Tuesday, March 29, 2011

Stakeholder capitalism vs. shareholder capitalism

In the last forty years, capitalism in America became "Shareholder Capitalism" - i.e. corporations were run solely for the sake of the shareholders - i.e. profit and shareholder returns trumped all else.  The collapse of that model happened in 2008, and the U.S., Europe, and the world are suffering pretty badly as a result.  Short term quarterly results for shareholder returns has run its course and needs to be rethought, I believe.

I have long thought that companies and corporations stand on a solid foundation of four pillars - their responsibilities to:

  • Shareholders
  • Customers
  • Employees
  • Community
And when any of these is neglected or ignored, the company would become out of balance and be harmed.  

It turns out this approach has a name - "Stakeholder Capitalism" as described in an interesting short article by Michael Lind.  He points out that the most dysfunctional industries have the highest paid CEOs, whose compensation is tied to shareholder value.  Overemphasis on shareholder value creates stupid management, witness the collapse of the financial industry, which has unfortunately rallied politically to protect themselves and their dysfunctional compensation structures to fail another day.

Stakeholder Capitalism is nicely described by the founder of Johnson and Johnson in 1943:

"We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services....We are responsible to our employees, the men and women who work with us throughout the world....We are responsible to the countries in which we live and work and to the world community as well...We must be good citizens....and bear our fair share of taxes....We must maintain in good order the property we are privileged to use, protecting the environment and natural resources....Our final responsibility is to our shareholders....When we operate according to these principles, the shareholders should realize a fair return."

Amen to that.