Shareholder Capitalism is under attack- we need to hear more from its defenders
CEOs should be on the front line in the battle of ideas against populist politicians of both left and right- As published in Financial News October 2019
Thirty years ago the publication of Barbarians at the Gate — the inside tale of KKR’s 1988 buyout of RJR Nabisco — chronicled the apotheosis of a form of capitalism in which shareholders reigned supreme. Three decades later, cracks are showing.
A major debate is now underway on how to rebalance the interests of different stakeholders, a debate made very challenging by the prevailing political and economic winds.
The leaders of the corporate world appear to want to get ahead of it. The US Business Roundtable — an influential lobby group for business leaders, chaired by JPMorgan CEO Jamie Dimon — raised quite a few eyebrows in August when it declared that shareholder primacy was old hat.
In a statement redefining what it sees as “the purpose of a corporation”, the Roundtable pledged to pay more heed to customers, employees, suppliers and communities — rhetorically demoting shareholders to just another group of “stakeholders”, albeit, the ones who get paid.
It was a significant contribution to the debate, and other CEOs — in other parts of the world — should add their voices. Because the future of capitalism is at stake.
For all the US dominance of this debate and the power of the US corporations, the pendulum is also swinging away from the US being the sole arbiter of the culture and governance of the future.
The RJR deal and Barbarians at the Gate marked the dawn of a new era of globalisation and the spread of raw, full-blooded capitalism. Wall Street embraced its Barbarians and their corporate stakeholder priority system of values.
And in Europe, just as Barbarians hit the shelves, the mantra of the American shareholder-first philosophy was boosted by other forces. Communism collapsed, unleashing a wave of capitalist enthusiasm that took almost two decades to subside.
It would be wrong to say it has gone unchallenged until now. The 2000’s saw plenty of anti-globalisation protestors manning barricades; and in 2005 came the memorable denunciation by a left-leaning German of “locust swarms” — by which he meant hedge funds and private equity firms; the unacceptable face of capitalism.
But although that comment captured the mood of the moment, today’s popular and political backlash against globalisation and shareholder capitalism took some time to gather steam — stemming ultimately from 2008’s crisis — and it is far more strongly rooted.
Today, global capitalism appears distinctly battered and discredited. The primacy of shareholders’ interests and maximising returns is now in question, and defenders of globalisation and the old mantras are thin on the ground.
Today’s business leaders will be called upon to interpret the current mood and adjust their corporate strategies accordingly. This will be potentially a bewildering and fraught process for some. They find themselves facing fickle public opinion and megaphone, soundbite politics.
Across the Western world iconoclast politicians hailing from both left and right are taking a wrecking ball to established structures. World trade arrangements, the EU or old alliances are starting to crack.
And all this furore has allowed alternative economic theories a look-in, as exemplified by the ideas of France’s Thomas Pinketty or Greece’s Yanis Varoufakis, preaching redistributive systems.
It is not many investors’ base case, but there is an outside chance that within a year, the UK and US might be run by strongly left-wing Labour and Democrat leaders, who are in tune with these ideas. Some in Labour even talk of nationalising companies without paying compensation to shareholders — the very antithesis of the mood of 1988.
These, then, are the latest Barbarians gathering to establish a new order.
Those with the task of defending shareholder capitalism — perhaps by tweaking it to be more responsive to public concerns — have a tough job on their hands. The current wave of populist politicians draws on none of the tools, language or practices that the corporate world is used to. Experts are out, with their tedious, technical details.
Investment and employment decisions might rely on calculations and forecasts, but ranged against these processes is a growing political class that casually dismisses facts and figures with pithy reductions of populist ardour.
This class, notably short of business experience, bases its politics more on emotion than analysis.
This is the context for the US Business Roundtable’s unusual move. Under debate is a far-reaching re-ordering of corporate governance. Private equity and leveraged funds, the children of the earlier Barbarians' vision, are unlikely to be particularly impressed — but mainstream fund managers appear keen to join the movement, encouraged by investor appetite for environmental, social and governance-themed funds.
However, as the strategists of global capitalism peer into their crystal balls, the shape and substance of what emerges from this period of re-evaluation will be subject to influences from farther afield.
Western populism will also run up against Asian style capitalism, dynamism and economic power. Expect also renewed confidence in alternative forms of European dirigiste capitalism. These together are all part of a complex picture of the future.
Populism will run out of steam. The interests of an interconnected global trading system fuelled by rising Asian prosperity may overcome some of today’s anti-capitalist scepticism. If high finance rises to the challenge of climate change — as Mark Carney and Michael Bloomberg clearly believe it must — that, too, will do much to assuage the malcontents.
Nevertheless, advocates for globalisation and good corporate governance in the West must find a voice. Corporate CEOs must be on the front-line, accountable and ready to explain how they see the world, and the re-balancing of stakeholder interests.
Tim Skeet