The Raging 2020s

by Alec Ross

  * * *

  THE ABSURDITIES OF shareholder capitalism have become so clear and extreme in the last decade that the tide seems to be turning. Nobel Prize–winning economist Joseph Stiglitz has spoken repeatedly about the flaws of Milton Friedman’s vision. To put it bluntly, “he was wrong,” Stiglitz said at a World Economic Forum panel in 2018. Decades of the Friedman doctrine have not brought about a more efficient, effective economy for the many. Even business leaders have begun advocating against shareholder capitalism and for a return to stakeholder capitalism. In an interview with the New York Times, Salesforce CEO Marc Benioff said, “It influenced—I’d say brainwashed—a generation of C.E.O.s who believed that the only business of business is business. The headline said it all. Our sole responsibility to society? Make money. The communities beyond the corporate campus? Not our problem. I didn’t agree with Friedman then, and the decades since have only exposed his myopia. Just look where the obsession with maximizing profits for shareholders has brought us: terrible economic, racial and health inequalities; the catastrophe of climate change. It’s no wonder that so many young people now believe that capitalism can’t deliver the equal, inclusive, sustainable future they want.”

  “Stakeholder capitalism” has become a buzz phrase of choice for a whole sea of top executives.

  In August 2019, 181 members of the Business Roundtable—the trade association that decades ago helped bring shareholder capitalism into the mainstream—signed a letter committing their businesses to delivering value to stakeholders as well as shareholders. “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” including employees, customers, and the communities in which businesses operate, the letter said. In effect, the statement called for a return to the more holistic approach to business that dominated the private sector during the mid-20th century.

  In some instances, signatory companies have adopted more socially conscious policies. In January 2020, BlackRock committed to making environmental sustainability a central tenet of its investment strategy, and the following month JPMorgan Chase announced it would cut back financing for fossil-fuel companies. But absent any sort of broader tools of accountability, it is guesswork to determine how real the Business Roundtable pledge really is.

  What is necessary is a set of very clear, transparent, industry-specific measures with goals and benchmarks that define who a company’s stakeholders are and their performance against stakeholder goals. This would be the functional equivalent of the balance sheet tools we use to measure financial performance.

  Hedge fund billionaire Daniel Loeb railed against the movement toward stakeholder capitalism when he said, “Stakeholder capitalism distorts the incentive that prompts investors to risk their capital: the promise of a profit on their investment. So, I share Friedman’s concern that a movement toward prioritizing ill-defined ‘stakeholders’ might allow some executives to pursue personal agendas—or simply camouflage their own incompetence (until it is starkly revealed by poor shareholder returns).” In his polemic Loeb accurately captured what now needs to happen: we need to define who the stakeholders are and provide the kind of measures of performance and accountability for those stakeholders that we provide for shareholders.

  For example, right now publicly traded companies in most countries are required to disclose the compensation for the CEO and other top executives. It would be productive to also produce a sort of “Gini coefficient” measure across the company to show the distance between top and bottom earners and to demonstrate where people fall in the averages (including mean and median).

  The assumption here is not that equal pay is the ultimate good, any more than zero pay would be an ideal measure for CEO compensation. But publicizing CEO compensation makes CEOs publicly accountable to shareholders, and to anyone else who would critique their earnings. Similarly, while it is unrealistic to expect that the janitor of a company will make anywhere near the same wage as the CEO, it is reasonable to have a measure and judge the company based on whether the difference in that compensation is ten times or one hundred times or ten thousand times.

  I remember being at a party in Davos during the World Economic Forum, held in the chalet of a billionaire. Stakeholder capitalism critic Dan Loeb was talking to a fellow billionaire, Sean Parker, discussing the costs of private jets relative to the altitudes they can reach.

  “I won’t pay $10 million for another five thousand feet of altitude,” Parker said to Loeb.

  “I will,” Loeb responded with a shit-eating grin.

  I don’t detest Loeb for his wealth or private jet ownership. I don’t believe every billionaire is a policy failure. But I do believe that Loeb’s critique of stakeholder capitalism has to be placed in the context of an economy that has become comically unequal and, in turn, is producing the rage all around us.

  “In some companies’ minds, there is a tug-of-war between the profit motive and social responsibility,” Mohamed El-Erian, the legendary asset manager and president of Queens’ College, Cambridge, told me. “These companies will slowly be reminded that you cannot be a good house if you don’t care about the neighborhood.… But left on their own, they’re not gonna move fast enough.”

  Indeed, many executives feel like they are caught in a bind. All the incentives continue to push CEOs toward exclusively serving shareholders. To resist them can be incredibly risky and costly, even when the decision to do so is perfectly justified. For instance, Amazon announced in the midst of the 2020 COVID-19 pandemic that it would spend $4 billion to increase safety for its nearly six hundred thousand workers. The stock market swung against the company, which saw its share values immediately drop 7.6 percent in response to the decision. Because of a $4 billion investment in the well-being of its workers, $83 billion of shareholder value was lost. Why? Because in the eyes of traders, Amazon’s decision took profits away from shareholders and posed a threat to the bottom line. The absurdity of this form of shareholder capitalism pits the interests of workers and shareholders directly against each other, and it belies both the real health and the real value of the company. Two months later, Amazon regained $400 billion in market cap as its businesses spiked in growth, increasing share value by more than 30 percent.

