Covid-19 has unmasked the ugly reality of our unequal, disadvantaged society. It has made plainly obvious all the problems that existed before the horrific pandemic struck. To borrow George Packer’s words in a recent piece in The Atlantic, we are living in a failed state.
Business has failed most of our country’s 162 million workers who have lived through forty years of flat wages. It has also done a disservice to the additional 32 million folks who should be working and are not. (The real unemployment number, before the pandemic, was just over 20%, not the 3.5% officially used). We have failed our people because, despite having some of the best hospitals in the world, the health outcomes for most Americans rank at the bottom of the developed world. Then, our government has failed a large swath of our citizens by desperately trying to make changes to Medicare, a move that would take away further insurance coverage for millions of Americans. We have certainly failed the kids of most Americans. We have done so badly that our country now produces high school graduates whose academic performance ranks in the middle to bottom half of the developed world according to the Pew Center for Research. And we have certainly continued to fail our African American brothers and sisters in most ways, including continued, aggressive efforts to disenfranchise their votes. Worst yet, bigotry against blacks (and brown people and immigrants) is at an all time high.
Despite all the failures, the devastation of COVID-19 has created two positive outcomes. First, it has shown in vivid, striking examples how ordinary people turned out to be extraordinary. They are the hospital nurses and doctors on the front lines, the first responders, the custodians cleaning our medical facilities —are all working together for a higher purpose, for the common good. They are acting with love, caring, and compassion to benefit society as a whole. And they are risking their lives every day. Then there are the truckers, the grocery and drug store workers, the police, the firefighters – all those who keep world functioning during these unprecedented times to keep us safe. Ordinary people in America are responding to the call and even inventing new, better ways to do their jobs. They are rising to the challenge, being exemplary citizens whom we should all emulate. The American people who business has so spectacularly failed over the past forty years are rising to the occasion and behaving in a way that is undeniably remarkable. Let us give them the opportunity to shine in normal times as well.
A second outcome of the pandemic has given us the opportunity to clearly see the dysfunction of our society and yearn for a better future for the next generation. For all the lives COVID-19 has claimed, it has offered in return a once in a lifetime opportunity for us to reset capitalism, the force that originally built America into the greatest nation in the world.
Business has been culpable in most of the failures I have cited above. Yet business can and must be the force that enables this country to lift itself out of the COVID-19 devastation and create unparalleled, inclusive growth and prosperity for all Americans. The secret sauce for the future starts with a reimagined form of free market capitalism. The business governance of the past must be trashed. The mantra of maximizing short-term shareholder value that has been followed in America for forty years, must be expunged. Stakeholder capitalism represents our exciting future. We must optimize the interests of all critical stakeholders. Not just one stakeholder, as in the failed shareholder primacy era, but all the vital stakeholders: customers, workers, shareholders, the corporation, the environment, and society. All these stakeholders must be taken into consideration and there must be a positive, symbiotic relationship among them. Fulfilling the interests of each creates a virtuous cycle.
The exceptionally good news is that this is not a new, unproven idea. It has been tested over time and has produced spectacular results. From 1945 to the early 1980s, this capitalism produced real prosperity in America. It made this country the leading economic and military nation in the world, while building the largest consumer market—America’s middle class. Even after business and government hijacked capitalism in the mid-1980s in favor of shareholder primacy, many successful companies continued to practice stakeholder capitalism. Just Capital, one of the leading not-for-profits now advocating for stakeholder capitalism along with the Business Roundtable, the World Economic Forum, The Aspen Institute, The Ford Foundation, The Rockefeller Foundation, B-Corp and others, have demonstrated the benefits of this form of capitalism. Just Capital’s ranking of the Russell 1000 corporations shows that most successful corporations, in terms of financial performance, are also the most just, as defined by how Americans hope business behaves. Unleashed from the shackles of the past, stakeholder capitalism can and must bring about extraordinary results to benefit all Americans.
The starting point for stakeholder capitalism is to reimagine the relationship between the corporation and its employees. Employees must become a corporation’s most prized asset, rather than being viewed as a cost to be cut and squeezed. They must be treated with dignity and respect, they must be trained and empowered. And they must be fairly rewarded by sharing in the incremental value of what they produce. With some exceptions, that has not happened in 40 years. In return, workers must focus on being increasingly productive and innovative. Whether it is friendlier relationships with customers or using technology to add value to what is produced, each employee’s goal must be to make the corporation thrive. That is the quid pro quo required to produce dramatic increases in prosperity and wealth for all Americans.
Freed from the obsession of quarterly results, Amazon chose to put consumer needs — quality, convenience, price—first. They executed this strategy brilliantly. Not through modest, incremental, short term steps, but through remarkable, breakthrough entrepreneurial innovation. Courageously, Amazon also ignored the pressure to produce dramatic boosts in profit every quarter, instead taking a long-term view of creating value for all of its stakeholders.
Who created the value at Amazon? People. The hard-working, knowledgeable employees who work with a clear purpose and passion. The business governance was clear. Give the customer, one of the critical stakeholders, the superior benefits they seek. Next, the company used technology – meaning the application of scientific knowledge and programming language to the tasks at hand. And who makes that happen? Again, the employees. Technology is simply a servant to be used and stakeholder capitalism empowers people to use it achieve excellent results as Amazon did. This kind of empowerment is also happening at Google, Microsoft, and Mastercard. In more traditional industries, Costco, Home Depot, Delta Airlines, and others are using it to become leaders in their fields. Take that to scale among thousands of companies and the result could be truly miraculous.
