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!

Getting Capitalism And Democracy Right - A Mindset and Life View Matter: Smith Had It Right, Friedman's Explicit Teaching, as Applied for 50 Years, Did Not, and President Trump Certainly Does Not!

First, The Tragic Corona Virus Pandemic, and the Trump Failing.

With its global reach and overwhelming harm to people everywhere, does the pandemic tell us anything about this mindset and life view question? Yes, it does.

Using one of Disneyland’s most famous rides as a guide, “It’s A Small World After All,” it reminds all of us that we do share this one planet. This one joyful Disneyland ride reminds us that we do have some extremely important shared interests, some unifying common bonds. So, it suggests pleasantly and clearly that there is a reason for us to have life views and mindsets that reflect things that unite us rather than things that divide us.

The pandemic would have been much better dealt with from the start, in the United States and worldwide, if all nations and international organizations had been working together – grounded in this unifying long term life view and mindset.

The handling of the pandemic, nation by nation, and even state by state in America, has been sadly uncoordinated, with the Trump administration being one tragic example of getting things wrong from the start. The Trump failing is clearly visible through the delayed action and the subsequent (and ongoing) bumbling on specific items – like the irresponsibly delayed testing availability and provision, the inexcusable failure to get  supplies and protection to all health care providers and all essential workers in a timely fashion and lack of national coordination of health care systems and associated needs. 

And, most recently (mid-April), the unthinkably divisive posture he has taken toward the governors of the states on testing and on who decides about when and how to ease restrictions is another irresponsible decision on his part.

In fact this bumbling is not surprising given that the Donald Trump life view is antithetical to a unifying life view and unifying behavior, so his leadership is certainly in question on this ominous matter – and on his entire presidency!

Now, Mindsets, Life Views, Professors Smith and Friedman – The Lessons We Must Learn!

Democracy and Capitalism, when both are done right, enable societies to reach their highest long term value, wealth and full life well-lived potential.

Professor Adam Smith, the father of modern economics by virtually all accounts, wrote in 1776 about the way butchers, brewers and bakers should be able to make and sell their products and how people in the marketplace should buy them – or not. Smith’s teaching 250 years ago supports and even screams out for the life view and long term mindset presented in this narrative – the way to get capitalism right that follows his teaching.

Professor Milton Friedman, a disciple of Smith and a Nobel prize-winning economist from the University of Chicago wrote his doctrine in 1970 for how to get capitalism right. He wrote, in the New York Times Magazine in September, 1970 – and taught through 2005 - that "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." This is his mindset or life view of the purpose of companies in a free market economy.

Friedman’s profit-as-sole-purpose model for leaders of corporations has been dominant in free enterprise capitalist economies ever since. It has been taught in business schools and used as the singularly important performance measure for companies and their top management for the last 50 years. Much value and wealth has been created over this time period. However, it is sub-optimal as a model and some serious leadership mistakes have also flowed from (largely) perverse applications of this model. Yet, it remains dominant.

What Is The Difference And Why Does It Matter?

The difference lies in the mindset or life view choice leaders make.

The short description of the difference between these two critically important mindsets (life views) is:

1.     The Friedman shareholder (profit-as-purpose) mindset is short term, inward-focused and win-lose.

2.     The Smith stakeholder (primary stakeholder groups) mindset is long term, outward-focused and value-optimizing for each of the six (6) primary stakeholder groups of every corporation – every company or organization.

This difference matters because one of the outcomes, if not the uniquely important long term outcome, of every corporation (company, organization for profit or non-profit, publicly or privately held, etc.) is the long term maximization of its own value or wealth creation.

The ironic reality is that the road to maximization of a company’s long term value (wealth creation) goes through its focus on and optimization of the long term value it provides to each of its six (6) primary stakeholder groups!

Professor Friedman would almost certainly have explained this model this way 50 years ago if he had not considered it an automatic result (“the invisible hand”) of each company in an economy focusing narrowly on making profits from its product or service.

Professor Smith articulated it explicitly and  pointedly in his teaching 250 years ago.

So, Getting Capitalism and Democracy Right.

In August, 2019, a group of CEOs from some of America’s leading companies, through their association, the Business Roundtable (BRT), signed a new purpose statement for corporations. The BRT is an association of CEOs from several large American companies. Collectively, their companies have more than 15 million employees and $7 trillion in annual revenues – having businesses in every state in the United States.

BRT effectively endorsed the broad stakeholder mindset and model as the purpose of corporations on August 19, 2019. This decision moved away from (replaced) their long held shareholder purpose – which they had adopted formally in about 1997, and which was passionately presented and urged on capitalist (free market) economies by Professor Friedman in 1970. Again, this model has been dominant for the last 50 years.

A Bit More About The Shareholder-Focused Mindset.

This long held idea that it is by focusing on profit day in and day out that companies will achieve this outcome (long term value maximization for the company itself) is simply wrong!

A correct understanding of Professor Milton Friedman’s teaching, it must be said, is that he argued that when management has a singular focus on profit as it does its work, all those affected by its work, throughout the economy – especially its own employees, communities, suppliers and the general public interest will be best served as though by the guidance of an invisible hand - with all companies behaving in the same way. His motives and expectations for societal well-being were fine.

