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Without further ado, let’s dive in.
Amid Covid-19-induced lockdowns, essential workers have kept cities running—garbage collectors, farmers, delivery drivers, security guards, nurses, teachers. But if these people are so important, why are they some of the lowest-paid and most vulnerable workers, at least here in Southeast Asia?
For decades, we’ve lived with a certain brand of capitalism—one where an unbridgeable chasm exists between top executives’ pay and workers’ wages; where employees are merely another expense on the balance sheet; where the goal of business is always to increase their share of the pie; where profits fatten only the shareholders’ wallets.
This 21st-century capitalism is largely attributed to Milton Friedman, a Nobel Prize-winning economist who, in the 1970s, popularized (but didn’t create, as some believe) the ideology of maximizing shareholder value (MSV).
If there’s anything the pandemic has shown, it’s that capitalism is long overdue for a reset. Businesses need to adopt a new system, which should include improving the lives of the stakeholders that make their operations possible in the first place.
TL;DR:
- Falling out of love with Friedman
- Stakeholder capitalism—a viable alternative?
- Plugging the loopholes with metrics: AirBnB’s attempt
- Can you walk the talk even in a pandemic? Tech CEOs say yes
- What’s in it for investors and business owners?
- Tech is ahead of the curve: zebras, camels, proficorns, and the non-startup startup
- Dethroning doesn’t mean death—MSV will live on
- But will the real unicorns please stand up?
- Businesses can’t do it all. They shouldn’t have to
Falling out of love with Friedman
When it’s considered as the core purpose of corporations, MSV does more harm than good.
Pulitzer Prize-winning columnist and analyst Steven Pearlstein summed it up well:
In tech, MSV pushes startups to chase growth at the expense of everything else, so that the investors who risked funding them can reap ever larger returns. It’s when influential companies, like unicorns, make irresponsible decisions in the service of shareholder profits that MSV really rears its ugly head in tech.
Fair wages? Try contractual workers with no protections and benefits.
Consumer privacy? Try selling the data to any party with the right budget.
Community contribution? We’re already creating jobs—never mind that we might end up making some cities unlivable too.
Every once in a while, a rallying cry goes up against the Friedman brand of capitalism. Marginalized groups try to hold up a mirror to governments, businesses, and the social elite to show that the system is broken.
But the status quo has remained, because, after all, life has improved if you zoom out and look across the decades. Global poverty dropped to a record low of 10% in 2015, according to the World Bank. Free markets have allowed technology to flourish, in turn leading to the development and production of things that enhance, and even save, lives—from entrepreneurship and global trade to medicines and e-learning tools.
It appears Covid-19 has brought us to a tipping point, though. This time, it’s no longer just marginalized groups and far-leaning political parties that are decrying MSV—even businesses have joined the fray. Pundits now say Friedman’s legacy is another coronavirus casualty.
And guess who’s helping bang the nails on the coffin? Powerful tech CEOs.
So if we’re saying goodbye to the dominance of MSV, what type of businesses will emerge?
Stakeholder capitalism—a viable alternative?
In January this year, the World Economic Forum (WEF) convened its annual meeting under the theme, Stakeholders for a Cohesive and Sustainable World.
This was based on the Davos Manifesto 2020, which asserted that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation”. It identified five stakeholders every corporation must serve: employees, customers, suppliers, local communities, and society at large.
This wasn’t the first time the WEF advocated for stakeholder capitalism. In 1971, German engineer and economist Klaus Schwab published the book, Modern Enterprise Management in Mechanical Engineering (he also founded WEF in the same year). In it, he and co-author Hein Kroos argued that enterprises should serve all of their stakeholders, not just shareholders. WEF’s Davos Manifesto 1973 asked businesses to “harmonize the different interests of the stakeholders”, which include employees and society, among others.
If the concept of stakeholder capitalism isn’t new, why has it only recently gained enough momentum to threaten the dominance of MSV?
Aside from the failures of MSV mentioned earlier, backlash against capitalism as we know it has grown ever since the Great Recession of 2008, when the rich walked away richer and the poor, ever poorer.
There are other factors, too, such as the shift in global political conversations and the strength of social justice movements that are often amplified through social media.
But for now, let’s focus on one factor: businesses themselves are declaring their commitment to stakeholder capitalism, and even putting their money where their mouths are. Some now acknowledge MSV to be a selfish, short-sighted approach to business that leads to decisions that benefit only the company owners, top executives, and shareholders.
