PSG Stakeholder Capitalism: The Real Existentially Transformative Economic Paradigm.

 

Brief Prefatory Comment: This discussion of stakeholder capitalism asserts that there is a specific set of characteristics that a “stakeholder capitalism” model must have to persuasively replace shareholder capitalism as the dominant model for free enterprise economies. Specifically, it is necessary to explain what the best model is, why it is best and how it must be designed and function to make it the ultimately best free market capitalism paradigm. That case is made here.

Making the Case.

This article explains why stakeholder capitalism, correctly defined, is the best way to create long term value and wealth for corporations, economies and societies – local and global. Stakeholder Capitalism, as presented here, applies to all organizations, including, even if only indirectly, nations and their governance systems (representative democracy in the United States for example), economic systems - all organizations.

All readers, after reading and concurring, are invited to respond and to join in taking the next steps to make this 21^st century ultimately correct stakeholder capitalism model dominant, so that long term value and wealth creation for all organizations, economies and societies is the outcome, locally and globally!

Professor Adam Smith and His “Stakeholder Capitalism” Axiom.

Professor Adam Smith, through his two famous books in the last half of the 1700s, presented an axiom that can – and should - guide societies through their economic and political systems.

 Many – even most – students of Smith contend that his focus and thesis was on self-interest only. Most Smith researchers over the last 250 years have not discussed, and possibly have not understood, that he really connected self-interest, that of the butcher, baker, brewer et al to other-interest, that of the buyers and that of those other five (5) groups significantly affected by the seller. This paper explains this key connection. While he did not use these words, it is almost self-evident that he gave us this elegant axiom that connects self-interest and other-interest. Here it is in brief, and it is discussed in more detail below:

Self-interest value maximization is a direct function of optimization of the value provided by every organization to each of that organization's primary stakeholder groups (PSGs) – each relative to the others. 

The “primary stakeholder group” concept is discussed at length below.

 

 Unfortunately and in spite of the powerful advocacy of people like Professors R. Edward Freeman, Klaus Schwab and others in academia, along with business leaders like Larry Fink, Jamie Dimon, John Mackey, the 190 + CEO members of the Business Roundtable in the United States and so many others, Professor Milton Friedman’s profit-as sole-purpose shareholder capitalism model remains the dominant model in free market (private ownership of capital) economies.

 Professor Friedman, of the University of Chicago, proposed this model forcefully in 1970 and it is the way corporations – and really most organizations – have conducted themselves over the last 50 years. As such, it has been and remains the dominant capitalism model. It is grounded in a short-term, inward-focused and win-lose mindset – and it has controlled day-in and day-out business leadership, back office and factory floor conduct over the last 50 years. It has also been an integral part of business school education and, of course, the centerpiece of the financial community part of capitalist economies.

The natural question is straight forward: Why has stakeholder capitalism not caught on? Why has it not become the dominant model through which companies conduct themselves, especially over the time since about 1970?

The Problem in Brief.

The shortest answer is that we have not persuasively explained and compared this existentially transformative alternative model to the simple and easy to understand and narrow shareholder-focused (profit) model.

 And, even where we come close and attract leaders (like the BRT signatories), we have not presented a plain-language explanation of how to “walk the walk” using the stakeholder model

The “Short Termism” Role.

The shareholder profit-focused model largely revolves around the quarterly financial and operating reports companies must provide to the SEC in the United States (other capitalist nations have similar short-termism prompting requirements or protocols). Also a paper and proactively forceful teaching by Professors Michael Jensen and William Meckling in 1976 put the profit as purpose short termism-emphasizing model on steroids, with their principal-agent connection of company leaders to company owners (which they said are the shareholders). Thus, the 15 to 20 times multiple of CEO compensation to entry level (or even average employee level) compensation in the 1970s has become a 250 to 300 times multiple by 2015 or so.

 Even though companies do prepare longer term plans (one, three or five year plans for example), decisions are so often based on the financial market’s view of the very short term quarterlies and one year earnings expectations. This is fairly called a perverse incentive when considering what companies should do to produce best results for all in the medium and longer term. The Friedman model results in mostly short term behavior.

Stakeholder Capitalism Itself Owns Part of the Problem.

For example, virtually every proponent of stakeholder capitalism has advocated their own version – and at a minimum have often used different terminology and different suggestions about what it is and how to act it out – in the corporate suites, back offices and factory floors.

 Even more to the point, details are not provided for how to act out this existentially critical paradigm (model) for daily, weekly, quarterly, three year (even 100 year) plans, conduct and cultural behavior from the boardroom to the boiler room. This letter provides that model with its details. 

 Interestingly over the years, some company leaders say that their companies do consider all stakeholders as they make and sell their products and services – so what’s the beef? For example, it is almost a staple comment in the last paragraph in the Chairperson and CEO letters to shareholders in corporate annual reports to write “our employees are our most valuable asset.” This talk is weak, and a “bad on us” cop-out.

The Tragedy.

One tragic consequence of it all over the years has been underperformance of capitalism since about 1970. To be sure though, this 50 year “opportunity cost” is partially hidden by reasonably significant value and wealth creation flowing from the Friedman model over this period.

 Nevertheless, examples of underperformance are many, including several individual company mistakes like those of Enron, WorldCom, General Electric, Boeing, VW, Takata, etc.

And, the 2007-’08 great recession, a direct product of the shareholder (and the principal-agent perverse incentive) model almost brought the United States - and  global - economies to their knees. These and so many other examples are caused by practicing shareholder capitalism, with its dominantly short term mindset and allowance of bad behavior by leaders and employees. As one indicator, one study estimated the cost of the 2007-’08 great recession in the United States alone at about $2 trillion – some studies suggest a much higher cost.

