Why we need the 'Davos Manifesto' for a better kind of capitalism
The Davos Manifesto: "We should seize this moment to ensure that stakeholder capitalism remains the new dominant model."
01 Dec 2019
Klaus Schwab, Founder and Executive Chairman, World Economic Forum
- 'Stakeholder capitalism' is gaining momentum, in part thanks to the 'Greta Thunberg effect'
- It offers the best opportunity to tackle today's environmental and social challenges
- The World Economic Forum is launching a new 'Davos Manifesto'
What kind of capitalism do we want? That may be the defining question of our era. If we want to sustain our economic system for future generations, we must answer it correctly.
Generally speaking, we have three models to choose from. The first is “shareholder capitalism,” embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximize its profits. The second model is “state capitalism,” which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China.
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But, compared to these two options, the third has the most to recommend it. “Stakeholder capitalism,” a model I first proposed a half-century ago, positions private corporations as trustees of society, and is clearly the best response to today’s social and environmental challenges.
Shareholder capitalism, currently the dominant model, first gained ground in the United States in the 1970s, and expanded its influence globally in the following decades. Its rise was not without merit. During its heyday, hundreds of millions of people around the world prospered, as profit-seeking companies unlocked new markets and created new jobs.
But that wasn’t the whole story. Advocates of shareholder capitalism, including Milton Friedman and the Chicago School, had neglected the fact that a publicly listed corporation is not just a profit-seeking entity but also a social organism. Together with financial-industry pressures to boost short-term results, the single-minded focus on profits caused shareholder capitalism to become increasingly disconnected from the real economy. Many realize this form of capitalism is no longer sustainable. The question is: why have attitudes begun to change only now?
The Greta Thunberg effect
One likely reason is the “Greta Thunberg” effect. The young Swedish climate activist has reminded us that adherence to the current economic system represents a betrayal of future generations, owing to its environmental unsustainability. Another (related) reason is that millennials and Generation Z no longer want to work for, invest in, or buy from companies that lack values beyond maximizing shareholder value. And, finally, executives and investors have started to recognize that their own long-term success is closely linked to that of their customers, employees, and suppliers.
The result is that stakeholder capitalism is quickly gaining ground. The change in direction is long overdue. I first described the concept back in 1971, and I created the World Economic Forum to help business and political leaders implement it. Two years later, attendees at the Forum’s Annual Meeting signed the “Davos Manifesto,” which describes a firm’s principal responsibilities toward its stakeholders.
Now, others are finally coming to the “stakeholder” table. The US Business Roundtable, America’s most influential business lobby group, announced this year that it would formally embrace stakeholder capitalism. And so-called impact investing is rising to prominence as more investors look for ways to link environmental and societal benefits to financial returns.
Stakeholder capitalism at Davos
We should seize this moment to ensure that stakeholder capitalism remains the new dominant model. To that end, the World Economic Forum is releasing a new “Davos Manifesto,” which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field – particularly in the “platform economy.”
But to uphold the principles of stakeholder capitalism, companies will need new metrics. For starters, a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics. Fortunately, an initiative to develop a new standard along these lines is already under way, with support from the “Big Four” accounting firms and led by the chairman of the International Business Council, Bank of America CEO Brian Moynihan.
The second metric that needs to be adjusted is executive remuneration. Since the 1970s, executive pay has skyrocketed, mostly to “align” management decision-making with shareholder interests. In the new stakeholder paradigm, salaries should instead align with the new measure of long-term shared value creation.
Finally, large companies should understand that they themselves are major stakeholders in our common future. Clearly, all companies should still seek to harness their core competencies and maintain an entrepreneurial mindset. But they should also work with other stakeholders to improve the state of the world in which they are operating. In fact, this latter proviso should be their ultimate purpose.
An incredible opportunity for leaders
Is there any other way? State capitalism, its proponents would say, also pursues a long-term vision, and has enjoyed recent successes, especially in Asia. But while state capitalism may be a good fit for one stage of development, it, too, should gradually evolve into something closer to a stakeholder model, lest it succumb to corruption from within.
Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society. They can bring the world closer to achieving shared goals, such as those outlined in the Paris climate agreement and the United Nations Sustainable Development Agenda. If they really want to leave their mark on the world, there is no alternative.
Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution
A. The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.
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i. A company serves its customers by providing a value proposition that best meets their needs. It accepts and supports fair competition and a level playing field. It has zero tolerance for corruption. It keeps the digital ecosystem in which it operates reliable and trustworthy. It makes customers fully aware of the functionality of its products and services, including adverse implications or negative externalities.
ii. A company treats its people with dignity and respect. It honours diversity and strives for continuous improvements in working conditions and employee well-being. In a world of rapid change, a company fosters continued employability through ongoing upskilling and reskilling.
iii. A company considers its suppliers as true partners in value creation. It provides a fair chance to new market entrants. It integrates respect for human rights into the entire supply chain.
iv. A company serves society at large through its activities, supports the communities in which it works, and pays its fair share of taxes. It ensures the safe, ethical and efficient use of data. It acts as a steward of the environmental and material universe for future generations. It consciously protects our biosphere and champions a circular, shared and regenerative economy. It continuously expands the frontiers of knowledge, innovation and technology to improve people’s well-being.
v. A company provides its shareholders with a return on investment that takes into account the incurred entrepreneurial risks and the need for continuous innovation and sustained investments. It responsibly manages near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.