  A system that is amoral and imbecilic enough to compel selling Amazon’s stock because it invested in protecting its workers during a pandemic is not one that we should trust to steward the overall health and well-being of our economy. And it is worth noting that many other companies might well have hesitated to invest in workers’ safety, knowing all too well that it would bring the ire of shareholders. The vast majority of CEOs are working on smaller time scales than Amazon’s Jeff Bezos and are more vulnerable to the whims of their boards. So, instead of protecting workers, that rival CEO could take an easier route by opting for a stock buyback instead.

  What makes this even more obvious is that it is not just Wall Street analysts overthinking the short-term effects of a CEO’s actions; it’s a bunch of dumb algorithms.

  CEOs are now speaking differently on quarterly earnings phone calls to account for all the AIs listening in. The algorithms measure the tone of the CEO’s language and weigh certain words more optimistically and favorably (therefore producing more favorable reporting, pushing to buy more stock) and others more pessimistically (producing more stock sale signals). The CEOs are using language developed by their staffs to optimize for what the algorithms want to hear. It’s not just bad human judgment propelling the inanity of shareholder capitalism, it’s bad algorithms.

  The calls for a turn to stakeholder capitalism are well justified. The track record for stakeholder capitalism demonstrated more inclusive growth, which meant stronger communities, and stronger long-term growth, which meant better returns for stakeholders and shareholders alike over time. Shareholders may well have seen their returns soar under shareholder capitalism, but one can make the case that the model has failed even them. This
may come as a surprise, but companies that are more rooted in stakeholder capitalism—that take responsibility for their impact on the environment and for the well-being of their employees, customers, and communities alike—make more money than their equivalents that espouse shareholder capitalism. Shareholder primacy has failed both shareholders and stakeholders. And now, as our society stands at a crossroads, stakeholder capitalism offers the only potential path to relief. Our biggest unsolved problems are interconnected across issues of economics, race, climate change, and health; and they require an interconnected response that includes business. Business cannot solve every big problem, but no big problem can be solved without the participation of business. And under the shareholder model, many CEOs are unable to act in meaningful ways.

  Consider the issue of minimum wage. If the US minimum wage had increased at the rate of productivity since 1960, it would now be $22.50. Instead, it’s $7.25, and it has been stagnant since 2009, which has led to a game of chicken among many businesses. One of the strangest points came recently when Doug McMillon, the CEO of Walmart, called on Congress to raise the minimum wage. Why would he make a request that could cut into his margins? McMillon started his career at Walmart making minimum wage as a teenager unloading trucks, but the answer is not rooted in his experience on the trucks or in the born-again Christianity that he says animates his choices as a father and leader. After all, he can just raise wages at Walmart as high as his board of directors will allow without concerning himself with Congress. The answer is shareholder capitalism. If Walmart unilaterally raises wages at a time when its competitors do not, it will take a walloping in the market for sacrificing potential profits. But if the company is forced to make a change by Congress, and if that change hits all of Walmart’s competitors at once, then there is less risk.

  It also was not lost on McMillon that if people making the minimum wage were earning more, they would have more to spend at Walmart. This ostensibly would help both Walmart and its competitors, but the short-term punishment doled out by Wall Street analysts reducing stock prices for any unilateral action makes it tricky for McMillon and his competitors to rationalize bets on the long-term benefit of having financially better-off customers or, for that matter, just paying hardworking employees more than a poverty wage because it is the right thing to do.

  There is a steady current pulling all sizable companies toward shareholder value, which makes change difficult to come by.

  “I see very little evidence that absent either effective internal negotiation or external pressure, companies will move towards a fairer and more equitable distribution of profits towards their stakeholders,” said Douglas Alexander, a former British Labour Party politician and cabinet member.

  Still, it is possible to swim against the current. And the companies that do so offer glimpses of new models.

  * * *

  ONE OF THE chief stakeholders that gets short shrift in shareholder capitalism is the environment. As the shift toward share price encourages companies to minimize employee benefits, community investment, and long-term research and development, it also incentivizes businesses to disregard pollution and environmental damage. Every dollar not spent to reduce environmental impact is a dollar that goes to the bottom line. If pollution costs can be shrugged off onto the broader public or future generations, then profits have more room to grow. As a result, corporations generally don’t make environmentally responsible decisions unless the law compels them to do so. The examples of businesses chasing profits at the expense of the planet are too numerous to count. From energy to transportation to manufacturing to agriculture, every industry leaves the environment worse than they found it.

