In the 1970s, a small group of activists and their allies came together and embarked on an unlikely quest to redefine what is good for society and enact discriminatory public policy to help themselves. Now, in 2022, their supporters are celebrating not only victory, but public denial of what they are doing.
I am referring here, not to the current effort to overturn women’s reproductive rights, but rather to the successful half-century campaign to overturn the normal workings of capitalism and channel most of its gains to shareholders, managers and their financiers.
In this current variant of capitalism, corporations seek to maximize shareholder value as reflected in current stock prices. The result is growing inequality, pervasive short-termism, personal dealings by leaders, and declining social cohesion. This calls into question the very legitimacy of capitalism: more young people today say that they prefer socialism to capitalism.
This current variant of capitalism is not the way capitalism has worked for the past 200 years. It is an aberration of capitalism, specific to our current era. In pre-1970s capitalism, workers’ compensation progressed primarily based on the productivity gains they helped create. It’s one of the reasons why millions of immigrants have flocked to America in search of a better life.
The contrary results of the past half-century can be seen in Figure 1. In a simple image, we can see the “irrefutable gun” of this aberration of American capitalism and the root of its impact on income inequality.
After the 1970s, workers’ compensation stagnated, while the earnings of managers, shareholders and their financiers grew exponentially as they began to systematically extract value from business. From 1978 to 2013, CEO pay increased by an astonishing 937%, while the typical worker’s compensation has increased by a meager 10%.
It should be noted that the transition from an equal sharing to an unequal sharing of productivity gains preceded the arrival of today’s digital giants by several decades: this aberration of capitalism was imagined by economists of the industrial era , not of the digital age.
Milton Friedman is not entirely to blame
How did it happen? Many point to Milton Friedman New York Times September 1970 article as the opening salvo of the campaign. Friedman’s article fiercely argued that “there is one and only one corporate social responsibility: to use its resources and engage in activities designed to increase its profits…”
Yet if Friedman had made it clear that he was talking about long-term profits, the consequences might not have been so dire. Long-term shareholder value is a good thing: that’s how healthy capitalism works. Long-term benefits require engaged employees and delighted customers and create the resources that can help achieve social goals.
Two new elements: share price and executive compensation
The real culprits of the current aberration of capitalism are business school professors Michael Jensen and William Meckling. They started with their famous 1976 article, The purpose of a businesswho added two essential elements to Friedman’s concept.
First, they defined shareholder value theory as the maximization of shareholder value as reflected in the current share price. The current stock price, according to the authors, is the best indicator of long-term shareholder value. Thus, companies should focus on increasing the current stock price as a goal. This has created a pervasive short-term orientation in thinking.
Second, in order to align the self-interest of the leaders with the corporate purpose, the leaders had to be generously compensated in shares.
And indeed, when CEOs were paid this way, they became very enterprising, but in their own cause, not necessarily companies”. Now, a company’s long-term value has received less attention than its efforts to increase the current share price. Their own compensation also skyrocketed.
In 1997, the Business Roundtable (BRT) made it official: maximizing shareholder value is the formally recognized policy of American companies. Over the next two decades, large corporations implemented the processes, practices, and values that made maximizing shareholder value the standard method of managing most large corporations. This is also what business schools have taught. Internally, it was just the way to run a business.
Externally, however, it has come to be seen as a toxic mix of skyrocketing short-term profits, exorbitant executive pay, internal bureaucracy, stagnant worker incomes, growing inequality, corporate buyouts, and more. stocks, executive insider trading, periodic financial crises, corporate life in decline. life expectancy and, overall, a growing distrust of business.
In August 2019, several hundred CEOs of major corporations came together and signed a new BRT statement ostensibly acknowledging the problem, setting aside the goal of shareholder value, and acknowledging the need to serve all corporate stakeholders.
But now, in 2022, almost three years later, not much has changed. The company processes, practices, attitudes and values that were installed in 1997-2019 are still in place. Companies say they are at the service of all stakeholders, but their actions say otherwise. The 2019 statement was a fake head. The focus on maximizing shareholder value continues with its well-documented disastrous consequences;
It is not capitalism itself that has caused all these problems: it is the particular aberration of capitalism that must be corrected.
A better way: customer capitalism
Meanwhile, a smaller and much more successful group of companies have done just that and are pursuing a better path: customer capitalism. There are different ways to express it. The Microsoft and Amazon formulations are shown below in Figure 2. “Love your customer as yourself” is another version. “Co-creating value for customers” is yet another. Other formulations dwell on the balance, authenticity, and joy that comes from removing the BS that affect corporate life so much today, and then experiencing the extraordinary returns for everyone. when this happens. Profits are the result, not the goal.
The difference between shareholder capitalism and client capitalism is like night and day: everything is different. It is the disparity between a group of inwardly focused goals and a set of other-oriented ethical goals.
Pleasing customers is not just ethical. It’s also very pragmatic. Delighting customers helps to generate financial gains that allow the company to satisfy all other stakeholders: staff, managers, partners and shareholders, as well as society as a whole, as shown in Figure 3 below. -below. This allows companies to be among the best companies. in terms of total return and attention to the environment. As Apple succinctly puts it in its vision statement: “We aspire to leave the world better than we found it.”
Customer capitalism is no secret. Companies like Microsoft and Amazon reveal their obsession with delivering value to customers in their vision and mission statements, as shown in Figure 2.
IBM and GE, which have notoriously pursued shareholder capitalism, do not hide the fact that the customer is still not included in their vision and mission statements: these companies are always centered on themselves.
As shown in Figure 3, the total return of these three companies over ten years is significantly lower than that of the average S&P 500 company, which limits their ability to deliver value to other stakeholders or to society.
We must solve the current crisis of capitalism, not by removing capitalism itself, but rather by removing the current aberration of capitalism.
And also read:
The Origin of the World’s Dumbest Idea: Maximizing Shareholder Value
Why Stakeholder Capitalism Will Fail