Taylor Gray, Ph.D.
The world is a better place when companies are good corporate citizens. I remain focused on developing meaningful and actionable insights from empirical data in pursuit of a better world.
At Motive, we base our decisions and our development in a framework of Democratic Capitalism. This is the belief that no other institution is as well-structured, well-resourced, and well-incentivized to effect and manage change in the modern world as is the corporation and no other force is as powerful in guiding corporate development as is consumer choice. In other words, the world is a better place when companies are good corporate citizens, and consumer demand is the most important force in driving companies to become better corporate citizens. It is a framework which recognizes the interdependence of business and society and which strives to understand the formative dynamics within this relationship.
One question we get quite frequently is why Democratic Capitalism and not simply Stakeholder Capitalism? After all, stakeholder capitalism has been around much longer--originally framed in 1932 in the classic publication The Modern Corporation & Private Property by A.A. Berle and G.C. Means (to say that this book is foundational to modern understandings of corporate governance is not an overstatement)--and is now broadly supported and perpetuated by leading companies and management consultancies (such as McKinsey & Company). It would seem stakeholder capitalism is a framework which has been building for decades and whose time has finally come...so why not embrace it?
Many social, cultural, and environmental ills have increasingly--and correctly--been attributed to the single-mindedness and short-sightedness of shareholder capitalism...cue Stakeholder Capitalism.
To be clear, we are big fans of stakeholder capitalism; it is a much more realistic and complete framework which moves us much closer to a properly integrated Business & Society relationship than does shareholder capitalism. Yet, we do believe it has one fundamental shortcoming which cannot be reconciled with our understanding of the Business & Society relationship. To explore this shortcoming, let’s first proceed through a brief comparison of frameworks beginning with shareholder capitalism.
From Shareholders to Stakeholders
Shareholder Capitalism is often characterized along the lines of Milton Friedman’s ‘The business of business is business’ mantra. The popular understanding and performance of shareholder capitalism has come to be the management of business in the interest of shareholder returns...consequences be damned. Any development which enhances shareholder returns should be optimized while any development which detracts from shareholder returns should be minimized...and shareholder returns are now increasingly calculated at a quarterly (if not daily!) basis. The gross caricature of shareholder capitalism today is of ‘everything and everyone in servitude to profit’.
The sin of shareholder capitalism comes down to a question of agency.
Many social, cultural, and environmental ills have increasingly--and correctly--been attributed to the single-mindedness and short-sightedness of (what has now become) shareholder capitalism...cue Stakeholder Capitalism.
Stakeholder Capitalism has gained traction as a business-friendly foil to shareholder capitalism. It is a recognition that no business exists in isolation but rather as within an integrated network of stakeholders which gives rise to the conditions for business success. Employees, suppliers, communities, regulators, natural systems and so on are all stakeholders which join the likes of shareholders in creating the business and the business’ success and therefore concern and consideration should be given to the outcomes and consequences experienced by all stakeholders rather than only by shareholders. Shareholder returns are still to be maximized, but within a broader understanding and context of the outcomes experienced by all stakeholders.
Yet here’s the catch with stakeholder capitalism. Who is a stakeholder, how they are to be integrated into decision-making, and what sort of outcomes they are to experience (and how), is all to be determined by the company itself. Who matters, what matters, and how it is all measured and enacted is determined by the company--and power within any company remains with executives and directors, or, in other words, with the agents of shareholders. It is easy to see how stakeholder capitalism can be perceived more so as enhanced shareholder capitalism rather than as an actual alternative to shareholder capitalism.
The sun is setting on shareholder capitalism as more and more stakeholders of all walks unite under the umbrella of stakeholder capitalism. But this will be but a way-point.
In contrast, Democratic Capitalism embraces the similarly holistic perspective of the multi-stakeholder and socially-embedded nature of a company but fundamentally disagrees with the attribution of agency within this system. Businesses are not as powerful as they would often like to think, and shareholders, in particular, are not nearly as important as they often believe. Democratic capitalism places all agency in the hands of consumers. It is the decisions of consumers which determine a business’ success and a business’ ability to remain a going concern. Executives make plenty of decisions, but these are not the ultimate decisions; these all simply create the conditions to make it easier for consumers to make the ultimate decisions.
All of a company’s stakeholders are important, but all are replaceable and interchangeable--except for consumers. This dependency creates agency, and agency creates power--any business is only ever as successful or as important as its consumers want it to be.
Democratic capitalism is premised on this understanding of agency. But it is also premised on the understanding that agency is only powerful when acted upon. If consumers act on their values then businesses must be quick to reflect these values--if we won’t buy food products with palm oil then businesses will be quick to find alternatives to palm oil; if we only buy from companies with diverse workforces then businesses will be quick to develop inclusive employment standards; if we only buy products made in the USA then businesses will be quick to re-shore production capabilities. They may all want to fight these trends, or spend heavily on marketing to convince us why we shouldn’t want what we want, but in the end, they will adjust because their very survival depends on it--everything in a business is replaceable and/or interchangeable, except for consumers.
The sun is setting on shareholder capitalism as more and more stakeholders of all walks unite under the umbrella of stakeholder capitalism. But this will be but a way-point. The sin of shareholder capitalism is a question of agency, and this question is not resolved by stakeholder capitalism. We are building Motive with a clear understanding of where agency truly lies, and with the intention of empowering this agency, and for this we are skipping over stakeholder capitalism in favor of democratic capitalism.
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