Stakeholder capitalism vs shareholder capitalism

December 16, 2019 15:23
Flags stand outside the UN building in Geneva. Wealth inequality can become a serious social and political issue, as many governments and corporates are realizing. Photo: Bloomberg

Klaus Schwab, founder and executive chairman of the World Economic Forum, recently marked the 50th anniversary of his organization by unveiling a new ‘Davos Manifesto’. His aim is to ask what sort of capitalism the world needs in the future. He essentially proposes ‘stakeholder capitalism’.

Whatever you might think about Davos as a talking shop for international elites, the basic question is an important one.

The last half-century has been one of ‘shareholder capitalism’, which is often associated with the pro-market economist Milton Friedman. The core idea is that companies should – within the framework of the law and regulatory systems – focus on returns for their shareholders.

This focus on profit rather than broader social well-being was not supposed to be about selfishness or greed. The idea was that by doing what they do best, companies would maximize wealth creation and benefit wider society.

In many ways, this has worked. Combined with globalization and technology, this system has delivered huge gains in prosperity throughout the world – including in developing economies.

Yet there is a strong feeling that things have gone wrong. Schwab looks at what he calls the 'Greta Thunberg effect' after the young Swedish woman who campaigns on climate change. He is referring to a widespread belief, especially among the young, that the existing system of capitalism is unsustainable, and indeed unfair.

We know from our experience in Hong Kong that a growing economy does not necessarily benefit everyone equally, and that inequality can become a serious social and political issue. Worldwide, we see the rise of politicians calling for a system that requires companies to focus more on their impact on the environment and society in general.

Schwab’s new Davos manifesto reflects some specific concerns about how corporations behave. It says companies should pay their fair share of taxes, have zero tolerance for corruption and pay attention to human rights and fair competition.

It proposes benchmarks for companies’ ‘environmental, social and governance’ (ESG) performance (an area listed companies must now address in their reporting in many jurisdictions, including Hong Kong). It also suggests such measures as linking CEOs’ pay to broad (not just shareholders’) value creation.

Schwab sees a new model of stakeholder capitalism as the best alternative to the shareholder-focused one. The only other form he sees is ‘state capitalism’, such as the system in China, which as he says is more of a developmental stage (like Japan or Korea went through in the past).

In many ways, I think the ‘stakeholder capitalism’ idea is on the right track. For quite a few years now, we have seen consumers and investors pressuring companies because of things like workers’ conditions in subcontractors’ production lines. Companies that do not pay attention to social and environmental issues will potentially pay for it in terms of reputation or even share price.

At the same time, we need to look closely at what has and has not gone wrong with our economic system.

To take one example, monetary policy has had a major impact on investment and wealth distribution. Low interest rates have fed asset price inflation and encouraged so-called financialization. Some sectors have benefited, but they have increasingly been detached from the real economy. This is a real problem, but it is caused by public macro-economic policy. We cannot fix it by forcing businesses at individual level to change their behavior.

We should be genuinely concerned about the negative impact companies can have on the environment and social fairness. Most businesses are run and owned by people who have a stake in the well-being of the community, just like anyone else. They will adapt to new incentives – including regulatory burdens – if it benefits broader society and the playing field is level.

But who will decide how this unfolds? It is vital that the debate about this is open and not just influenced by populism and anti-business sentiment. There is a risk of a backlash against the capitalist system as a whole – leading to socialist-style policies that undermine wealth creation.

We must bear in mind the fundamentals of risk and reward and the profit motive. Without them, the innovation, job creation and tax generation will not happen.

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RC

Executive Council member and former legislator; Hong Kong delegate to the National People’s Congress