Stakeholder Capitalism

In 1970, economist Milton Friedman popularized the concept of shareholder theory, which states that a business’ sole social responsibility is to maximize its returns for shareholders.

Five decades later, it’s clear that Friedman was misguided. Climate change and rising economic inequality have shown that businesses' responsiblity cannot be exclusive to its investors.

And it’s not just inequality — overall net worth has plummeted across almost all wealth brackets. Neal Gabler, writing for The Atlantic, reports:

Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile.

It’s time for a new model of economic success. Enter stakeholder capitalism, which suggests that businesses need to expand their social commitment.

Stakeholders include shareholders, but also employees, vendors, contractors, customers, government, and even the earth itself. In short, a stakeholder is any entity that contributes to the success of a business and therefore deserves to be better off for having done so.

Stakeholder capitalism isn’t a utopian vision or an impractical dream, it’s the only sustainable way forward for us. And it’s taken root in a big way: In 2020, the World Economic Forum added it to its "Davos Manifesto," the set of guiding principles for its annual meeting in Davos. It was the first update to the manifesto in over 40 years.

Here's Deborah D'Souza reporting on it for Investopedia:

[The Davos Manifesto] now plainly states at the top, "the purpose of a company is to engage all its stakeholders in shared and sustained value creation" and says companies should have zero tolerance for corruption, uphold human rights, and pay their fair share of taxes.

In short, we need to ensure that everyone can benefit from the vast wealth that's been created since the dawn of the industrial era. The accesibility of modern advances like cell phones, vaccines, and cars that contribute to our quality of life is not enough — overall economic security needs to improve as well.

As clichéd as it is, the idea that each of us is better off when we pursue collective success is also radical, given how significant a departure it is from the way western cultures have prized individualism.

But consider, for a moment, the following analogy: A group of 30 people each write their name on an index card and have one person randomly spread the cards throughout the room. Then, everyone is tasked with locating their index card as quickly as possible.

What’s the best way to do this? One option consists of every person running around checking each card until they find their own again.

But there’s a better way: If each person simply picks up the nearest index card and returns it to its owner, the group can accomplish this task in a fraction of the time and with less effort.

This is a simple example, but if we apply its lesson to the rest of our lives and society, we quickly discover that everywhere we look, we are richer and happier when we think of others first.

And when we invest in the success of every stakeholder around us, we plant the seeds for a brighter, more sustainable future together.