Representative Democracy – A Comment on the 1st Year of the 2nd Term of Donald Trump as President of the United States of America

 

The first part of this post repeats a preview of our take about our Representative Democracy at the time of our 12/28/2024 post about Capitalism 2.0. We wondered then about the 2^nd Trump administration before it began its term. That post is titled “Is it Time for Capitalism 2.0? And, Whither Democracy Starting in 2025; a Glance.”  (Saturday, December 28, 2024).

 That first glance suggested that:

1. "An outward-focused long term and value-optimizing mindset is the best mindset for the leadership of a representative democracy, and 2. As in primary stakeholder group (PSG) capitalism, a finite number of primary stakeholder groups exists in a representative democracy, including people as citizens, taxpayers, workers, etc. domestically and including all nations around the world individually and as one group that we affect in a significant and even treasured way when we are acting as a true leader (relying on our better angels) of a leading global nation, which we have been at least for the post WWII rules-based world order. This concept fits representative democracy in accordance with the expectations of our founding fathers. Our Constitution contemplates it.

Right from the start of the 2^nd Trump term, the behavior of the Trump president-elect group, including Donald Trump and his top advisers at the beginning, including Elon Musk, Steve Bannon, Stephen Miller and others looked like 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 out-of-the-starting-gate 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.”

That before-the-fact look at the start of Trump’s 2^nd term now has proven prophetic!

This Post and its Message.

The 1^st year of this 2^nd term, with Trump and his team acting out what some call project 2025, screams out for the absolute need to address the change that is being practiced – in an arrogant and “only I can fix it” way through the actions of the second term of President Donald Trump.

The examples in this post are many, but they are not an exhaustive list of the Trump administration’s decisions, actions and announcements in this first year of his second term.

This post was drafted before the decision by President Trump to initiate an invasion of Iran. That decision, while not fully addressed in this post, fits the conduct and behavior of Donald Trump as President that this post addresses. More importantly, even at the very beginning of the invasion and war with loss of lives already happening, President Trump and his team (like the Secretaries of State and of Defense) are giving conflicting reasons for the purpose of the mission and the desired outcome. It is a very important matter for the Iranian people, for all nations in the Middle East and beyond - it affects the global order.

We can call the Trump and group’s model “transactional democracy,” rather than the representative democracy whose complete origins and charter documents - the Constitution - were adopted in 1776 and which has guided America in its domestic and global principles and conduct over 250 years. Calling the Trump unfolding model anything resembling “democracy” is generous and incorrect!

Relatedly and not coincidentally, the top leaders of so many companies have submitted themselves to the pressure from the Trump presidency by acquiescing to his demands (of his government as he surely thinks of it), like taking an ownership position in some companies in return for exempting them from the effects of tariffs and requiring a media company to do a documentary on his wife, for about $74 million or so. And there is so much more interference in the business world by this president.

By the way, Professor Adam Smith, the father of modern economics, would be thoroughly disgusted with the Trump administration’s behavior. One of Adam Smith’s core beliefs was that we should be conducting our economic activity in a way that moves all people, all citizens, toward increased prosperity. A divided population that has such a separation of the elites with their income and prosperity levels (about 1% or so of the population) from the rest of the population would disgust him. He would be a greatly disappointed parent!

So, the Trump model being increasingly practiced today, with all the glaringly catastrophic harm it is imposing on the world order that existed and acquitted itself well since the end of WWII, is in fact creating the basis for a doomsday cataclysm for America and the entire world – to risk just a slight overstatement!

What?

In addition to the examples above of interference in the economy by requiring certain behavior by companies (including suing some of them), consider the Trump Board of Peace proposal  that is really offered as a replacement for the United Nations, the assertion that Canada should become the 51^st state, the Greenland proposal, the reduced attention and support of Ukraine as it resists the Putin invasion and his 4 year vicious attack on the Ukrainian sovereign nation and its people, the distancing of America from its long term participation and central role in NATO , even suggesting that NATO is not a key part of our transactional agenda going forward, and more.

At its core, we are watching the attempted creation in real time – right now – of an autocratic empire (with an autocrat as its de facto leader), that was once known as the United States of America.

There is so much more unfolding evidence of this autocratic agenda, including ignoring Congress or holding sway over it at virtually all times, acting with only grudging acknowledgement of a separate but equal judicial system and treating the DOJ as having him as its sole client (a most curious, arrogant and obvious emasculation of the true long term independence and integrity of the DOJ)!

So, our precious Representative Democracy is clearly under attack through a not-so-subtle transactional model change led by Trump and the ideologues who sit at his feet!

Is that all?

Of course not. Donald Trump (President Trump) has ordered a militaristic enforcement of his administration’s ill-thought-out immigration strategy, using the Department of Homeland Security (DHS) as the de facto undisciplined and anti-democratic non-rule-of- law enforcer to seek out, capture and deport people (especially those from the southern border with brown or black skin,…) in a mean-spirited and violent way.

