Stakeholder Capitalism Revisited

Capitalism contains a paradox: the same economic system that creates prosperity can imperil health, safety and privacy. Solving this paradox means respecting the principles of capitalism for their inarguable benefits without subordinating social and human interests.

The recent “Statement on the Purpose of a Corporation” by the Business Roundtable recognizes that businesses have responsibilities to customers, employees, suppliers and communities, in addition to stockholders. Signed by 181 CEOs, the statement advocates “stakeholder capitalism.”

The social responsibility of business has been debated for well over 50 years. In 1970, libertarian economist Milton Friedman famously sought to discredit the concept, writing “The Social Responsibility of Business is to Increase Its Profits.” The Business Roundtable joins this debate on the side of social responsibility, but how well does its statement address the paradox of prosperity? The limits of stakeholder capitalism become apparent by examining what the statement does not propose.

First, recognize that customers, employees, stockholders, suppliers and community members are people exposed to mass shootings at movies, night clubs, concerts, shopping malls, at work, in churches, synagogues and temples. Even though lives would be saved, condemning immunity for injury to gun manufacturers falls out of bounds of stakeholder capitalism; no one expects managers in one industry to challenge the privileges of another industry. Nor does one find the Business Roundtable suggesting corporate managers abstain from financing the campaigns of politicians who block laws to reduce gun violence, even though doing so would protect stakeholders.   

The intentions of CEOs “to protect the environment,” however commendable, apparently went silent within the Business Roundtable when President Donald Trump withdrew from the Paris Climate Agreement. A Business Roundtable recommendation for corporate members to defund climate change deniers in Congress would show dramatic support for the country’s communities, but such action lies beyond stakeholder capitalism.

We do not expect Business Roundtable CEOs to oppose government policy prohibiting Medicare and Medicaid from negotiating drug prices, even though to do so would enormously benefit their companies’ stakeholders. Nor should we wait to hear CEOs objecting publicly to other policies that penalize stakeholders at the expense of special interests, such as the preferential “carried interest” tax privilege for ultra-wealthy hedge fund managers.

Adam Smith was among the first to shed light on conflicts between private action and public interest. Smith decried the loss of national wealth due to privileges bestowed on a few merchants by 18th century British mercantilism. Today, Smith assuredly would call out state-sponsored privileges for gun manufacturers, fossil fuel producers, drug companies, hedge fund managers, and others businesses receiving special treatment, and he would likely be dismayed at campaign finance laws that tilt the playing field toward corporate interests and wealthy individuals. 

Politicians can often be convinced to grant government-sponsored privileges to business.   Special treatment acts as a powerful incentive for managers, even though it often results in prioritizing stockholder interests over those of other stakeholders.  

What, then, are the limits of stakeholder capitalism? Where Americans are practically united in favor of a policy, such as expanded background checks for gun sales and red flag laws, corporate managers are more inclined to support those proposals in the name of social responsibility, as 145 CEOs recently wrote in a letter to Congress.  

On the other hand, corporate support will be lacking when issues are more controversial and especially if profitability and executive financial wealth are in play. A case in point is the business-favored, inequality-promoting Tax Reform and Job Act of 2017. Corporations may line up on the side of social responsibility when it can enhance their public standing; however, the positives of stakeholder capitalism also define its limits. 

Many problems involving business and society lie beyond the reach of stakeholder capitalism; how, then, should society address conflicts between business interests and the public welfare? 

First, the country needs a Constitutional Amendment to overrule Supreme Court decisions in Citizens United and related cases that grant corporate managers and wealthy individuals an advantage in securing economic privileges by financing political campaigns.

Managers naturally fund politicians willing to grant privileges that increase company profits.  Campaign finance reform should remove incentives that lead to corporate/managerial privilege at the expense of the rest of the citizenry.

Second, we need to recognize that failure to enact cost-effective regulation constitutes state-sponsored corporate privilege. To be clear, there is nothing sacred or inherently virtuous in government regulation — agencies are also susceptible to abuse, and public officials must be held strictly accountable. Regulation is an imperfect instrument, and it needs to be implemented wisely.  

However, public policy is the mechanism available to maintain a free, competitive, market-based economic system, and it is the only means consistently available to ensure both economic prosperity and human well-being. Nor should we see the issue as either-or: problems as vast and threatening as climate change are going to require both private and public sector solutions.


John Aram is a retired professor of management policy at the Weatherhead School of Management at Case Western Reserve University, teaching and writing in the area of business and public policy.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.