B. A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.
C. A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.
Written by Klaus Schwab, Founder and Executive Chairman, World Economic Forum
Global Risks Report 2020
The 15th edition of the World Economic Forum’s Global Risks Report is published as critical risks are manifesting. The global economy is facing an increased risk of stagnation, climate change is striking harder and more rapidly than expected, and fragmented cyberspace threatens the full potential of next-generation technologies — all while citizens worldwide protest political and economic conditions and voice concerns about systems that exacerbate inequality. The challenges before us demand immediate collective action, but fractures within the global community appear to only be widening. Stakeholders need to act quickly and with purpose within an unsettled global landscape.
Schools of the Future: Defining New Models of Education for the Fourth Industrial Revolution
As globalization and rapid advancements in technology continue to transform civic space and the world of work, education systems have grown increasingly disconnected from the realities and needs of global economies and societies. Education models must adapt to equip children with the skills to create a more inclusive, cohesive and productive world.
“Schools of the Future: Defining New Models of Education for the Fourth Industrial Revolution” outlines a new framework for defining quality education in the new economic and social context and shares key features of 16 schools, systems and programmes pioneering the future of education. These examples may serve as inspiration for driving holistic and transformative action on this important agenda. This paper is the result of a widely consultative process with educators, policy and business leaders, education technology developers and experts curated by the Platform for Shaping the Future of the New Economy and Society.
The Future of the Last-Mile Ecosystem
Growing demand for e-commerce delivery will result in 36% more delivery vehicles in inner cities by 2030, leading to a rise in both emissions and traffic congestion without effective intervention. Without effective intervention, urban last-mile delivery emissions and traffic congestion are on track to increase by over 30% in the top 100 cities globally. The Future of the Last-Mile Ecosystem analyses 24 interventions that can reduce emissions, congestion and delivery costs for the urban last-mile. With the ecosystem-wide change, interventions could reduce emissions and traffic congestion by 30%, and delivery cost by 25%, compared to the “do-nothing” scenario.
Taking the Pulse of the New Economy: Chief Economists' Outlook
The new decade opens with a fragile growth outlook, social tensions over the evident polarization of economic outcomes and high levels of uncertainty. There are signs of policy agility and business reform that may lead to a different, better kind of economic growth, but this momentum needs strengthening. “Taking the Pulse of the New Economy” summarizes the emerging contours of the current economic environment and identifies priorities for focus and action by policy-makers and business leaders in early 2020. This paper is the outcome of consultations with leading Chief Economists from both the public and private sectors, organized by the World Economic Forum’s Platform for Shaping the Future of the New Economy and Society. It will be issued on a bi-annual basis.
Mind the 100 Year Gap
None of us will see gender parity in our lifetimes, and nor likely will many of our children. That’s the sobering finding of the Global Gender Gap Report 2020, which reveals that gender parity will not be attained for 99.5 years.
Why gender parity matters
Gender parity has a fundamental bearing on whether or not economies and societies thrive. Developing and deploying one-half of the world’s available talent has a huge bearing on the growth, competitiveness and future-readiness of economies and businesses worldwide.
The index’s rankings offer an effective means to benchmark progress. They are designed to create global awareness of the challenges that gender gaps pose, as well as the opportunities that emerge when action is taken to reduce them.
Political representation on the rise, but is it enough?
Now in its 14th year, the Global Gender Gap Report 2020 benchmarks 153 countries on their progress towards gender parity in four dimensions: Economic Participation and Opportunity, Educational Attainment, Health and Survival and Political Empowerment. In addition, this year’s report examines gender gap prospects in the professions of the future.
The report presents a decidedly mixed picture. Overall, the quest towards gender parity has improved, ducking back under a century and registering a marked improvement on the 108 years in the 2018 index. Greater political representation for women has contributed to this, but overall the political arena remains the worst-performing dimension.
At the other end of the scale, it is forecast to take just 12 years to attain gender parity in education, and in fact, overall, gender parity has been fully achieved in 40 of the 153 countries ranked.
The “role model effect” reaps dividends at the top …
Drilling down into the facts and figures, it will take 95 years to close the gender gap in political representation, with women in 2019 holding 25.2% of parliamentary (lower-house) seats and 21.2% of ministerial positions.
Positively, the so-called “role model effect” may be reaping dividends in terms of leadership and wages. Improving political empowerment for women has, as a general rule, corresponded with increased numbers of women in senior roles in the labour market.
… but not lower down
In contrast to this positive progress in the lofty world of leadership, women’s participation in the wider labour market has stalled and financial disparities are increasing. Globally, the trend is towards a deteriorating picture in emerging and developing economies, which is offsetting the gains made in OECD countries.
Although education attainment as well as health and survival enjoy much closer to parity (96.1% and 95.7% respectively), one important area of concern is that of economic participation and opportunity. This is the only dimension where progress has regressed. Here, the figures are sobering, with a deteriorating situation forcing gender parity to a lowly 57.8%, which in time represents a massive 257 years before gender parity can be achieved.
The report highlights three primary reasons for this: women have greater representation in roles that are being automated; not enough women are entering professions where wage growth is the most pronounced (most obviously, but not exclusively, technology), and women face the perennial problem of insufficient care infrastructure and access to capital.
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The white paper is designed to help policymakers and other stakeholders be more informed about such platforms and about the people using them to work; to support constructive and balanced debate; to aid the design of effective solutions; and to help digital work/services platforms, labour organisations, and others to build alliances. This initiative is part of the World Economic Forum’s Platform for Shaping the Future of the New Economy and Society.
Plus at https://www.weforum.org/reports
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