 For example, one estimate is that the loss was as high as $6 trillion to $14 trillion, a range that approximates 33% to 60% of one year’s output of the United States economy. Other studies are in the same range – enough to say it was in the trillions of dollars for the United States alone – before analyzing the global cost.

The Solution: We Need an Existential and Transformative – Actionable - Model to Get to Stakeholder Capitalism’s Promise and Potential.

The Short Answer Solution.

We should turn to this axiom Professor Adam Smith gave us. He of course used  the language of his time in his two major books 250 years ago to present this  axiom that connects long term self-interest value maximization with other-interest value optimization. He might not have ever considered it to be a precise axiomatic concept, but it is!

 Here it is:

Self-interest value maximization is a direct function of optimization of the value provided by every organization to each of that organization's primary stakeholder groups (PSGs) – each relative to the others. 

Of course, right away we must ask; who are these “primary stakeholder groups” of every organization. The answer is:

The Primary Stakeholder Groups (PSGs) of Every Organization are:

a. Customers, b. Employees, c. Financial Investors, d. Suppliers, e. Communities in which it has a presence and f. Society at large (the general public interest).

Every business, in fact every organization (every group with a unifying purpose), will maximize its own long term value or wealth creation as a direct function of providing optimal value to each of these six (6) primary stakeholder groups. There are not seven (7) PSGs and there are not five (5) PSGs. There are precisely six (6) PSGs for every company – every organization. It is finite, definite and not open-ended.

A little Longer Answer.

The angels are in the details, of course, for this ultimate definition of stakeholder capitalism.

For example, it is essential that we know what each PSG values and what people in their role as buyers in the marketplace value. We also must know why and how the self-interest relationship to other-interest is an axiomatically correct relationship. That explanation follows. In a nutshell, though, the universally treasured inalienable rights of all people, with the core and ubiquitous virtues and traits we all share (around the world) in pursuit of happiness and the full life well lived are best and only satisfied through this relationship. People everywhere, by their nature – the better angels of their nature – will yearn for and embrace this capitalism model – it focuses on them!

The summary of the stakeholder model presented here, including the critically important concept of primary stakeholder groups (PSGs), is supported by and incorporates several pillars of human characteristics, including how people choose to behave in their role as markets for goods and services. These characteristics represent and truly are at the center of the best of human nature around the world.

 

The Supporting Pillars:

These pillars are grounded in the special and wonderful aspects of what can generally be described as the best of human nature in all parts of life – including life acted out in the marketplace between sellers and buyers of goods and services locally and globally. And, capitalism can be the key economic system catalyst that enables all of these characteristics to flourish, through this existentially correct model in action.

 

 The Pillars:

1.       First, of course, are the six (6) primary stakeholder groups of every organization – companies (for profit and non-profit), governments, schools, nations, etc.

2.       The things most valued by each primary stakeholder group of every organization.

3.       The unalienable rights of every person in the world.

4.       The universally (ubiquitously) shared virtues of all people around the world.

5.       The traits (behaviors of people) leading to these virtues.

6.       The better angels of our human nature (all people and peoples around the world).

7.       The gold standard leadership characteristics for all organizations.

8.       The gold standard cultural characteristics for all organizations.

9.       The centrally important role of ethics and ethical behavior for all organizations.

10.     The robust understanding and conduct of fiduciary responsibilities of all organizations.

11.     Happiness.

All stakeholder capitalism models, like the 2019 BRT new purpose statement and the statements and manifestos from Klaus Schwab’s World Economic Forum (WEF) work over these 50 years will only be actionable through these pillars – otherwise as said by some, it would all indeed be mostly just anodyne rhetoric!

 

Again, the Angels are in the Details.

Importantly, there are details for each pillar – all very kitchen table understandable, but even the details need some further explanation to enable an organization to fully live them.

So, there will remain more to explain. After all, a written explanation of the “existentially transformative” model for getting capitalism right should not fit on the back of a pack of matches!

 

The Next Steps.

This article asserts the following:

1.     PSG Stakeholder Capitalism will result in the highest long term wealth and value creation for societal well-being – for companies, for local and global societies and economies and for all people everywhere. Both explicitly explained here and readily deduced where not explicitly explained, the why question is answered here.

 

2.     The explicit answer to the how question is presented in some detail in this narrative. Further detail is readily available for the interested reader.

 

 

3.     The answer to the what question (what economic system - shareholder capitalism, stakeholder capitalism or some other system (others have shown that capitalism of either form is superior to all other economic systems)) – is now self-evidently clear.

 

4.     PSG Stakeholder Capitalism is the ultimately best system for all organizations, nations, local and global economies and all people everywhere!

 

 

Front of Mind Focus on All Six (6) PSGs – The Organizational Imperative!

A Few Final Thoughts:

1.     This existentially transformative change in organizational culture and behavior is necessary to finally gets capitalism right: modeling the best of people in their various roles in economies.

2.     The cultural changes and leadership changes in companies must go from the boardroom to the boiler room.

3.     Co-equal front-of-mind focus on each of the six (6) PSGs is essential to A. Maximize long term wealth and value creation for the enterprise, B. Provide optimal long term value for each PSG and C. Best contribute to maximization of local and global societal well-being.

In fact, the Front of Mind Focus on All Six (6) PSGs is at the heart of putting into action what we all should know and what Adam Smith said forcefully in his own words. It is capitalism’s Organizational Imperative!

When PSG Stakeholder Capitalism is universally adopted and acted out, the ultimately equitable and highest long term wealth and value creation economic system will be in place.

Always as an implicit complementary result, all national governance systems will be drawn to move toward adopting the underlying axiom that the moral philosopher gave us for economies 250 years ago – an ultimately beneficial outcome for all people and peoples everywhere!