Is it Time for Capitalism 2.0? and, Whither Democracy Starting in 2025; a Glance.

This post takes a deep dive into shareholder primacy capitalism, which we call capitalism 1.0. It also presents a deep dive into primary stakeholder group (PSG) capitalism, which we call capitalism 2.0. By deep dive we mean a presentation and discussion of the core purpose of capitalism as Professor Adam Smith contemplated it about 250 years ago and a discussion of the currently dominant model of capitalism that Professor Milton Friedman first explained in 1970 in his famous New York Times Magazine article.

It also offers a brief glance of where democracy might be headed beginning in 2025.

Is it Time For Capitalism 2.0?

The answer is yes. This opinion presents and proposes the model we believe should become the dominant capitalism model going forward – for economies, companies and societies – in the best long-term interest of all people and peoples everywhere. It should be adopted as Capitalism 2.0. It is offered as “primary stakeholder group (PSG) capitalism” and will be explained in brief in this paper.

We consider profit-focused capitalism, or “shareholder primacy capitalism” to be Capitalism 1.0.

First though, a brief thought about whither democracy beginning in 2025 in the United States:

 The capitalism core principles explained in this post do indeed apply to our democracy as well. This glance suggests that:

1. An outward-focused long term and value-optimizing mindset and 2. As in primary stakeholder group (PSG) capitalism, a finite number of primary citizen groups in a democracy exists (like people as citizens, taxpayers, etc.). The concept fits representative democracy in accordance with the expectations of the founding fathers. Our constitution contemplates it.

The behavior of the Trump president-elect group, including Donald Trump and his top advisers Elon Musk, Vivek Ramaswamy, Steve Bannon, Stephen Miller and others is precisely the opposite mindset; short term, inward-focused and win-lose.  Among other widely proposed policies that can bring adverse consequences to the people of the nation, the ideas of tax cuts for high income individuals and large corporations and tariffs on imports from several countries are substantive examples of the oligarchical governance model – far from representative democracy and pursuit of the common good, the public interest.

So, we address capitalism 1.0 and 2.0 in this opinion. Representative democracy governance compared to oligarchical governance must also be squarely addressed promptly, but not in this opinion. Congress, the Judiciary and, if possible, the incoming Trump administration need to address this issue and rely on our constitution as the main criterion for getting the decision correct!

 The Profit or Shareholder Primacy Model.

It has been the dominant economic model in the United States for over 50 years. Professor Milton Friedman introduced and explained it in his New York Times magazine article of September 13, 1970. As we will discuss, it has been the catalyst for significant value and wealth creation and has been good for society. But, it is sub-optimal. It is second best. It has allowed or caused important instances of value and wealth destruction over the years – precisely because it is focused primarily on only one of the six groups companies affect in a significant and treasured way.

All companies, all organizations, have six (6) groups they affect in this meaningful way. The groups are Customers, Employees, Investors (including Shareholders in publicly held companies), Suppliers, Communities where the company has a presence and the General Public Interest. This model can be called the primary stakeholder group (PSG) capitalism model.

It is if and only if each company optimizes the long-term value and wealth creation of each of these groups, each relative to the others, that it will produce as an outcome the maximization of the company’s own long- term value and wealth creation.

The profit model is grounded in self-interest. The primary stakeholder group model is grounded in other-interest. In fact, the difference can be described as the difference between induced avarice and better angel-based altruism. What a profound difference!

As we will see, people as markets and people in general are more pleased with the latter than the former.

Adam Smith and Milton Friedman.

 First though, Adam Smith, the father of modern economics and Milton Friedman, the father of capitalism 1.0 must be acknowledged. Each of these professors explained their core beliefs, Smith about 250 years ago and Friedman about 50 years ago.

Professor Smith would be disappointed to see how the dominant model for capitalism over the last 50 years, the “shareholder primacy model” is practiced today. Professor Friedman, a disciple of Smith, would be both affirming and disappointed – even though he authored the “shareholder primacy model” first in 1970.

So, what is wrong with the “shareholder primacy model,” the profit or first-among-equals shareholder primacy model?

As practiced over the last five decades it has been the catalyst for significant value and wealth creation in capitalist economies - certainly in the United States. It is characterized as one of the best ideas to ever come along in service to society.