The courts are stepping up and ordering many of the DHS practices to be reversed, but the bad intentions (un-American intentions) of the Administration are still being used. As an example of how mean-spirited the immigration strategy is, the goal that was apparently established by Stephen Miller, one of the nastiest ideologues Trump relies on, to deport a quota of about 3,000 “illegal” immigrants (the “worst of the worst”) per day is still being used, even after the tragic and absolutely neanderthal tactics ICE and other masked enforcers applied in Minneapolis and St. Paul, Minnesota. How unenlightened and un-American can they get? And they go after other cities as we write!

Further, the use of the Military to blow boats out of the water in the Caribbean Sea and the Eastern Atlantic Ocean based on the “belief” that they were carrying drugs to the United States is also un-American and quite possibly illegal.

The list of un-American strategies, tactics and actions goes on. The language of the president, that used by plain old run-of-the-mill bullies, just rattles on every day. For example – a huge example - after the Supreme Court ruled 6-3 in February that a major part of the Trump tariff actions are unconstitutional, he immediately took to the media to call certain justices the meanest names he could think of at the moment – and in effect had a vile and ranting moment to show his displeasure with a non-submissive co-equal branch of government. How about that!

So, we have a rogue president presuming he has also been ordained to change the post WWII rules based world order – the order that so many leaders from so many nations discussed and agreed on in the late 1940s. It has worked well and stood the many tests of time since then. The idea that one person, President Trump of the United States of America can or should, all by himself based on what his own mind tells him to do, change from that working world order, as well as ignore the constitutionally based governance system the founding fathers of the United States of America established in 1776 is completely unbelievable and unacceptable.

 That is, he and his administration is overriding the collective and virtually timeless wisdom of two groups, our founding fathers in the 1770s with their deliberations and elegant conclusions creating our Constitution and the several nations after WWII that, upon deliberation, created the United Nations and its Security Council. Five nations, the U.S., UK, USSR, China and France were the original five, and 51 original founding members signed the charter in June, 1945. So, Donald Trump now comes along and asserts that he can change all the collective wisdom and experience of the 1776 group and the 1945 group because of his own mind. You must be kidding!

.To Repeat:

1.    The founding fathers and the thinkers whose ideas they used to help create this “republic,” as Benjamin Franklin called it, thinkers like John Locke and Montesquieu could not in their worst nightmares have anticipated that such a self-focused person  (some call him a narcissistic sociopath) could one day come along and, based on his own faculties, such as they are, completely change this Republic into an autocratic government that no longer has three co-equal branches – the elegantly designed model that has been until now (Trump’s 2^nd term) the envy of most nations in the world.

2.    Further, the founding nations of the post WWII world order could not in their worst nightmares have anticipated that the same self-focused person could one day come along and based on his own faculties, such as they are, completely change the post WWII world order they established in 1945.

So, What Now?

There are many more examples of the un-American dysfunctionality of President Trump and his administration. But rather than go on listing more, this post turns to how we can change the un-American path and desires of Trump and his group.

First, the upcoming mid-term congressional elections are critically important. The House of Representatives must become a Democratic majority. The elections in each state must be conducted with the same integrity that the states have provided over the decades. That integrity must include no role for the federal government in any part of the election processes of the states. The Senate should also become a Democratic majority. The Democrats clearly understand that they are in Congress as both delegates and trustees. With Trump as president, virtually all (not all but virtually all) of the Republicans vote as Trump tells them to vote. Why? In great part and somewhat depending on the make-up of their districts, they know they risk being “primaried” if they don’t follow the Trump and “MAGA” line. This short-term thinking demonstrates the acquiescence to Trump of most of the Republican members of Congress, especially of the House with its two year terms.

Not all Democrats are wonderful as members of Congress and not all Republicans are terrible as members, but the Trump and MAGA influence has made both Houses with Republican majorities virtually if not literally Trump slaves!

What Else?

The Judiciary must continue to show the independence and integrity expected of them as a co-equal part of our three co-equal branches of government. The courts below the Supreme Court (SCOTUS) level have been doing a good job in this matter – with a few notable exceptions. The SCOTUS recently issued its order rejecting the Trump administration’s actions and beliefs that they (He) could impose tariffs literally as he pleased. SCOTUS must do much more to assert its co-equal status – consistent with the Constitution, of course. Politically grounded individual justice behavior on any matter should not exist.

There is much more to address. The Trump administration, in virtually everything it touches, has been following a Trump-enabling autocratic model, whether following the project 2025 playbook by and large, or not.

The founding fathers would indeed turn over in their graves – over and over and over again if they knew what was happening with this Republic and the Representative Democracy government they created.

The year 2026, therefore, is as important for the United States as any of the 250 years that preceded it. It must be the year that begins the process of saving the Constitution and Declaration of Independence-based experiment that they created from the completely self-focused and self-aggrandizing life and behavior of President Trump and his submissive administration and staff.

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.

 

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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.