  The effects are now despairingly obvious, and increasingly hard to reverse. In 2019, the global average temperature was approximately 1.1˚ Celsius (2˚ Fahrenheit) higher than levels in the late 19th century. Absent “drastic action,” the United Nations expects global temperatures to rise as much as 3.2˚ Celsius (5.8˚ Fahrenheit) by the year 2100. Climate change will rock the foundations of society: droughts and famines will become more frequent, natural disasters will grow more devastating, and seven hundred thousand square miles of land (an area larger than Alaska) will sink beneath the ocean, displacing hundreds of millions of people.

  Environmental causes have become a staple of corporate responsibility efforts. But on balance, such efforts tend to be public relations stunts or otherwise minor efforts that fail to offset companies’ real impact on the environment.

  The original sin of industrialization was environmental destruction. Our planet now needs to be a key part of our social contract for the first time in history. Businesses need to embrace sustainability across their full enterprises even when they are not legally required to do so. Governments need to reduce pollution and carbon emissions, protect natural spaces, and promote the development of green technology even at the expense of short-term economic output. Citizens need to examine the impact of our consumption choices. Yet the incentives of the current shareholder-dominated economy stand in the way of real change.

  Despite the challenge, a small segment of companies has already started moving in that direction, even creating a special corporate structure in the United States to cut against shareholder primacy. These firms prove it is possible to turn a profit while minimizing their environmental impact. We have even seen a few such companies pop up in the sectors of the economy most in need of reform.

  Take the fashion industry. It is not the first sector that comes to mind when most people think of environmental impact. But fashion is responsible for 10 percent of the world’s carbon emissions and 20 percent of the world’s wastewater, more than all international flights and maritime shipping combined. Most people do not realize the wastefulness of their wardrobes, but at its current growth rate, the fashion industry will produce a quarter of the world’s carbon emissions by the year 2050. Some brands do not mind cashing in on humanity’s shopping sprees, but others have pioneered a more sustainable approach to clothing their customers. Prominent among them is Patagonia.

  Patagonia is a benefit corporation, a relatively new class of company that aims to serve the public good as well as turn a profit. It was the first “B Corp” in California. The legal purpose of a benefit corporation designation is to provide cover for board members and executives to make decisions that may not maximize shareholder value over the short term, but create public benefit and sustainable value in addition to generating profits. It might sound ridiculous to have to establish that kind of legal cover, but after my friend Craig Newmark sold his website Craigslist to eBay, eBay actually sued him—and won—with a finding in court that any nonfinancial mission that “seeks not to maximize the economic value of a for-profit” for its shareholders is inconsistent with directors’ duties, and therefore against the law. As sad as it is that it’s necessary, a benefit corporation designation allows a company to serve stakeholders without fear of a similar ruling—and to go further by establishing an obligation to stakeholders within the company’s mission.

  The environment has been a stakeholder in Patagonia’s business model for decades. The company’s founder, American rock climber Yvon Chouinard, is an icon among outdoors enthusiasts and environmentalists. He came of age in the climbing scene that emerged in California’s Yosemite Valley in the 1950s. Chouinard and his comrades—known affectionately as “dirtbags”—lived off the grid, forgoing careers and general hygiene to spend time scaling the valley’s towering granite walls.

  After teaching himself to use a forge and anvil, Chouinard started fashioning handmade steel pitons (the spikes climbers drive into walls to hold their rope) and selling them to fellow climbers from the back of his car for $1.50 apiece. His equipment became the gold standard for “big wall” climbing, but Chouinard did not let success change his lifestyle. He lived out of his car, sustained by cat food, dumpster diving, and small game he could kill with his climbing tools. Any profits he made went primarily to climbing and surfing
trips. By the 1960s, Chouinard Equipment Ltd., then headquartered in the chicken coop in his parents’ backyard, expanded to other climbing equipment and apparel. When the clothing business took off in 1973, Chouinard and his wife Malinda spun it into a new company, Patagonia.

  That was about the time Vincent Stanley joined the company. Tired of working at a car wash, Stanley asked his uncle Yvon for a job. He planned to stay for a few months, but nearly fifty years later his fingerprints are all over the company.

  Today, Stanley’s official title is director of philosophy, a role that lets him serve as the de facto caretaker of the Patagonia ethos (“we didn’t know what else to call me,” he said). He trains employees on the company’s history and values, advises student entrepreneurs at Yale, and evangelizes for benefit corporations. A soft-spoken poet with high cheekbones and a grandfatherly demeanor, Stanley puts you at ease the minute he introduces himself.

  Though Patagonia was born in the outdoors, the company did not always see itself as a protagonist in the effort to protect the environment. “In the early seventies, I think our conception was that anything to do with environmental protection was the business of the government,” Stanley said. “Because we were such a small, tiny company, we didn’t see that we had any agency … to look at the environmental implications of what we did.”

  Within its own lane, however, the company worked to reduce the mark it left on the environment. In the early 1970s, Chouinard discontinued his trademark pitons and began selling chocks, aluminum wedges that climbers could remove without scarring the rock. It was a risky move, considering piton sales accounted for 70 percent of the company’s business, but in a 1972 catalog Chouinard published a twelve-page article explaining the decision to customers. Within months, the company was selling chocks faster than it could make them.