Editorials

U.S. firms rethink capitalism

There is a growing sense among U.S. business professionals that their guiding principles are off the mark. For nearly half a century, boardroom decisions have focused on maximizing the value delivered to shareholders. Profit has been the overriding consideration and other concerns do not matter. As inequality mounts and anger spreads throughout the United States, even those executives sense that they need to reassess core principles and priorities. This accounting is overdue and those executives should see how their peers in Europe and Japan do business for clues on how to reform.

This week, the Business Roundtable, a group of nearly 200 of America’s top firms, released a statement declaring that firms should no longer focus on shareholders. Instead, they “share a fundamental commitment to all of our stakeholders.” And, they continued, “we commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

For most people, that is common sense. Companies must be alert and responsive to a wide range of interests. After all, they could not function without their workers, suppliers or customers. Businesses are integral parts of a community, and they cannot divorce themselves from the larger environment in which they operate. Firms cannot sell products indifferent to the problems they create.

This is not a new idea. In fact, it guided corporate decision-making from 1932, when “The Modern Corporation and Private Property” by Adolf A. Berle Jr. and Gardiner C. Means was published. That book was a response to the excesses of the Gilded Age and argued that firms had to benefit all who had a stake in them. The thinking produced a less adversarial relationship between labor and management, and a sharper sense of responsibility to the local community. A sense of civic purpose was an integral part of business operations rather than an afterthought or a salve to troubled consciences.

By the 1970s, that thinking was roundly criticized for creating complacent executives who were not maximizing value. A new approach, championed by Milton Friedman, charged that business leaders should focus solely on profit. In a real marketplace of ideas and concerns, companies focus on what they do best — make their particular product or provide their particular service at the best price — and that is enough.

That ruthless focus on profit rewarded shareholders and managers that delivered them. Executives focused on quarterly returns, cutting costs — often in the form of labor but also in research and development — and sometimes cutting corners. Short-term calculations of cost and benefit — tied to executive compensation — prompted the relentless squeezing of assets and questionable assessments of returns.

The results were unmistakable. Stock prices soared to record highs, as did returns to senior management. According to one study, chief executive compensation increased 940 percent since 1978, while typical worker compensation had risen just 12 percent over the same period. The yawning gap in pay and compensation has yielded an increasingly unequal society and all the social strains that are evident today. There is a growing call for political action against big companies and a rising chorus that questions the very practice of capitalism.

There is considerable skepticism about whether this new outlook is an attempt to deflect that criticism. Some executives, such as Larry Fink of BlackRock and Howard Schultz, founder of Starbucks, have been promoting it for several years and even if they are motivated by survival — they know that an angry public will not discriminate between visionaries and villains — they deserve credit.

Also deserving of credit is Klaus Schwab, founder of the World Economic Forum. In 1973, he promoted the Davos Manifesto, which argued that “the purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.” Schwab is a German and his thinking reflects the mentality of his home country, where businesses have long practiced a capitalism that embraces all stakeholders.

That model is also evident in Japan. Firms here have long taken a holistic view of corporate interests, and this outlook has created a form of capitalism that led to an extraordinarily equal society and one that is not rent by tensions between labor and capital as in the U.S. Traditionally, Japanese management eschewed a short-term, quarterly approach that puts profits above people and focused on long-term results and the impact of decisions on a wider range of stakeholders than shareholders.

This model is by no means perfect and it too needs reform. But the larger sense of shared collective purpose that is the bedrock of Japanese capitalism is in many ways the essence of the stakeholder economy. The Business Roundtable should reach out to counterparts in Japan to begin a dialogue on meaningful reform of capitalism in the 21st century.

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