The Strategy of Change
The defining characteristic of shareholder capitalism is that one type of stakeholder — investors — is elevated above all others. But when financial performance and total shareholder returns are used as the ultimate measure of performance, it is inevitable that many companies will skimp on their other responsibilities as employers, innovators, partners, taxpayers, and local citizens.
A new book by David Gelles, The Man Who Broke Capitalism (Simon & Schuster, 2022), narrates how General Electric CEO Jack Welch myopically pursued Milton Friedman’s doctrine that the sole duty of business is to increase its profits. In the process, Welch systematically underinvested in people, innovation, brands, and environmental stewardship. In doing so, he created the conditions for decline at GE and, via his direct proteges and acolytes (such as the founders of 3G Capital), similar declines at companies such as Boeing and Kraft Heinz.
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The shift away from a sole focus on financial returns to multistakeholder capitalism has involved a welcome rediscovery of the idea that businesses are social entities that are embedded in a network of economic relationships — a concept that was popularized in the 1990s by management thinkers such as Arie de Geus and Charles Handy. Recent business reporting has focused on the increased attention being given to stakeholders other than investors and customers. The Great Resignation and quiet quitting are both manifestations of the importance of employees and the long-term consequences of treating them indifferently, while ESG (environmental, social, and governance) efforts involves giving a voice to those stakeholders (such as future generations and communities) whose interests were often overlooked under shareholder capitalism.
However, there is a fundamental point about multistakeholder capitalism that has not yet been fully appreciated: It involves a different kind of math because it views business as a dynamic system rather than just a mechanism for allocating capital to its most productive use.
The math of shareholder capitalism is compensatory: A deficiency in one aspect of the business, such as a toxic culture or poor environmental performance, is outweighed by stellar near-term financial performance. The math of multistakeholder capitalism, on the other hand, is combinatorial, taking into account the health of each type of stakeholder, since all are regarded as essential to the economic and social sustainability of the system.