In August 2019, Business Roundtable, an influential association of CEOs in the USA, released a new Statement on the Purpose of a Corporation signed by 181 CEOs. The statement declared a commitment “to all of our stakeholders”, and to:
- Delivering value to customers
- Investing in employees
- Dealing fairly and ethically with suppliers
- Supporting the communities in which companies work
- Generating long-term value for shareholders
Then in October, Marc Benioff, the chairman and CEO of Salesforce, called for a “new capitalism” in an essay in The New York Times.
Benioff acknowledges the privileges he’s gained through capitalism. His company, Salesforce, has “generated billions in profits and made me a very wealthy person”. (It’s currently worth roughly US$168.46 billion.) He admits that he’s among the 0.1% in America who own about 20% of the nation’s wealth.
In his essay, Benioff asks companies to measure not just shareholder return, but also stakeholder return. Profit and purpose can and must go hand-in-hand. For Salesforce, this has played out in equal pay among genders. The company also gives back 1% of its equity, time, and product to communities through Pledge 1%, a corporate philanthropy movement that Salesforce helped found.
But one of the most common criticisms of stakeholder capitalism is that it doesn’t hold companies to specific standards. That was one allure of MSV—it gave companies a concrete goal to chase. With MSV, companies could measure success with a numerical value, which was the dollars that shareholders get.
The inability to measure goals is anathema to business success and accountability, especially for tech companies that are used to measuring everything. With data analytics being ubiquitous and even integral to tech operations, startups and tech giants can hardly be expected to buy into a vision that doesn’t offer concrete goals and metrics.
Enter: Airbnb.
Plugging the loopholes with metrics: Airbnb’s attempt
Airbnb announced its commitment to stakeholder capitalism in 2018, but it wasn’t until January 2020 that it shared specific plans and metrics for implementation.
Here are its core elements:
- Identify our stakeholders.
- Establish principles and metrics for serving our stakeholders.
- Update our corporate governance and compensation.
- Report on our progress.
- Share our success.
For each type of stakeholder—guests, hosts, communities, shareholders, and employees—they identified principles and tied each one to a set of metrics. For example:
While we’ve yet to see how Airbnb will implement its plan and reap its rewards, its roadmap can serve as a guide to others.
Can you walk the talk even in a pandemic? Tech CEOs say yes
But Covid-19 has thrown a wrench in everybody’s plans.
A select few companies—particularly high-margin tech businesses—can afford to avoid layoffs during the pandemic. American telco Verizon announced it will instead retrain its staff as part of its recently launched responsible business plan. In late March, Benioff pledged to avoid ‘significant’ layoffs within the next 90 days, and urged fellow CEOs to do the same.
Some hard-hit industries have few other options, though. And as travel shriveled up, Airbnb had to let go of 25% of its global workforce.
You read that right. Twenty. Five. Percent.
Nearly 1,900 people out of 7,500.
But get this—some people praised Airbnb’s move. And that’s because, in laying off staff, it demonstrated care for the departing employees. The workers were offered severance pay worth 14 weeks plus additional weeks depending on tenure; months of health insurance and mental health support; and assistance with job placement, among other forms of help.
Layoffs by LinkedIn in July came with similar offers of support. One would argue that massive layoffs are profit-driven moves, but stakeholder capitalism doesn’t mean not trying to turn a profit (that would be irresponsible, and plain silly). Businesses need to survive and be profitable in order to keep employing people and make products or services—that should be obvious.
Meanwhile, what do Klaus & Co say, now that their ideals are undergoing an excruciating litmus test?
Together with some business leaders, WEF proposed “Stakeholder Principles in the COVID Era” in April:
Tech companies can also focus on other aspects of responsibility and sustainability aside from keeping their staff safe. Some areas to work on include improving data privacy for tech users and reducing a company’s carbon footprint, according to Benioff.
What’s in it for investors and business owners?
Business leaders must have weighed the costs and found much to gain in practicing stakeholder capitalism.
It’s surely no coincidence that Airbnb announced its stakeholder capitalism roadmap when it was the brink of an IPO. (Covid-19 has postponed that plan.) The unicorn company has faced significant hurdles in recent years, including regulations and restrictions on Airbnb leasing, lack of protections for guests and hosts, and accusations of causing rental prices to soar and making neighborhoods unaffordable for their residents.
The release of its stakeholder-focused roadmap could be seen as a way to manage its risks. By tying principles like guest safety to employee bonuses, Airbnb signals it’s taking concrete action in this area—and will thus reduce the potential business loss, reputational harm, stock price plunge, and liabilities that could result from safety incidents.
