Stakeholder Capitalism

Posted on Oct 18, 2019

These are my notes from the article on Stakeholder Capitalism by Edward Freeman et. al.

The society contains following actors for the purposes of economic discussion

  1. Government (State, democratically elected entity)
  2. Investors (Stock holders or owners of corporation)
  3. Managers (CEOs, executives)
  4. Customers (That buy products and services from the corporation)
  5. Workers (employees of corporations)

The article calls these actors as Stakeholders.

Five contemporary narratives of Capitalism are described. It's argued that the root of the problems of capitalism lie in these rigid narratives. Each of them describes Capitalism as a system that serves one of the above mentioned stakeholders and not all of them simultaneously. These narratives emphasize that how serving only one class of stakeholders is beneficial to others too.

These narratives are as follows:

  1. Labor narrative - Marxist viewpoint of Capitalism. It puts labor and capital at opposite sides. According to it any business activity is amoral and only solution is for labor to take control of prouction process.
  2. Government capitalism - Viewpoint of John Maynard Keynes, which sees Government as the manager of Capitalism. This was popular until the end of cold war and is held true by current liberal politicians.
  3. Investor capitalism - Milton Friedman's view that believes in economic freed of shareholders. Its assumes that when shareholders allocate their capital in order to generate greater profit, it benefits everyone else. It openly states that any business activity is void of ethics or morality. This view has no place for welfare of customers or charity.
  4. Managerial capitalism - This view favors those that control the corporation (executives, management) as opposed to those who own the corporations (investors). The managers are agents of investors and have fiduciary duty serve in the best interest of investor's profits. This narrative also sees any business activity as amoral.
  5. Enterpreneur capitalism - This modern look at capitalism puts an enterpreneur at the center. Enterpreneurs are considered to be different from any of above stakeholders (although the distinction is not well defined). They bring creative destruction or creative discovery, which challenges status quo of the business and facilitates creation of new markets. There is a scope for morality, however it's not necessarily present.

These narratives have three assumptions:

  1. All actors hold naive version of self-interest
  2. Morality is separate from economic prosperity
  3. Competition over limited resources is required for prosperity (zero-sum game)

This view of capitalism leads to four problems:

  1. Competition is seen as the pre-requisite for capitalist society. The actors in such system tend to compete for survival rather than cooperate.
  2. Saying that morality has no place in business, perpetuates the myth deep into the managers.
  3. Each of the traditional narratives simplistically prioritizes only single group's interests at expense of others. They not only ignore other groups, but claim that serving one group automatically benefits others. This clearly doesn't work (otherwise such different narratives wouldn't exist)
  4. If government is made to do abritration in case of business conflicts, or set rules for moral behavior, or redistribute wealth through laws; it can be manipulated by businesses for their gains. e.g. Lobbying.

The solution

Creating voluntary agreements that protect interests of each group and make all groups agree on other group's interests. It has following six principles

  1. Cooperation - The goal of business activity should be value creation with cooperation of others
  2. Engagement - All stakeholder groups must be engaged in decision making
  3. Responsibility - If in the course of business any party is harmed, it should be compensated. It cannot be rationalized by claiming that morality has no place in business.
  4. Complexity - Humans are complex and cannot always be expected to do the thing that benefits everyone. This is acknowledged by assuming responsibility (as per 3)
  5. Continuous creation - Creation of value and working with others and for others should be considered more important than self-interests
  6. Emergent competition - Competition should exist to the extent of providing options to stakeholders. It should not be assumed a basic characteristic of capitalist system.

These notes are meant to be summary/interpretation of the article. They do not include my opinions, except the text in italics