Shareholder Capitalism Got Dumped

After 50 years, Shareholder Capitalism, “the dumbest idea in the world”, got officially dumped: Stakeholder Capitalism finally gets a chance. Article by Dirk Siebert, Master of Digital Transformation class of 2019 and Senior Director with Software AG, Head of Project Management Practice DACH.


2019, September—The morning Professor John Kotter nearly dropped his coffee

In September 2019, Harvard Business School Professor John Kotter, regarded as the “foremost speaker on the topics of Leadership and Change”, published an article on MarketWatch and LinkedIn commencing with the words “I opened my newspaper one late August morning and nearly dropped my coffee”. That line both put a smile on my face and got me intrigued to keep reading, why? Harvard Professors are not exactly known to show that kind of humor in their articles, even if MarketWatch or LinkedIn are not particularly scientific. What could have surprised John Kotter so much? Well, I was about to find out.


2019, August—The statement by the Business Roundtable

The news John Kotter was so surprised about, was a two-page ad about an official statement by the Business Roundtable (BRT) signed by 181 top U.S. CEOs published on August 19, 2019—the list of CEOs reads like a who-is-who of the U.S. economy. The statement says that the purpose of a corporation is no longer only to maximize shareholder value, but to serve all stakeholders; employees, customers, suppliers, the broader society, and the environment. With this statement, the CEOs of the BRT commit to delivering value to their customers, investing in their employees, dealing fairly and ethically with their suppliers, supporting their communities, and generating long-term value for their shareholders. It concludes with the statement that each of its stakeholders is essential, and a commitment to deliver value to all of them. In other words, they extend the scope of stakeholders to be considered from just shareholders to customers, employees, suppliers, and communities.

Why is this important? Because it means the BRT—a “major Washington-based lobbying group of U.S. firms”—is officially burying a doctrine capitalism has been based on for the last 50 years: the so-called Friedman doctrine.


2019, August—The immediate reactions of the media

Not surprisingly, the statement created a tsunami of reactions in the business world. In an amazingly orchestrated way, major media outlets reacted on that same day. Several large U.S. and U.K. papers broke the news, including but not limited to the following papers—just have a look at the headlines:

  • The Guardian: “Leading US bosses drop shareholder-first principle”
  • The Financial Times: “Business must act on a new corporate purpose”
  • The New York Times: “Shareholder Value Is No Longer Everything, Top C.E.O.s Say”
  • The Washington Post: “Top CEOs are reclaiming legitimacy by advancing a vision of what’s good for America”
  • The Chicago Tribune: “U.S. CEO group says corporations have duty to address income inequality. ‘The American dream is alive, but fraying.’”
  • The Los Angeles Times: “Column: In shocking reversal, Big Business puts the shareholder value myth in the grave”
  •  Harvard Business Review, a day after: “181 Top CEOs Have Realized Companies Need a Purpose Beyond Profit”


So, why was this new statement on the purpose of a corporation such a big difference to the Friedman doctrine driving capitalism for the last decades? Let’s have a look at the Friedman doctrine by going back 50 years.


1970—Milton Friedman

On, September 13, 1970 (I was in Kindergarten at the time) Milton Friedman published an essay in the New York Times Sunday Magazine titled “The Social Responsibility of Business Is to Increase Its Profits”. It established the shareholder value primacy and determined the behavior and business ethics of corporate executives for decades to come. It is based on the assertion that corporate executives are acting as agents of the shareholders, who own the corporation. The primary responsibility of the agents is only to the shareholders, who act as principals. Conversely, when the corporate executives only care for the shareholders, there is basically no room left for all the other stakeholders the BRT now includes into the purpose of a corporation: Employees, customers, suppliers, and the broader society.

Six years later, 1976, Friedman’s understanding of the purpose of the corporation, that “A corporation is an artificial person and, in this sense, may have artificial responsibilities, but ‘business’ as a whole cannot be said to have responsibilities, …”, was picked up by Michael C. Jensen and William H. Meckling in a seminal article titled Theory of the Firm. Jensen and Meckling supported Friedman by stating “The firm is not an individual. It is a legal fiction…” and by saying the question “does the firm have a social responsibility?” is misleading. So, it sounds like, based on Friedman’s shareholder primacy, firms get away with having no social responsibilities. Of course, there have always been other views on the purpose of a corporation than the shareholder value theory. Let’s start with the famous management guru Peter Drucker.


1973—Peter Drucker

In 1973, Drucker emphasized in his book “Management”—just three years after Friedman’s article but without referring to it—that the concept of profit maximization ”… does harm. It is a major cause for the misunderstanding of the nature of profit in our society and for hostility to profit, which are among the most dangerous diseases of a society or organizations”. He continues by stating that “there is only one valid definition of business purpose: to create a customer”. There you go: Peter Drucker defined customers as the core purpose of a business. Referring to Drucker, Peter Denning called it “The primacy of the customer”, in a Forbes article in 2013. That’s a start, so let’s continue.