There is no mystery here. This model in action argues that, with this behavior and action template in use by all participants in a free market, all participants including all people will be best off. He therefore implicitly argued that the effects (outcomes) for what we call the “primary stakeholder groups” of one company and all companies would be as good as they could possibly be. This model, though, had the mindset and life view, the “focus criterion” precisely backwards!

This shareholder and (short term) profit focus that the Friedman doctrine calls for relies on the notion of this “invisible hand” that would automatically guide the company and collective result for societies and economies to this highest wealth and value level over the long term. Again, for the last 50 years this doctrine has been literally dominant in business education curricula and in corporations.

It has indeed resulted in value creation. It has also required the leaders of companies to behave in accordance with this dominant short term mindset, partly but not solely driven  by tying top management compensation to share price or market capitalization, etc. – measures only of shareholder well-being.

That is, one of the flaws of this model is that it asks – even requires – managers to behave in short term, inward or self-focused ways. This flaw alone is disqualifying.

One result has been companies making big value destroying mistakes (Enron, WorldCom, Adelphia, VW, GE, GM, etc.). Another result of this mindset is the 2007-’08 great recession, which is directly attributable to the behavior this mindset induces. The reality is that, as special as Professor Friedman's teaching is, the 'invisible hand" effect is not automatic. The teachings of Adam Smith were more explicit, as we will see, but without being front-of-mind focused, even his teachings have not been fully followed.

A Bit More About The Primary Stakeholder Group-Focused Mindset.

The primary stakeholder group mindset, on the other hand, asserts that a company that focuses on optimizing the value it provides to each of its primary stakeholder groups will produce as one outcome the maximum long term company wealth and value creation – precisely because of this serving, outward focus. That is, the ironic outcome for a company, by focusing on optimization of the value it provides to each of its primary stakeholder groups – each relative to the others - will be long term maximization of the wealth creation (value) of the company itself!

Here is the same idea expressed as a formula:

IVM= f (S₁VO, S₂VO, …S_NVO).

That is, a business (and a person) will maximize its own long-term value when it devotes its time, talent and treasure (its focus) on optimizing the value it provides to each of its primary stakeholder groups.

The Primary Stakeholder Groups of any 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). 

Professor Adam Smith, a moral philosopher by education, used his own words to express this mindset several times in his two books. Here are some of his own ways of saying the same thing:

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.

Therefore, the way for a company in a free market capitalist economy to maximize its own long term value and wealth creation is to optimize the long term value it provides to each of its primary stakeholder groups.
 It is here, though, that even followers of Adam Smith, including Professor Friedman, did not fully explain the front-of-mind necessity that must exist for the "invisible hand" concept to work. 
And importantly, Professor Smith almost certainly did not (and probably could not) anticipate that the six primary stakeholder group reality would exist in the way we now understand it in the 21st century.
 We do. The BRT new purpose statement does. Some other students of getting capitalism truly right do.
This explicitly front of mind focus is essential now. We stand of course on the shoulders of many, but especially those of Adam Smith and, more recently, Milton Friedman. We, though, now know that companies, leaders and free market economies must be explicitly committed to the broader primary stakeholder group-focused life view and mindset in order for capitalism to be the economic catalyst for society that it can and must be. 
 No new sentence!

What About President Trump And His Mindset, His Presidency’s Performance In The Context of This Discussion of Capitalism and Democracy?

This article until now has been primarily discussing Capitalism (and indirectly Democracy) done right and wrong, and has looked at life views – mindsets – to make the case.

The same concepts, the same criteria for achieving long term societal well-being, apply to sovereign nations – Democracies and all governance forms.

In a nutshell, Donald Trump has brought the short term, inward-focused and win-lose (us against them) mindset to the White House, and he personifies all that is fatally flawed about this mindset. It applies as fully – and more so – to the larger public interest stewardship that government leaders are entrusted with as it does to corporations in a capitalism-done-right free market economy.

With other autocratic leaders around the world, he is failing. He is failing with a flourish. Others are failing in other ways – but all the failures are tied to this short term mindset!

President Donald Trump is the quintessential failure as a “leader” in the private sector and even more robustly he has failed as a “leader” in the public sector!

Why? Because he personifies all the value destruction potential, the sub-optimal potential that the short term mindset brings to the nation and world – in an absolute sense and when compared to the value creation potential the long term, outward-focused and primary stakeholder group-focused mindset –life view – can bring to the nation and world!

His presidency has displayed this failing from day one. Each day of his presidency, helped by the win-lose philosophy and conduct of his close advisers, most of whom are themselves absolutely flawed as public servants, has been a seminar on selfishness. But, it has not been quite so fully on display until the corona virus hit the people of the planet. His mistakes, including unforgivable delays in decision-making and attempts to cover his mistakes up by lying, are unassailable proof of his incapacity to handle the job.

A Final Thought.

The Smith stakeholder (primary stakeholder groups) mindset is presented in the context of free market economies and one model for the way companies can approach their existence.

This mindset, as a more general matter, is a golden rule-connected model for behavior of people, companies, governments – all human groups and interactions.

To be long term, outward-focused and value-optimizing for each group of people we significantly affect over time, as individuals and in our own groups, is to be living our lives based on a servant-based leadership life view. And, happily, it is the catalyst that allows all nations, people and peoples to get on their highest long term value trajectory and stay there. 

It connects Democracy, free market Capitalism and the better angels of human nature in the best way possible!