating (Not Capturing) Value
The idea of stakeholder capitalism, that the interests of all major stakeholders (i.e. investors and workers) should be treated equally in corporations, has been implied as the way of the future in this recent blog post from the editors of the Harvard Business Review, and I think this idea is absolutely right. Movement in this general direction is not just coming up as a response to the recession—though you could say our recessionary times have made us aware of the growing importance of stakeholder capitalism in the first place.
Since the 1980s, markets have been stagnant and mature; there hasn’t been much real growth. Where there is growth, it’s often a case of resources previously controlled by the state becoming publicly available (i.e. in Russia and China); these resources are acquired relatively inexpensively and capital growth advantages are realized, though this growth is the exception rather than the rule.
In stagnant and mature markets, it’s very difficult for companies to differentiate and find their competitive advantage. And there’s the question of how to realize value: are we in a world where companies capture value or create value? For the past twenty-five years, value has mostly been captured. How? Financial companies were reasonably successful in creating complex financial instruments that worked on paper but lacked real value beneath them. These instruments lasted through previous booms and busts, but they never actually represented real wealth, and with their collapse came the global financial crisis.
And so in mature markets with companies seeking to capture value where there isn’t any, how can value be created? It has to be done slowly and collaboratively—hence the term ‘stakeholder capitalism’. The whole community has to be involved and be aware that creating value and capital growth can take a long time.
Stakeholder capitalism for the US and UK suggests a major political shift, making governments more like their German or Swiss counterparts. This includes collecting more taxes, incentivising steady growth—nothing dramatic—but also great perks that come with an investment in infrastructure capital: great healthcare, minimal crime, safe and excellent public transport, services, and other infrastructure. However, a stakeholder capitalist society shouldn’t do what France, Germany and Switzerland have done in response to the financial crisis, namely doing too much to protect dead capital and dead jobs. There needs to be a compromise: a shareholder-style market dynamism in a stakeholder market-driven world.
For example, in a stakeholder capitalist society, trade unions wouldn’t defensively negotiate ‘against’ management for jobs—they would work with management to create new strategic thinking. That’s what Obama is forcing the trade unions to do at Chrysler. Now are the union leaders actually up to thinking that way? The answer is probably no, but it’s too early to critique them; I doubt any German trade unions are thinking that way.
In a stakeholder capitalist society, employers and employees would need to be more dynamic in slow growth markets, particularly with regard to retirement. When one retires, he or she gets a pension. Employers often keep extending one’s date of retirement — why couldn’t they send a more motivating message by helping older employees to develop their third or fourth careers? The security of a pension could come from the state or private means, but employers could put money forward to prepare people to meet fundamental social needs. There is a need for better social service provision in the US, so why not have people who are trained at university (who will have a pension from the state) provide social care? These kinds of ‘employer looking out for employee’ schemes in a stakeholder capitalist society create the relational capital that keeps a society pleasant to live and participate in.
Stakeholder capitalism is thus the combination of relational capital and infrastructure capital, creating relationships on a human and organizational scale that develop society and make it a better place.
The writers of the Harvard blog post don’t quite go this far, but why keep Chrysler going unless it can work towards a stakeholder capitalist position? Chrysler (as well as other American car companies) is making cars that are big and clumsy, not efficient and barely attempting to go green. If a long-term sustainable future could be created for Chrysler, with investments in their infrastructure that help them to help society, perhaps people could be motivated to move away from petrol and towards a greener Chrysler vehicle.
Stakeholder capitalism is already being embraced by some companies, including John Lewis in the UK, BMW in Germany, and Mondragon Motor Cycles in Spain. However we have not yet seen it more broadly at a societal level. For that to happen, stakeholders need to play a larger role in shaping a company’s strategy, and the shareholder’s role needs to become more operational—both need to draw on different disciplines. It would be a societal shift, an economic shift that would get rid of the booms and busts the Anglo-American world has seen and move towards the steady growth that Germany has traditionally had, with people confident in the system (for example renting their homes at relatively low rents rather than buying and expecting fast capital growth).
A shift in thinking has to take place in order for the whole world to embrace stakeholder capitalism. I believe it is the way of the future, but how quickly stakeholder capitalism will be embraced remains to be seen.
