Shareholder Capitalism Is Destroying The World!
We need to broaden capitalism’s benefits to all stakeholders. When only shareholders win, everyone loses.
Shareholder capitalism has become toxic. Its relentless focus on maximizing investor profits disregards the well-being of other groups – employees, customers, suppliers – critical to long-term success. The results are striking: eroding benefits, stagnant wages, increasing inequality, and recurring economic crises.
Spreadsheets as a way to snapshot companies or make them look attractive are a great illustration of the problem. They let investors tweak assumptions to make opportunities look irresistible, obscuring real-world constraints while reducing everything to simple numbers. Take Amazon’s treatment of warehouse workers during the pandemic:executives wanted to take advantage of pandemic tailwinds so they began to scale at breakneck speeds without regard for a sustainable working environment. The company churned through available labor pools and projected that they would run out of potential new hires to work in their warehouses by 2024. Or you can look to the healthcare sector, where years of cost-cuts and administrative burden are driving nurses to leave bedsides, regardless of society’s needs.
Short-termism prevails because shareholder returns are the only true north in these, and many other, cases. But sustainable profits require healthy partnerships across the value chain. Without satisfied customers, employees, vendors, and communities there are no earnings to collect in the future. For capitalism to prosper, we need to transition to a focus on stakeholder value.
Non-profit ownership of commercial organizations is definitely not the answer. The recent controversy at OpenAI highlights some of the inherent challenges faced by non-profit organizations in the fast-paced and competitive business environment. Non-profits, by their very nature, are constrained in their ability to raise capital through traditional means like issuing stock, limiting their agility and capacity for rapid growth and innovation. This is particularly problematic in sectors like technology or healthcare, where staying ahead of the curve is crucial. OpenAI's situation illustrates how non-profits can struggle to balance their mission-driven goals with the practical demands of competing against for-profit entities. Similarly, non-profit health systems often face difficulties in accessing capital, investing in the latest technologies, and attracting top talent due to budgetary constraints and the lack of profit-driven incentives. These limitations can hinder their ability to effectively compete and innovate.
Alternative frameworks like mutually-owned enterprises, benefit corporations (B-Corps) and employee stock-ownerships (ESOPs) already exist. Some mutual insurers and financial groups have thrived for more than 100 years by putting customer well-being first. Member governance fosters loyalty and reinvests profits to improve services. The downside is mutuals typically move slowly and employees have no ownership stake in the company. B-Corps are required to have a fiduciary duty to stakeholders and have been adopted by numerous companies I love like Patagonia and Ben & Jerry’s. B-Corps don’t change the ownership structure and the standing of different stakeholders has, to my knowledge and superficial research, never been litigated in court.
I am especially intrigued by Employee Stock Ownership Plans (ESOPs). ESOPs offer employees an ownership stake in the company through a trust fund. As shareholders, employees are more invested in the company's performance, often leading to increased productivity, higher employee morale, and lower turnover rates. ESOPs provide a mechanism for succession planning, especially in privately-held companies, allowing for significant tax advantages for the seller and a smoother transition than a PE buyout while preserving the company’s legacy and retaining jobs. Additionally, there are substantial tax advantages for both the company and the employees participating in an ESOP, making it a financially attractive model.
No model is perfect. But elements of better align growth with collective prosperity. Lasting change requires redefining corporate purpose around all contributors, not just shareholders. Otherwise business becomes a spreadsheet exercise disconnected from its human components – a recipe for collapse.