‘Stakeholder capitalism, a model I first proposed a half-century ago, positions private corporations as trustees of society, and is clearly the best response to today’s social and environmental challenges.’
That’s the brand of capitalism Klaus Schwab, the founder of the World Economic Forum, sees as the way forward for the United States.
Meanwhile, there are two other models that he believes do not provide the answer: shareholder and state. The former is one currently used in the U.S., while the latter is what we’re seeing in places like China.
Shareholder capitalism, of course, is embraced by most Western corporations — maximize those profits first and foremost. State capitalism, on the other hand, is when the government is entrusted to set the direction of the economy, which is a favorite in many emerging markets.
“Though the concept of ‘stakeholder capitalism has been around for a half-century, it has only recently begun to gain traction against the prevailing shareholder-primacy model of profit maximization,” Schwab wrote in a piece for Project Syndicate. “Now, advocates of a more socially conscious economic system must take steps to ensure that their vision takes hold for the long term.”
He acknowledged that the current model in the U.S. has its merits in unlocking new markets and creating new jobs, but there’s a downside.
“Together with financial-industry pressures to boost short-term results, the single-minded focus on profits caused shareholder capitalism to become increasingly disconnected from the real economy,” Schwab explained. “Many realize this form of capitalism is no longer sustainable.”
Why are attitudes changing now?
Schwab credits Swedish climate activist Greta Thunberg as a reminder that the current system’s environmental unsustainability represents a betrayal of future generations and executives are waking up to the fact that their long-term success is closely linked to that of their customers, workers and suppliers. Furthermore, he explained, millennials and Generation Z aren’t willing to work for, invest in or buy from companies whose sole focus is to maximize shareholder value.
“The result is that stakeholder capitalism is quickly gaining ground,” he said. “The change in direction is long overdue. We should seize this moment to ensure that stakeholder capitalism remains the new dominant model.”
With that in mind, the World Economic Forum has come up with a new “Davos Manifesto,” which states that “companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field.”
One metric that needs adjusting, he said, is exorbitant executive pay. “In the new stakeholder paradigm, salaries should instead align with the new measure of long-term shared value creation,” he said. “Large companies should understand that they themselves are major stakeholders in our common future.”
Bottom line, the ultimate purpose of corporations going forward would be to “improve the state of the world in which they are operating,” Schwab wrote. “If they really want to leave their mark on the world, there is no alternative.”
Meanwhile, as far as the stock market is concerned, the current model seems to be doing just fine, though the Dow Jones Industrial Average DJIA, -0.70% , S&P 500 index SPX, -0.68% and Nasdaq COMP, -1.02% all traded lower Monday.