Stakeholder capitalism must also correct past sins. The so-called contract workers in the gig economy must be treated fairly. It is not about a minimum wage; it is about making a decent living wage. Amazon and others were wrong to treat contract workers as second-class citizens. Eventually, Amazon recognized their mistake and appropriately addressed this issue. And, if a business simply cannot afford to pay people a living wage, they should not be in the business. Exploiting workers to make a profit is no longer okay.
Paying people fairly creates another remarkably obvious positive result. One of the early giants in the car business, Henry Ford, recognized he should pay his people enough so that they could afford to buy the cars they produced. Now, the middle class has seen its purchasing power plummet. Just before the pandemic, GDP growth had been driven exclusively by the top 25% of Americans by income, with 75% of Americans spending less each year. We should aspire to live in a country where GDP growth is driven by a much larger share of that middle class – 70% at least. Dramatically increasing consumer demand is a critical objective and a worthy aspiration for stakeholder capitalism. The virtuous cycle works. Treat people well, pay people well, and create added economic demand and it will also help strengthen society’s social fabric.
Stakeholder capitalism can usher in bold new visions. It can and should encourage wise, productive investment over the long term. Why shouldn’t America create the world 3.0 manufacturing? China, Japan, India won the war on low wages. America can use its technology, creative genius, and entrepreneurship to create the world’s most efficient and effective manufacturing plants in the world. These plants of the future will require fewer people to operate, but many will be needed to design and build those plants, the warhorses of the supply chain and more. Stakeholder capitalism can facilitate that happening.
For some 100 years, America introduced almost every major generation of technological advancement. Yes, we missed Sputnik, but we caught up. Not only did we win the race to the moon, we created dozens of industries as a byproduct of that effort. Sadly, as a nation we no longer think in this daring and intrepid way. Today, China launched G-5 while we are reduced to pleading with nations not to buy China’s G-5 products. Ahead of us is AI, cyber, nano technology, the clean energy of the future. Here, stakeholder capitalism must partner with a more citizen-focused government to help create wise opportunities for business in these areas. In the end, the mission of government and business converge. Both stakeholder capitalism and government roles are to create superior solutions for human needs. For example, business will also need this reimagined government to help develop the best educated workforce in the world. We must have a truly revolutionary evolution of our public education, starting at age 3, including world class trade schools in both enduring and future industries. Private-public partnerships must become a critical component of America’s future landscape
Stakeholder capitalism must serve all its critical stakeholders. For sure, shareholders representing capital must receive a fair return. And so will the environment, the last vital stakeholder. In the months ahead our nation will win the COVID-19 battle. State and local governments (despite inadequate efforts from the federal government) supported by business, the healthcare and pharma industries, will prevail. Just in time because the next known pandemic is already galloping toward us. Again, it is massive, potentially catastrophic, in its likely destructive capacity for nations and the entire planet in its impact. It is called climate change.
Business and government must collaborate while each must also focus on issues big and small which must add up and create a collaborative, massive effort. Here again as when we faced COVID-19, climate change will require a change in our behavior at many levels. We will also need bold, breakthrough, out of the box ideas. One example: Bill Gates may well have created an urgently needed additional clean source to join wind, solar power and other promising initiatives. Bill Gates may well have created such a possibility, a dramatically reimagined safe, efficient and clean version of a nuclear reactor. The reactor was about to be built in China because China wants it, needs it, and would commit to expand, if successful, to benefit China and humanity. COVID and the trade wars interrupted that possibility. Can a reimagined American government intervene with the Gates Foundation and make America the test site for this clean, safe, nuclear power reactor? The constructive power of private-public partnership, academic and philanthropic efforts, could result in remarkable outcomes. We must welcome such possibilities with open arms.
Stakeholder capitalism driven business success will also benefit society as each of these businesses will be paying its fair share of taxes which will be greatly needed to reduce the COVID pandemic debt. Infrastructure repairs which must be undertaken, hospitals needing to be refinanced, state and local governments reimbursed, education reinvented and more. Government will need abundant revenues to fulfill all these needs and stakeholder capitalism can create superior financial results to benefit all.
America can thrive as a truly democratic society in the post COVID pandemic world. But only if business adopts the kind of governance demanded by stakeholder capitalism. At the same time, government must undertake its own dramatic changes to reduce the corrupt influence of special interests and diminish the escalating power of money in politics.
Our journey to the magic of stakeholder capitalism starts with a simply created and clearly defined operating model. Corporations can adopt that model to optimize the benefit of each stakeholder with governing guidelines to be interpreted as appropriate by each CEO, and board of directors, congruent with a company’s comprehensive situation and needs. The equity holders and the financial community must also concur. Further, this newly imagined business landscape will require a dynamic, entrepreneurial framework to serve as a critical driver of the vision for stakeholder capitalism. All of this will require leadership, wisdom, courage, and hard work.
It will be tragic for business and government to waste this opportunity. But we cannot afford to do less for the generations to come.
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