Every third week of January or so, the World Economic Forum holds its Annual Meeting. This Meeting which is also known as “Davos” – called as such given that it takes place in the charming ski village of Davos – is typically a gathering of the global elite, from heads of state to technologists to corporate leaders and many more including, at this most recent instalment of Davos, the 2019 Time Person of the Year, Greta Thunberg.
The theme for Davos 2020 was, “Stakeholders for a Cohesive and Sustainable World.” Indeed, Davos 2020 saw the launch of what World Economic Forum Founder and Executive Chairman Klaus Schwab calls the new ‘Davos Manifesto.’ The ‘Davos Manifesto’ essentially details out what the World Economic Forum and Schwab see as “The Universal Purpose of a Company in the Fourth Industrial Revolution.” As a side note and a fun fact, the “Fourth Industrial Revolution” – or at least its popularisation as a catch all phrase – is attributed as well to marketer extraordinaire Schwab.
The Manifesto states three main points. First, that the “…purpose of a company is to engage all its stakeholders in shared and sustained value creation.” Second, that a company is “...more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system.” Third, that a company “…acts itself as a stakeholder – together with governments and civil society – of our global future.” In essence, the Manifesto calls for a new kind of capitalism, amidst global societal issues such as climate change and inequality.
The Manifesto can essentially be summed up, according to Schwab, as “Stakeholder capitalism” which “positions private corporations as trustees of society and is clearly the best response to today’s social and environmental challenges.” This idea sounds great and promising and certainly, many – this writer included – find many of its points very attractive. Here is the problem though. It entirely misses the point.
The two main problems with Schwab’s conception of “Stakeholder capitalism” is its placement of the company as “trustees of society” and “the best response” to today’s multi-faceted challenges. Firstly, for some entity or person to be a “trustee of society”, it would be good if that person was democratically elected – at least in a democracy – and be able to be held accountable.
If the CEO of Company X made a killing on a business decision that benefitted her shareholders but destroyed the lives of many others who were not her shareholders, she is accountable only to her shareholders by law. She does not need to answer to those who aren’t her shareholders. Of course, Stakeholder capitalism supporters would say, “Well, she should be! Perhaps we need to change laws so that they are accountable as well to non-shareholders!” This is not realistic – businesses which do a tonne of good in their own way (though some definitely do a tonne of bad) would then be run by people who are better at politics than at business.
Compounding onto this problem of the lack of accountability is then the concentration of power in just a select group of non-democratically elected decisionmakers. Global giants like Amazon, Alibaba, Microsoft and others wield so much power, not just commercially but also politically and socially. This was nowhere more evident than in the various cities in the United States bending over backwards to get Amazon to select them for their second headquarters. In principle, those select group of decisionmakers making business decisions for their companies may be all well and good, but should they then be – as stakeholder capitalism would ask of it – trustees of society making critical societal decisions, by the very few for the very many?
The second problem is that many of today’s glaring societal issues – inequality, climate change, corruption, crime, protection of rights – are the domain of governments. These issues are all naturally very complex; figuring out some commercial solution that can solve any one of them is nothing more than a pipe dream. If Stakeholder capitalism holds that it is “clearly the best response” to these challenges, and therefore that companies should lead the way rather than governments, all it does is let government off the hook and undermine government capacity in the long-term. After all, if governments knew that someone else would do their job for them, perhaps even do a better job at it, what incentive do they have to improve?
To be clear, governments are not entirely innocent either. There are governments all around the world who would be more than happy to tai chi stuff they should be doing to some other entity – be it companies, NGOs, universities, or even to the citizenry themselves. But, over the long-term, we can only really make serious headway in solving our most difficult challenges if we have effective governments. Putting companies at the primacy of solving issues governments need to solve undermines those efforts.
A classic example is Corporate Social Responsibility (“CSR”). CSR sounds great, doesn’t it? Companies with some spare operating expenditure can choose to make donations to underserved members of society be it in health, education, or whatever other domain they so choose. Here is the thing. If governments were really effective at doing their jobs, you wouldn’t need CSR on a systematic scale.
For instance, if a government’s role is to take care of all members of its citizenry – regardless of background, race, age, whatever – then we wouldn’t see targeted CSR for education for the urban poor, or free mammograms for underserved women. Yes, there will be those who fall through the cracks – no government can be 100% effective – but those are not systematic. We won’t have people falling through the cracks who come from a particular demographic group. Similarly, if governments were really great at providing high quality education, then the market solutions (private schools or CSR funding for schools in poor areas) would be very limited in their scope.
Ultimately, one of the key responsibilities of any government, particularly democratically-elected ones, is to deliver social justice for their citizenry. CSR or even personal philanthropy (consider large foundations such as the Gates Foundation or the Chan-Zuckerberg Foundation) are built on principles of generosity. But generosity, however sincere, is not justice as Anand Giridharadas, author of “Winners Take All” so powerfully puts it. Attempting to substitute generosity for a perceived inability, however accurate, to deliver social justice only undermines that social justice in the long-term.
To be clear, it is certainly better for society if companies, dominant participants in the global economy, cared about social issues, governance issues, and environmental issues beyond its bottom line. And those companies are even more to be respected if they are willing to take hits to their financial bottom line to better serve those societal issues. There are those who will point out that companies who perform better along its ESG (Environmental, Social and Governance) responsibilities also tend to do better financially. Maybe, but let’s not mistake correlation for causation. Do you perform better financially because you are committed to your ESG responsibilities? Or is the correlation because only companies that do well then have the ability or resources to do good?
All this is to say that while companies certainly need to do their part in helping to solve some of society’s most urgent issues, to think of them as trustees or as “the best response” is misguided. The responsibility, as it always has, remains with the actual trustees of any society, the government. Companies and NGOs should complement governments but it should not substitute for them. Generosity is not justice, only justice is justice.