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!
