Profit Capitalism and/or Stakeholder Capitalism (SC): The 250 Year Conundrum - Solved!

Introduction. 

It is long past time for stakeholder capitalism (SC) to be correctly defined, taught and practiced. It is also time for the dominant profit as sole purpose capitalism model to become part of SC, important but not dominant.

 

The Challenge.

The years since about 1970 have witnessed many attempts to have SC replace Professor Milton Friedman's profit-as-sole-purpose capitalism. Virtually if not literally all have failed though. The failure is in part caused by incomplete and poorly explained, understood or otherwise flawed SC proposals. It also has failed because many of its critics say that it is a plot by progressives to take profit from companies and distribute them to their causes, a political criticism, or that it is just a public relations ploy.  

There have also been opportunity costs under profit capitalism, both through failure to create full value through a better model and through measurable value and wealth destruction. This opportunity cost must end. 

This narrative presents the ultimately best capitalism model going forward. And, it is only through SC, correctly defined, taught and implemented - practiced day in and day out - that it will happen.

For companies, economies, societies and nations where profit-focused capitalism is the dominant economic model, the benefits over the years are obvious. While there have been and are a few different variations on the core profit model, capitalism has indeed been the best economic system catalyst for value creation when compared to socialism. It is one of the best ideas ever conceived for people everywhere.

The dominant core capitalism model, especially since about 1970 or so, has been the Milton Friedman profit-as-sole-purpose model. It was and is characterized as the model that Professor Adam Smith intended in his seminal writings in the late 1700s. The value created over these last 50 years through the profit model is evidence that makes capitalism be properly acclaimed as one of the best ideas ever created for humanity.

 At the same time, the last 50 years have produced systemic business decision behavior that harmed corporations and their stakeholder groups, and instances of economy-wide value destruction. The Enron implosion and the 2007-’08 great recession are cases in point. It is the narrow focus on profit that Friedman dogmatically proclaimed that is at the heart of the behavior that caused these and other value destruction instances over the period. So, the tragedy is that virtually all variations of SC offered over the last 50 + years have not been correctly defined and again, as importantly, critics of SC virtually always accuse proponents of SC of having ulterior motives, claiming that SC will result in long term (and short term) financial harm to the company (the organization). Wrong on all counts when SC is correctly presented and practiced.

This paper presents the model that truly follows Professor Smith’s teaching. Adam Smith wrote about two main subjects, the Theory of Moral sentiments and The Wealth of Nations. As a moral philosopher and an economist, it is natural that his beliefs would come together in his world view. The resolution of the conundrum we are dealing with follows, and Professor Adam Smith would agree with it.

That is, we can do even better than we have using the Friedman model.

We have been underliving our economic lives, sub-optimizing the long-term achievable wealth and value creation for companies (organizations), economies, nations, people and peoples everywhere.

The Conundrum and The Solution.

Stakeholder capitalism, SC, correctly defined, taught and practiced, is compatible with profit-focused capitalism (it incorporates it). It can and will raise every organization that adopts it to a higher long-term value and wealth creation level than has the Friedman et al profit-as-sole-purpose model. 

This outcome for the company (any organization) is a direct function of optimizing the long-term value the company provides to each of its six (6) primary stakeholder groups (PSGs), explained below.

To reiterate for emphasis before explaining our SC paradigm: We as societies and nations, not to mention economies, companies and business in general have been and are underliving our lives. Opportunity costs over the last half century have been great – both in terms of uncreated value and wealth and in terms of value and wealth destruction (again, think 2007-’08 great recession, Enron, VW, Boeing and so many other examples of avoidable harm) directly caused by managers, leaders and cultures all wrapped up in the profit model!

If it is as straight forward as finding the correct definition of SC, teaching it and practicing it to raise capitalism to its highest long-term value and wealth creating level, why hasn’t it been done already?

It has not been done before precisely because of the conundrum: SC has been considered an either-or “alternative” to the Friedman profit or shareholder model of capitalism. The Friedman profit model or dogma really is the narrowest way to define the value expectations of the investor stakeholder group of a company, an organization.

Just the opposite of “either-or” is true. The solution: SC is in fact the essential both-and (solution) paradigm and will optimize the long-term value and wealth creation of this investor group to its highest level – along with optimizing the long-term wealth and value creation for each of the other five (5) primary stakeholder groups (PSGs) of every organization.

Six Primary Stakeholder Groups and Providing Optimal Long-Term Value to Each of Them.

There are precisely six (6) primary stakeholder groups (PSGs) for every company, every organization. They are customers, employees, investors, suppliers, communities where the company has a presence and the general public interest. These are the groups whose lives and existence are significantly affected by every company, every organization.

People in their roles in each of these groups place value on a finite number of things that a company can provide them. When these valued things are correctly understood and served by the company, the PSGs will treasure their respective connections to the company and stay with it – as customers, employees and so forth through and including the general public interest PSG. It is a straight-forward and even exquisite model.

The PSG capitalism model also, conceptually and behaviorally puts the lie to the criticism over the years that we can only focus on one objective function. Again, Adam Smith's two main works directly contemplate this PSG model.

Readers and true students of Professor Adam Smith will be, or should be, quick to understand and agree.

Whether Smith meant his teachings precisely this way or not, he should have. It is intuitively obvious. Professor Friedman’s dogmatic litmus test for excellent company outcomes will only be satisfied if this PSG value optimization purpose is satisfied. Why? Because it is only by achieving this purpose that the long-term outcome of maximization of a company’s wealth and value creation can be realized.

It is all both intuitively obvious and in perfect harmony with people acting in accordance with both their better angels and their enlightened self-interest!

Final Note.

 We have presented the top-level conceptual PSG model of stakeholder capitalism (SC) in this narrative. The angels are of course always in the details. There are details that every capitalist economy must embrace.

 Every business school that decides to teach it (curricula incorporation and faculty expertise) and every business (organization) that decides to adopt it (leadership and cultural commitment) must become steeped in it for the full long-term and existential transformation to PSG capitalism to flourish.  

So, more to come!