Why This Stakeholder Capitalist Rarely Criticizes Shareholder Capitalists

The Enterprise Engagement Alliance actively encourages stakeholder capitalism principles but rarely criticizes specific practitioners of shareholder capitalism. Why should we? Let the free market decide which business model investors, employees, customers, supply chain and distribution partners, and communities prefer. Besides, shareholder capitalists are ripe targets for disruption by our company's clients, and they are easy to find.

I enjoy the folks on Linkedin who single out companies for some of the awful things they do, but that's not my style. Who am I to criticize others who are lawfully making a boatload more money than I am? I'd rather focus on our mission to help organizations profit from the advantages of applying principles proven in total quality management in manufacturing to people management, rather than on singling out companies not aligned with these principles.

The big challenge today is to clear up the misinformation about the 70-year-old stakeholder capitalism field in response to the greenwashing efforts in the early 2020s that raised legitimate alarms from both the left and right.

The main difference between shareholder and stakeholder capitalism is not the focus on profits, but rather on how they are generated. Some people say the key difference between shareholder and stakeholder capitalism is a short-term rather than a long-term approach to generating profits. Untrue. There are many shareholder capitalists, most notably Amazon and SpaceX willing to wait years to generate a profit. Rather, in simple terms, the difference is in how organizations make money: by creating value and/or also by extracting value from customers, employees, supply chain and distribution partners, and communities. Amazon and SpaceX creates enormous values for customers, but at what expense to its employees, distribution and supply chain partners is less clear.

A Simple Distinction: Does an Organization Focus on Profiting From Value Creation and/or Value Extraction?

Organization’s dedicated to stakeholder capitalism principles such as Costco, Wegman’s, and Texas Roadhouse rarely advertise or tout their principles: they live them. In fact, Milton Friedman, one of the best-known advocates of shareholder capitalism wrote in his classic New York Times magazine article that investments in people or charitable contributions shouldn’t be bragged about because: “In practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions. To illustrate, it may well be in the long‐run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employes, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.”

Under shareholder capitalism, it’s fine to make money by minimizing the pay and working conditions of employees, deceptively advertising inferior products and services, squeezing distribution and supply chain partners, offloading costs on to communities in the form of pollution, infrastructure damage, or derelict buildings, use accounting gimmicks to avoid taxes—as long as it’s legal. It's done every day. Milton Friedman also noted that business should act legally and within ethical norms, which in the case of shareholder capitalism seems to be broadly defined.

Just like stakeholder capitalists, shareholder capitalists of course create value, often a lot of value, such as Amazon and Tesla, for example. For shareholder capitalists, though, extracting value through mass firings, coercing people through sudden return-to-work policies, curtailing customer service, cutting or delaying payments to supply chain and distribution partners, avoiding taxes, polluting communities or leaving behind derelict enterprises are acceptable. When questioned about these practices, shareholder capitalists often argue that it’s a free country as long as one acts within the law. ?Customers, employees, distribution and supply chain partners, and communities are free to choose which type of organization they wish to invest in, work for, do business with or welcome into their communities if they are not happy. They are correct. It's only the best customers, talent, distribution and supply chain partners who leave when squeezed, because they have the most choice, but none of this is tracked by most organizations.

Under stakeholder capitalism, organizations enhance returns for investors only by creating value for customers, employees, supply chain and distribution partners, communities, and the environment. Such leaders believe that offloading their costs on to society by mistreating employees, misleading customers, squeezing supply chain and distribution partners, and polluting communities leads to low levels of stakeholder engagement, loyalty, and productivity, and creates future risks for shareholders. The focus of stakeholder capitalists is on achieving results by harmonizing the interests of all stakeholders toward the purpose, goals, objectives, and values of the organization. The premise, increasingly supported by independent research validating the potential for enhanced future equity value creation, is that organizations having highly engaged and capable employees, passionate customers, fully committed distribution and supply chain partners, and supportive communities increases long-term profitability. This approach creates a culture of innovation, continuous improvement, higher productivity and quality products and services, greater loyalty, and organically derived talent and market diversity.

It is fair to say that capitalism in the US liberally lets businesses decide if they wish to make money through a combination of creating and extracting value, or if they instead commit themselves solely to value creation.?

Let The Free Market Decide

Both models can consistently create financial returns greater than obtainable through bank deposits and government bonds, and both have demonstrated the ability to provide spectacular returns. In fact, for most investors, a simple investment in ETFs (exchange-traded funds) will yield a better long-term return than most attempts at stock-picking.

Besides the ethical considerations between the two approaches to capitalism, which are up to investors and stakeholders to determine for themselves, there’s only the question of which approach, if any, provides more sustainable results for the long-term. On that, there is an increasing body of research supporting the logical hypothesis that organizations that have customers, employees, supply chain and distribution partners, and communities passionate about their businesses will outperform those that don't. Yet, a concept widely accepted in war and sports remains more debatable in business.

Some of the most ardent examples of shareholder capitalism, including General Electric, Enron, Silicon Valley Bank, and the later version of Boeing have spectacularly suffered the consequences of their business models. On the other hand, the Container Store, which for years promoted its commitment to customers and employees, has suffered the consequences of failing to anticipate new competitors and lifestyle changes.

If common sense and research are true, shareholder capitalists are ripe for disruption because they likely have disengaged stakeholders and a lack of internal innovation and drive to find a better product or service in their marketplace. Great examples without criticizing current companies would be Blockbuster Video and AOL.

So, let business leaders, investors, customers, employees, distribution and supply chain partners, and communities decide for themselves the types of companies they wish to invest in, work for, or welcome into their communities.

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