1984—R. Edward Freeman

In 1984, 13 years after Friedman’s article, Robert Edward Freeman picked up a couple of loose ends around yet another view on the purpose of a corporation—the stakeholder concept—in his fundamental book “Strategic Management: A Stakeholder Approach. How did Freeman define stakeholders, though? According to Freeman, the word “stakeholder” first appeared in an internal memorandum at the Stanford Research Institute (today SRI International) in 1963. SRI’s definition of stakeholders as “those groups without whose support the organization would cease to exist” was catchy and less formal, so Freeman formalized the definition: “A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.” To the project managers amongst us: Freeman’s definition was picked up almost by the letter by the Project Management Institute, which defines a stakeholder as “an individual, group, or organization that may affect, be affected by, or perceive itself to be affected by a decision, activity, or outcome of a project” (PMBOK, 6th Edition).

So, Drucker, Freeman, …: could we have seen BRT’s statement coming if we would’ve read the signs? And would the statement have been a surprise after all? There might be additional signs.


2009—Jack Welch

Let’s continue with the late Jack Welch. On March 12, 2009, Jack gave an interview to the Financial Times, frankly saying “On the face of it, shareholder value is the dumbest idea in the world”. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.” Put in our context, Jack includes employees and products in his understanding of stakeholders. And it gets even better:


2016 and 2020—Larry Fink

In 2016, Larry Fink of Blackrock wrote in his traditional annual letter to the CEOs what reads like a threat: “We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. … Blackrock’s corporate governance team, in their engagement with companies, will be looking for this framework and board review.” In 2020, Fink enhanced the call for long-term value creation by emphasizing that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. … Companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees, and the communities where you operate.”


2019—Skepticism regarding BRT’s statement

Of course, not everybody bought into that new statement on the purpose of a corporation. Let’s go back for a second to the article of the Pulitzer-prize winning Michael Hiltzik in the LA Times. In the article, Hiltzik underlines that the shareholder value myth—a term coined by Professor Lynn A. Stout of the Cornell Law School—has been buried by the BRT, however, he asserts “the corporate commitment to all these stakeholders may be largely rhetorical at the moment…”, and that “it’s proper to approach the Roundtable statement cautiously”. Hiltzik continues by quoting a statement from the ValueEdge Advisors, “But we are skeptical about what the CEO signatories to this statement have in mind. Everything will depend on how specifically and quantifiably they describe their stakeholder goals and especially how their compensation is tied to those goals. … Investors should insist on more specifics and more clarity”. The investors represented by the Council of Institutional Investors, short CII, did indeed reacted in the afternoon saying, “it is critical to respect stakeholders, but also to have clear accountability to company owners”. Well, this reaction is understandable, as the BRT’s statement must’ve stepped heavily on the CII’s toes. However, the CII calls its constituencies the “company owners”, though that’s exactly what Lynn Stout tried to explain in her book, putting her full weight as a law professor behind it: “But from a legal perspective, shareholders do not, and cannot, own corporations. Corporations are independent legal entities that own themselves, just as human beings own themselves”.


2019, December—Update of the Davos Manifesto

The following will help to resolve the skepticism. Just four months after its publication, the Roundtable statement got prominent support from the World Economic Forum (WEF). In December 2019, barely four months after the Roundtable statement, the Davos Manifesto has been updated for the first time since 1973. Published by the founder and Executive Chairman of the WEF, Klaus Schwab, it states that “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.” So, the BRT and the WEF are clearly aligned on this issue.


2020, October—Measuring stakeholder capitalism

In October 2020, Brian T. Moynihan, CEO of Bank of America, served the CII’s request for quantifiable, specific, and clear stakeholder goals: He published the common stakeholder metrics for companies, developed by the International Business Council. A day after Brian Moynihan’s publication, on October 22, 2020, Klaus Schwab wrote in the TIME Magazine, „ Rather than chasing short-term profits or narrow self-interest, companies could pursue the well-being of all people and the entire planet. … They only need to shift to a longer-term perspective on their organization and its mission, looking beyond the next quarter or fiscal year to the next decade and generation“.


John Kotter must be pleased to see his prediction supported

Klaus Schwab pays directly into John Kotter’s prediction that “all this takes time, but it is possible. In two years, my sense is that we will look back at the Business Roundtable’s declaration as the mark of the beginning of a transformation – or it will have been forgotten”. So, let’s have another checkpoint on August 19, 2021, shall we?