 However, it has also been the main cause of the behavior that caused the 2007-’08 great recession, the Enron implosion, the recent and tragic problems at Boeing, the absolutely tragic murder of the CEO of United Health Care and many other value destruction instances.

These examples range from single company behavior to economy-wide behavior (indeed global economic behavior) to some societal beliefs and behavior.

Professor Friedman.

When Professor Friedman wrote about the free enterprise system in 1970, he presented two core ideas that can help us all understand his teaching and thinking best:

1.     A corporate executive is an employee of the owners of the business. He has direct responsibility to his employers….to make as much money as possible while

2.     Conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom….

The first idea establishes the shareholder primacy model. The second statement acknowledges that there are societal constraints, legal and ethical constraints that place side rails on profit as the sole purpose.

His point also was that “…in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…”

His ideas were then expanded upon in the late 1970s and beyond by other academics and practitioners to suggest that the manager’s responsibility as the agent of the owners could be best served by linking the manager’s compensation closely to shareholder returns. While there has been much written about this connection idea (whether it was correctly understood or not), it is true that corporate CEO compensation compared to entry level or average employee compensation in the 1970s of about 10 to 15 times had increased to about 300 to 350 times by the 2010-2020 time period. It is also true that the value and wealth creation results, while significant, have infirmities – as indicated above - that are harmful.

So, the Friedman model, capitalism 1.0, as good as it has been, has problems.

 

Professor Smith and Us.

What about the proposed “primary stakeholder group” (PSG) model?

The following statements from Professor Adam Smith sum up its reason for existence. These statements show that he gave us an axiom tying self-interest to other-interest in an axiomatic and functional way.

That is, long term self-interest value and wealth maximization is a direct outcome for the company (organization) of optimizing the long term other-interest value and wealth optimization of each of its six (6) primary stakeholder groups, each relative to the others. It is indeed a better angels-based model and Smith, a moral philosopher by education explicitly describes it as such in these statements:

1.     “The property which every man has is his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable…To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor is a plain violation of this most sacred property.”

2.    “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

3.    “Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favourable to the happiness of all.”

4.    “He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.”

 

 It is as clear as can be that he connected focus on others with focus on self. He gave us an axiom that connects self-interest and other-interest.

 

Returning to Our Question: Is it Time for Capitalism 2.0?

 

Over the time since Friedman’s 1970 proclamation of the profit-as-purpose model, (capitalism 1.0), several attempts have been proposed as alternative capitalism models. Virtually all of them fall under the umbrella terminology of “stakeholder capitalism.”

 

Two helpful points in time that illustrate the advocacy of stakeholder capitalism are; a. Professor R. Edward Freeman’s 1984 book on Strategic Management: a Stakeholder Approach which comprehensively addressed the subject to b. the Business Roundtable’s (BRT) adoption in 2019 of a new statement of purpose for corporations, which affirms the essential role corporations can play in improving our society – through serving the main stakeholders of companies.

These two explanations and affirmations of stakeholder capitalism, one in 1984 and the other in 2019, while each is very important (Freeman can be thought of as the father of stakeholder capitalism) have not really gained much traction over those 35 years – and still have not as of 2024!

 

 PSG capitalism in this narrative does fit under this umbrella. However, it is the first proposal that represents an existentially transformative and actionable way for companies (all organizations) to behave in service to their six primary stakeholder groups.

As a result of adoption of the PSG capitalism model by all companies and all capitalist economies, the highest long-term value and wealth creation outcomes can be achieved. This outcome is what Professor Adam Smith envisioned, what Professor Friedman must have envisioned and is the outcome that serves society best.

 

It is time to adopt PSG Capitalism – Capitalism 2.0!

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!

The Ultimate Victory for Stakeholder Capitalism

 

The Ultimate Victory for Stakeholder Capitalism:

 The 50+ year Debate: Shareholder versus Stakeholder Capitalism is Resolved

 The Fundamental Mistake of Treating the Corporation’s Long Term Value and Wealth Creation as Synonymous with the Long Term Value Created for Shareholders (The Friedman Model).

During the last 50 years people have been discussing the purposes of a corporation in a capitalist economic system. Why? Because in 1970 Professor Milton Friedman declared increasing profit for shareholders of corporations as the only purpose of business. His doctrine has been dominant in capitalist economies ever since. However, others have argued that there are other distinct groups affected by business and that business has a responsibility to consider those groups as well.