For investors, there’s also the fact that most environmental, social, and governance (ESG) funds—many of which favor tech companies—have performed better than non-ESG funds over the past 10 years. And even in the midst of the pandemic, ethical investment funds have continued to outperform the global stock index. Small wonder that 96% of investors in Southeast Asia now consider environmental and social criteria when assessing potential investments.
At times, it’s even the investors themselves who advocate stakeholder capitalism.
In a letter to CEOs, Larry Fink, Chairman and CEO of investment firm Blackrock, wrote that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders”.
So it all boils down to a question of sustainability—of whether or not a company will continue to thrive in the long run. As a sign of these sentiments, the Long-Term Stock Exchange became approved as a securities exchange in the US in May 2019. It was founded by Eric Ries, the Silicon Valley veteran known for developing the lean startup methodology. Ries calls for a “Capitalism 2.0” that focuses on long-term thinking in capital markets.
Plus, companies can’t ignore consumers’ growing demand for sustainable and ethical business practices. That includes prioritizing environmental sustainability, ethical sourcing and production, and fair treatment of workers. Stakeholder capitalism, then, is also a response to consumer demand. As a result, it will help drive the bottom line.
Tech is ahead of the curve: zebras, camels, proficorns, and the non-startup startup
IIn some ways, tech companies have preempted the rising popularity of stakeholder capitalism.
In 2010, the makers of Basecamp published the book, Rework. With chapter sub-headers like “Outside money is Plan Z,” “You need less than you think,” and “Start a business, not a startup”, they made it clear that they were advocating for a tech business model that wasn’t VC-reliant and pursuing growth at all costs.
They chose “slow, consistent growth”, and turned down offers from more than a hundred investors. (They did sell a small, no-control stake to Jeff Bezos.)
Today, Basecamp is a $100 billion business, and the software has been used by 16 million people worldwide.
In recent years, more tech entrepreneurs have been advocating a similar approach to building tech businesses.
“Zebra companies are both black and white: they are profitable and improve society. They won’t sacrifice one for the other,” wrote three entrepreneurs and a marketer.
“‘Camel’ startups grow in controlled spurts, investing in growth when the opportunity calls for it,” wrote a social impact investor.
And meanwhile, there’s the “proficorn”, which has “four characteristics: profitable, private, promoter-funded and having a reasonable valuation (say, $100 million or more)”.
Sound familiar?
Love or hate these monikers and metaphors, but the ideas they symbolize are appealing in a world that’s reeling from a pandemic. When the bricks are falling down, pursuing controlled, purposeful, and sustainable growth makes more sense than recklessly chasing a wild dream that few companies have managed to attain.
Dethroning doesn’t mean death—MSV will live on
MSV’s dominance might be on its last legs, but the ideology will persist, especially in legacy corporations. And of course, it’s possible that some CEOs’ public support of stakeholder capitalism is a mere PR move to manage further economic risk during this crisis.
In tech, MSV will persist when powerful companies make decisions based on improving the next quarter’s profits than on long-term sustainability. It will also persist when founders lose sight of the original purpose of their business and chase the unicorn dream in response to pressure from external funders.
But will the real unicorns please stand up?
The good news is that just as businesspeople and consumers are finally decrying MSV, they’re now falling out of love with unprofitable and reckless unicorns. Investors have become cautious about overly bloated valuations of tech—and pretending-to-be-tech (ahem, Luckin Coffee)—companies.
Now, a rarer breed of unicorn—the profitable and sustainable one—needs to step up. Zoom has been hailed as one of these “true unicorns” because it was already profitable before it went public last year. In Southeast Asia, we’ve yet to see the likes of Grab, Go-Jek, and Tokopedia turn a profit and come up with sustainable models for their businesses.
Businesses can’t do it all. They shouldn’t have to
If we really are seeing a shift towards stakeholder capitalism, it will take time. Transformation won’t happen in a year. A lot of discourse and upheaval need to take place among businesses, shareholders, investors, employees, consumers, and communities.
And in the end, if government policies continue to favor the rich and burden the poor, inequality will keep growing exponentially. If the top leaders of countries coddle oligarchs and prioritize cronies when granting licenses for certain operations, then business will continue to be about lining the pockets of a privileged few. If lawmakers balk before industry giants and corporate lobbyists, the rights of consumers and employees will erode at the mercy of the highest bidder.
Tech leaders don’t have to lead the charge towards change. But with their clout and (for some) charisma, they just may be the ideal advocates of a new, better type of capitalism that the world needs right now.
