There are two distinct forms of capitalism emerging in the world today –shareholder capitalism and stakeholder capitalism. The former seems to be in serious trouble and the latter is rising to a position of ever increasing influence. Charles Hampden Turner asks if the UK currently has the wrong model
So what is shareholder capitalism?
Shareholder capitalism grew up in an era of high risks. The first steel industries, the first chemical industries and the first power companies were all high risk-high reward ventures and investors wished to get a good return for what they had hazarded. But the nations that chased the leaders like France and Germany faced lower risks. That such industries were possible had been demonstrated and a broad alliance of banks, trained engineers, trades unions, universities and governments chased the leaders and closed the gap. Because the risks were lower shareholders were not needed and banks typically invested long term at with lower rates of interest.
In the UK and the USA the sole owners of a company are its shareholders. They are principals and everyone else is an agent, hired contractually to do a specific job for which they are paid. Any residues are the property of shareholder and where those profits are large the owners are enriched although some of the money will be re-invested. In the stakeholder economies those who operate the business day by day retain most of the influence by reason of being physically present and because many shareholders are foreigners. Countries like Singapore, South Korea, China and Malaysia want their indigenous populations to benefit hence the influence of shareholders is much less, while the influence of employees, suppliers, customers, the government and local lenders is higher .
So how did stakeholder capitalism come about?
When East Asia began to develop, starting with Japan in the late Fifties, recourse was had to very rates of savings in these cultures which meant that capital was readily available and much cheaper than capital supplied by shareholders. The latter were supplanted. Thanks to technology transfer the risks were lower than ever and high-risk, high-return capital was not needed. From all this two kinds of capitalism have emerged.
The clinching consideration is that in the wealth creating process, shareholders come last in stakeholder capitalism. This does not mean they are least important. It means there is no wealth for anyone until managers have inspired employees, employees have served customers, customers have upped their purchases and provided revenue. It is from this revenue that shareholders are paid their share. It follows that that cutting employee costs, paying suppliers late, preying on your customers, avoiding taxes etc. are all self-defeating. It makes everyone else poorer and in the end harms shareholders too.
Conscious Capitalism, a book published by Harvard Business School Press, likens the maximising of shareholder value to cancer in the human body where cancerous cells grow aggressively at the expense of surrounding tissue. Such cells are ultimately suicidal because they destroy there host body and perish with it. All companies begin as stakeholders, typically owned by founders and their families but when they make an IPO (initial public offering) they pass into the control of shareholders at which point they turn themselves into money machines for their owners and in too many cases cease to sustain those stakeholders essential to innovation and productivity.
So is stakeholder capitalism creating new types of companies?
The crisis of shareholder capitalism has led to a new corporate form in the USA called the B Corporation or Benefit Corporation. This voluntarily alters its articles of incorporation to pledge itself to serve all stakeholders, shareholders included. It will prosper through serving customers via well-paid employees and happy suppliers, which will generate more for all concerned. There are now 206 B-corporations and these are growing by 10% a month, certified by the B-Lab. Eleven states in the USA have passed legislation to encourage the B-form.
Just how much more the stakeholder corporation makes for its willing participants is detailed in Conscious Capitalism. They selected 28 corporations for their voluntary ethical commitment to stake-holding. They hoped to show that such companies were as profitable as the average company that you could serve stakeholders and that shareholders would not lose thereby. What they found was that companies “conscious” of their commitment to all their partners were over ten times more successful than the Standard and Poor’s Index of relative profitability of America’s leading corporations, a truly amazing feat. This sample included Whole Foods, Harley Davidson, UPS, LL Bean, Patagonia, Trader Joe, Southwest Airlines, Jet Blue, IKEA, Costco, Johnson and Johnson, Wegmans, Pedigree, Toyota (USA), Community Bank and so on.
Charles Hampden Turner will be speaking about leadership dilemmas at ILM's event on 6 February in London - for more information and to book visit www.i-l-m.com/events