One effect on corporate existence and well-being since the 1970s has been that the shareholder focus has relegated these other groups to a lower status in terms of company decision-making, cultures and priorities. This never should have happened.

The critical overriding mistake in the 1970 period was to treat the enterprise (corporation or company, organization, etc.) as synonymous with the shareholder group from a value creation standpoint. That is, maximize share price, earnings   per share (eps), net present value of free cash flows (npv), etc. for the shareholders and the enterprise’s long term value and wealth creation will also be maximized. Wrong!

Before addressing the shareholder-stakeholder debate, a further word about the dominant Friedman profit model is in order. That is, a bit more about why there is a debate at all. Why change from the Friedman profit-as-purpose model for capitalism? After all, it has resulted in significant value creation in capitalist economies for 50+ years – and continues to this day, even with the assertion about the “critical overriding mistake.”

 

 Some Examples over the last fifty years of Value Destruction Directly Caused by the Narrow Friedman Profit-as-Sole-Purpose Model, for Context.

The 2007-’08 great recession is the largest example of value destruction directly flowing from the narrow profit model. More than $2 trillion of value destruction was caused in the United States alone. The Enron implosion, the WorldCom disaster and many other value destructive examples – the Boeing 737 800 Max problem, the Takata airbags problem and the VW emissions scandal are direct results of business leaders acting in accordance with the profit model. In fact and importantly, the tying of leadership compensation to share performance (a proposal from the mid-1970s in an article by Professors Michael Jensen and William Meckling that caught on in a pervasive way) is an explicit mechanism that takes business leaders’ eyes off the consequences to the other five primary stakeholder groups (PSGs, defined below) in order to produce near term share price increases and leadership compensation increases. Enough.

 

The Debate.

This created a long running and important debate about the purpose of companies (business) in a capitalist economy. Broader views that companies must pay attention to other groups too, like employees, customers, suppliers, etc. in addition to shareholders have been regularly offered from academia, some business leaders and others. The debate has been going on for 50+ years. The advocates of the broader vision of capitalism argue for models that fall generally under the umbrella of “stakeholder capitalism.” We use “SC” to represent it in the remainder of this paper.

So, SC advocates have presented a number of models for how to create value in addition to profit - value for other groups, stakeholder groups. Some SC proponents, but not all, have even identified the six primary stakeholder groups that we present here as most important. Identifying the primary stakeholder groups of a company is one critically important step.

A full model that also explains why and how a specific SC model can and should become dominant for capitalism to be the ultimate catalyst for long term value and wealth creation has been missing all these years.

We do exactly that in this brief paper – and we are confident Professor Adam Smith would agree with our model. Professor Milton Friedman himself would also join in supporting our model.

First, some criticisms of SC as understood over this 50 year period.

Just this year, we have two recent criticisms of SC, criticisms from two respected and widely known American journalists - George Will and Steve Denning.

 Mr. Will and Mr. Denning have each written articles in 2022 criticizing SC (Stakeholder Capitalism). Their criticisms are discussed and dismissed below.

We then present our model (the ultimately correct capitalism paradigm). We demonstrate that our model is just what the world has been waiting for to make the transformative and even existential change from the narrow but dominant profit-as-sole purpose of business model to the primary stakeholder group (PSG) model of capitalism – that Adam Smith really taught and that Milton Friedman would surely support.

 So, the Two Examples of Criticism of Stakeholder Capitalism.

As explained above, our two highly respected journalists have recently tried to kill it in articles, using the most common criticisms.

George Will, known far and wide, tried to kill it in his Washington Post opinion piece in its June 22, 2022 issue. Steve Denning, also a leading writer in many publications and a frequent contributor in Forbes, tried to kill it in his article in the January 5, 2022 Forbes issue and in virtually the same piece in an Agile Week event, on about April 29, 2022. Assertions or beliefs in their articles are presented here, along with our gentle but absolute dismissal of their opinions:

1.     George Will: Mr. Will is concerned that the economic dynamism in the existing capitalism model will be lost if stakeholder capitalism ever becomes the dominant model. Quite the contrary: The stakeholder model presented here will breathe full life into the dynamism of capitalism – it will be done right, and be more dynamic for right reasons. He also characterizes SC as a trick of progressives to take the profits from companies in a capitalist economy, like in the United States, and distribute those profits to whatever groups express an interest in them or claim they should receive them because they are affected by the company in some way (that is, the number of stakeholder groups is unlimited – nonsense). He is so wrong that he does not deserve a rebuttal. First, SC correctly defined and made actionable is absolutely apolitical. And, the stakeholder model presented in this paper will increase the dynamism, not harm it. Also, the notion of an open-ended number of stakeholder groups is a scare tactic at best and a deep misunderstanding at worst – Mr. Will’s use  of the Oxford Reference definition of stakeholder to the contrary notwithstanding. Finally, he advises all to “recoil” from this idea. With George Will’s wonderful credibility as a wise leader on public policy matters, his opinion piece can result in readers and leaders following his advice, which would be a terrible outcome on this important SC matter.

 

2.     Steve Denning: Mr. Denning, once an advocate of a broader definition of the groups a company ought to focus on as those it significantly affects by its very existence (he was formerly an SC supporter of sorts), has concluded that the “true North” of a company is, as Peter Drucker proclaimed in 1954, the customer. Everything the company does is predicated on creating a customer. Any expansion, he says, to focus on more than one stakeholder group has almost always resulted in “garbage can organizations.” In fact and following Drucker’s reasoning, Denning calls the Friedman shareholder focus “an unacceptable form of institutionalized selfishness.” Mr. Denning goes on to explain his beliefs about other failings of both the narrow Friedman shareholder focus and the broad stakeholder focus. He also believes that “agile” companies, ones that adopt the agile model of company behavior and culture are the way of the future. As with Mr. Will’s economic dynamism, the stakeholder model in this paper will put full wind into the sails of companies that also embrace agile behavior models (in fact, the PSG capitalism model presented here defines the best and ultimate “North Star” any organization could have). His assertion about “customer capitalism,” is quite rational as an alternative to shareholder capitalism, but it is still a narrow focus on the things valued by just one of the six primary stakeholder groups of every organization. As explained below, it is the main valued things of each of the six (6) primary stakeholder groups of every corporation that the business must know and optimally serve to have the business achieve its own highest long term value and wealth creation as an outcome of getting capitalism right – not as its purpose!

 

Like George Will and Steve Denning, others have criticized SC over the years, but virtually all criticisms address the several incomplete – though directionally correct – attempts to bring SC into a dominant role in capitalist economies.

 

Primary Stakeholder Group (PSG) Capitalism.

While alternative proposals have been offered, none has yet become dominant. This paper is intended to change that, once and for all.

Every company has precisely six (6) primary stakeholder groups (PSGs) – not five or seven or any other number. They are customers, employees, financial investors, suppliers, communities where the company has a presence and the general public interest.

Each of these PSGs values certain things most – because of its role. It wants to receive that value from its engagement with the company – knowing of course that it (the PSG) must provide certain specific value to the company in turn. It is a straight forward relationship.

 For the company though, the obligation is always to optimize the value it provides to each of its six PSGs, each relative to the others – not a difficult task, but it requires a transformational, even existential, change to company mindsets and behavior in order to become the dominant capitalism model going forward. This adds a natural complexity to the matter. It is still not difficult. This complexity is exactly the natural phenomenon that has allowed the Friedman model to do pretty good for shareholders since the 1970s while a. not providing optimal long term value for each of the other five PSGs and, b. as a direct result, falling short of the ultimate value creation opportunity for both the company (the enterprise) and the economy – and as a result for people and society.

 

 

A Summary statement on Primary Stakeholder Group (PSG) Capitalism.

 PSG capitalism, unlike virtually all  other attempts over the years to have “stakeholder capitalism” become the dominant paradigm practiced in companies and taught in business schools, is grounded in those things valued by people in their roles – as listed above - as customers, employees, investors, suppliers, communities where they have a presence and the general public interest.

This paradigm, or model, presents the unassailable truth that the company’s (enterprise or organization) long term value and wealth maximization outcome is a direct function of optimizing the value the company provides to each of its six (6) primary stakeholder groups - not seven (7), not five (5) and certainly not the unlimited number suggested by George Will.

 

 

An Important Word about Company Mindsets. There are two main mindsets that companies can have - either the good mindset or the bad mindset.

