By Annisa Essack
Economist, Milton Friedman, some 50 years ago, said that companies exist purely to maximise profits. A declining belief in capitalism, an accelerating climate emergency, increasing divisiveness and inequality — all exacerbated by a global pandemic and its disparate economic impacts threaten business, democracy, society, and our planet.
Presently, we are on the verge of a historic opportunity. The time has come to reset and the Coronavirus pandemic has highlighted this. In a bid to address these profound challenges, we must look at root causes and not symptoms. Look closely and what we find is a more fundamental problem – an economic system that serves the few, not the many.
The trajectory of the current economic system was set by American economist Milton Friedman in September 1970. A system that rewarded the maximisation of profits for shareholders – no matter the cost to people, communities, or the natural world on which all life depends. Five decades later, we are in dire need of a reset that will lead to a more just economy designed to work for everyone and for the long-term. We are in dire need of a reset that is consistent with the three essentials of a 21st-century economy, i.e. to invest for justice, design for the interdependence, and account for all stakeholders — that means for all of the workers, customers, suppliers, communities, the environment, and of course shareholders.
A reset is in all our shared interests and without it, we will not achieve the global development goals meant to save the planet and its most vulnerable people. We need an economic reset for the workers who deserve a voice, health care and a living wage. A reset for women whose leadership we need and whose pay gap we must close, for the indigenous and for people of colour who deserve equal access to investment, leadership, and ownership. A reset to create sustainable value for long-term shareholders. And, finally, a reset for nature because we cannot live safely in a home on fire or one that is drowning.
In summary, we need a reset that moves us away shareholder primacy and towards stakeholder capitalism. The good news is that stakeholder capitalism is already working. According to JUST Capital, evaluation of the Russell 1000 companies shows that companies that lead in meeting the needs of all stakeholders have financially outperformed those that lag behind by almost 30% over the past four years, and by double-digit margins throughout the pandemic. We can no longer be asking whether we must transition to stakeholder capitalism.
The only question that forward-thinking leaders in business, finance, government, and civil society should be asking is how. In fact, there are many businesses already embracing a stakeholder approach and showing how the imperatives can be successfully implemented. During the pandemic, dozens of large corporations took steps to invest in new business practices that promote greater resilience of their workers, customers, and suppliers. These range from permanent wage increases and changes to paid sick leave, to community investment funds and high-risk customer accommodations. Such efforts were welcomed, and we now know that we need more and bolder steps.
In the United States, through the Business Ambition for 1.5 degrees Celsius pledge, which commits to achieving net-zero carbon emissions by 2050 or before, nearly 300 companies are aligning their business models to design for the interdependence of healthy people, planet, and economies. These market leaders, including Microsoft and Pepsi represent $3.6 trillion in market capitalisation. Broadway Financial is investing for justice by investing in communities of colour, too often overlooked and underserved by traditional financial institutions. After its recent merger with City First, the new entity will be the largest Black-owned bank in the U.S., with $1 billion in assets. Larger corporations are also beginning to break new ground on equity: Intel fully discloses wage data for its workforce by gender, race, and ethnicity; and PayPal is lifting wages of its most financially distressed employees, boosting both engagement and productivity.
Fifty years later, evidence abounds that shareholder primacy is damaging people and the planet. In contrast, the opportunity of stakeholder capitalism, with a market of US$ 30 trillion in Environmental, Social, and Corporate Governance and impact investments and growth, is clear.
The time for a reset is now.