The following is an excerpt from my 2021 book 'Sensible Decarbonization.' Since then, the ESG tide has been stemmed a bit by pushback from corporations and the anti-woke GOP who have equated ESG with so-called 'woke' policies. Nonetheless, the main and more sensible metrics of it are still being adhered to by many companies, including energy companies.
Smart and Compassionate Stakeholder Capitalism: Capitalism Can and Should Be Tweaked for Fairness
Clearly,
capitalism has been the most successful system ever devised to create wealth.
Though often that wealth was just for some, as time goes on that wealth is for
more and more. The poorest of the poor today are wealthier than the wealthiest
of the past. Capitalism has succeeded in lifting people out of poverty through
voluntary exchange while other economic systems like communism can only do it
in a limited way by coercion. Milton Friedman was a smart guy with many
interesting ideas but his insistence that the only responsibility of business is
to increase profits for shareholders is looking like it won’t last much longer.
As a mentioned above there is the profit motive but there is also the usefulness
or utilitarian motive that promotes public good and public interest. Public
good and public interest include externality management like mitigating
environmental and climate impacts. That usefulness includes usefulness to
society as a whole. As mentioned, in 2018 Larry Fink, CEO of world’s largest investment
firm BlackRock, announced that all future investments will be screened for usefulness
or benefit to society. This stakeholder capitalism is likely to continue
eclipsing shareholder capitalism. Friedman’s shareholder primacy
is likely to continue fading away, especially as shareholders themselves begin
to demand it. Companies that ignore social responsibilities are becoming more
and more disadvantaged. That is why stakeholder capitalism is also smart
capitalism. Socially responsible investing has been around for decades and offers
returns roughly similar to traditional investing. Companies overly focused on
short-term quarterly returns are not likely to last. This is not mainly because
they are likely to fail but because they may succeed and be acquired or merge
with another company. For some executive management that is the goal. Of
course, such mergers and acquisitions often involve some downsizing of workers.
Sometimes, or perhaps more often, it is market conditions that lead to
downsizing. The 2020 market conditions in the US oil industry, due mostly to
demand drop from coronavirus but also to OPEC-plus price competition, are
beginning to yield bankruptcies, and mergers and acquisitions. The industry as
a whole may contract a bit before returning to profitability.
Whole Foods
founder and former CEO John Mackey and Harvard Business School’s Raj Sisodia wrote
a book in 2014 called Conscious Capitalism: Liberating the Heroic Spirit of
Business. They argue that a business model that includes all stakeholders: investors,
suppliers, customers, contractors, team members (employees), industry partners,
the community, the environment, and even competitors, is better, more realistic,
and just as profitable or potentially more profitable. All of these should be
integrated into the business model and linked by many shared goals. Getting
people out of poverty was basically a side-effect of past capitalism but with
conscious capitalism it can be a primary goal as well. Mackey and Sisodia note
that:
“… voluntary
exchange for mutual benefit has led to unprecedented prosperity for humanity” and that “free enterprise, when
combined with property rights, innovation, the rule of law, and
constitutionally limited democratic government, results in societies that
maximize societal prosperity and establish conditions that promote human
happiness and well-being …”
Short-term focus is the method of “flippers,”
speculators, system gamers, and those with “exit strategies.” ‘Build the
company and sell’ has been a model that focuses on the success of company
owners, executives, and investors, sometimes at the expense of non-executive
employees, contractors, and other stakeholders. Mackey and Sisodia noted that
the average shareholder time period dropped from 12 years in the 1940’s to less
than a year in the mid-2010’s. Pressure to show quarterly gains is one reason,
so some have argued that such financial reporting should be stretched out to a
half-year model. Offering incentives to executives for short-term gains as is
common, will certainly lead them to focus on short-term gains, often at the
expense of long-term gains.[1]
Former
Medtronic CEO and Harvard Business School professor Bill George says
stakeholder capitalism is here to stay and that seems to be the case. All major
businesses are being urged to address their environmental, climate, labor, and
social impacts. ESG is a ubiquitous buzzword in the energy sector. Providing
clear and demonstrable plans to address these concerns and externalities is
becoming mainstream. He notes that shareholder primacy is being dropped as the main
concern of major companies. He notes that the coronavirus has reminded us about
the essential workers whose concerns must be better addressed. The pandemic has
also highlighted remote work with its advantages and disadvantages, but especially
the advantages. It will also likely result in more spending toward keeping
supply chains more responsive and less vulnerable to disruptions. He also says
it highlights the importance of our local communities. He says better long-term
strategies toward stakeholder capitalism will help companies to improve their
“bottom line” as well.[2]
The late
corporate law scholar Lynn Stout was an advocate of prosocial behavior, meaning
behavior that benefits others, or unselfish behavior. She points out that the
notions that shareholders own a corporation, and that maximizing shareholder
value is the sole or main focus of a corporation, are erroneous. She notes that
before the 1970’s and 80’s there was a corporate style known as managerialism
that promoted other stakeholders and demoted shareholders. She argues that
corporate law and precedents have upheld that shareholder primacy is not
enshrined in law in any way but is merely a style of running corporations. She
argues that it is really an ideology. She does acknowledge that some SEC
decisions and parts of the tax code have supported maximizing shareholder
value. She notes data that strongly suggests that over-focus on short-term
investing by shareholders has weakened the profits of most corporations and
their staying power in the market. It has also weakened the profits of
long-term investors, say those of us investing in retirement, to the benefit of
short-term investors. Practices like tying executive pay to shareholder value
encourages and rewards a focus on short-term share price. If anyone is
interested the video of her explaining these issues referenced and linked here
is quite interesting.[3]
[1]
Mackey, John and Sisodia Raj, 2014. Conscious Capitalism: Liberating the Heroic
Spirit of Business. Harvard School Press.
[2]
George, Bill, May 15, 2020. Stakeholder Capitalism is Here to Stay. https://www.billgeorge.org/articles/stakeholder-capitalism-is-here-to-stay
[3] Stout, Lynn, posted 2018. The Shareholder Value Myth.
Youtube. https://www.bing.com/videos/search?q=The+Shareholder+Value+Myth+youtube&view=detail&mid=6B29975FF36BB2D3C90A6B29975FF36BB2D3C90A&FORM=VIRE
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