The good mindset is long term, outward-focused and value-optimizing for each PSG relative to each of the others. The bad mindset is short term, inward-focused and win-lose.

Advocates of stakeholder capitalism over these last 50 + years have not explained this model well enough (nor perhaps understood its nuanced reality clearly enough), and advocates for the Friedman shareholder capitalism profit model have clung to its 1^st among equals PSG position over the years – to the long term detriment of all.

 

Why focus on what people value in their “PSG” roles?

 

The implicit assumption underlying Professor Milton Friedman’s teaching that the sole obligation of a business is to increase its profits for shareholders is that profit is the one and virtually only thing shareholders value.

 

Just as profit is certainly valued by investors, there are some other things   investors value. Similarly, customers have a number of things they value and look for from the business, as do employees, suppliers, the communities where the business has a presence and, in the largest context, the general public interest values certain things from a business.

Here are indicative and important but not necessarily exhaustive lists of the main value expectations of each PSG of every business:

1.     Customers: 1. High quality, 2. Reasonable prices, 3. Kindness, 4. Companies that treat their employees well and 5. Companies that are good citizens.

2.      Employees: 1. Opportunity, 2. Fair compensation, 3. Security, 4. Opportunity and Challenge to achieve as individuals and teams/groups and 5. Company conducts itself as a good neighbor, a good citizen.

3.     Suppliers: 1. Fair dealing, 2. Long term partnership opportunity mutually earned, 3. Great treatment of employees, 4. Positive citizenship conduct of company and 5. Enjoyable to work with.

4.     Investors: 1. Best value creation from their funds, for any period but especially over the long term, 2. Positive company participation in communities, 3. Great company treatment of employees, 4. Great company standing in society (loved), 5. Gold standard leadership in the company and 6. Full participation in society.  

5.     Communities in which it has a presence: 1. Good citizen in local communities, 2. Long term participative partner in community well-being, 3. Great company treatment of its employees, 4. Full company involvement in environmental and societal stewardship for the long term and 5. Openness.

6.     Society (The General Public Interest): 1. Great local and global citizen, participative and engaged, 2. Great social and environmental steward, long term, 3. Willing partner and participant with others (including governments) in serving the public interest and 4. Excellent treatment of its employees, suppliers and neighbors.

 

When a business has a leadership and culture that recognizes and serves these valued things for each of its PSGs (the “stakeholder” groups whose lives the business significantly affects in the present and over the long term), the business will maximize its own long term value creation and wealth as its ongoing and ultimate outcome.

 

This is not rocket science. Rather, this is how we live our lives, and business must go with this reality. They have not yet – although a few are trying and doing well.

 

 Nevertheless, this PSG model of capitalism was not contemplated by the Friedman model (except through the “invisible hand” sterile notion that Professor Adam Smith himself did not emphasize).

And, while Professor Peter Drucker did say that “the purpose of a business is to create and keep a customer,” he said many other things treasured by the business and economic communities worldwide. Creating and keeping a customer is best done, the PSG model holds, by knowing and genuinely optimizing the value it provides to each PSG – now and over time.

 

Is There More?

There indeed is more, and it is easily deduced but takes explanation at the same time.

 “Easily deduced” means that it is all based on the globally ubiquitous virtues (and traits leading to these virtues) treasured by all people, the globally unalienable rights of all people, a robust understanding of fiduciary obligations of a business and the essential importance of ethical behavior by the business at all times.

 

 This paper is inviting the reader, and the business and larger societal community, to consider the better angels of our shared human nature acted out in the context of the marketplace of buyers and sellers.

PSG stakeholder capitalism, adopted and implemented in business schools and in companies, as briefly explained in this paper, will maximize the likelihood that long term maximization of the wealth creation of the enterprise and of entire economies – all societies and peoples – is achieved as the outcome of PSG capitalism in action.

 

.

 

Summary.

This article, in an all too brief explanation, dogmatically asserts it is the PSG paradigm of stakeholder capitalism, finally correctly defined and ready to be taught, implemented and practiced that will optimize long term value for the PSGs of all companies and will maximize the long-term value and wealth creation of the company (enterprise, organization) itself as the natural outcome.

Business leaders, business schools and all who participate in providing free market capitalism to society should understand, teach and implement the PSG paradigm of capitalism so that societies (all people and peoples) can receive maximum long-term value and wealth.

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!