by Alec Ross
In addition to creating more-inclusive boardrooms, Solomon said the policy is good for business. He has the data to back up his statement. Among the US companies it has IPOed since 2016, Goldman Sachs found that firms with at least one woman on the board had a median return rate of 19 percent. The return rate for those with all-male boards was only 2 percent. “Differences create better performance,” Solomon said.
Ensuring that women and people of color get seats in the boardroom is a step toward reducing inequality in the workplace. Women fill just 20 percent of the board seats in major US companies, and people of color hold approximately 10 percent. Meanwhile, pay gaps and discrimination still exist. However, for the dozens of Western companies that Goldman Sachs brings public every year, the policy will at least raise the floor for representation. Solomon acknowledges the policy is still a work in progress and said the company will continue to revise its scale and scope in the years ahead. “It’s not perfect,” he noted, “but it sends a very strong message.”
The idea that Goldman “the great vampire squid” Sachs is using its power for good cuts against the grain of today’s narrative and hashtag snark commentary. That makes it all the more consequential.
When companies like Walmart and Goldman Sachs take a stand on social issues, they usually justify it on the basis of values and social responsibility, but more often than not, those decisions boil down to a simple economic calculation: Do the long-term benefits outweigh the short-term costs? For Goldman Sachs, the answer was yes. Positioning itself on the right side of history was an investment in the long term.
“You get a handful of opportunities when you can try to move the needle,” Solomon said of his thinking. “If you see one and you think you can make a difference, I think you have a responsibility to try to step forward and make a difference.”
More and more business leaders are reaching this conclusion and trying to find ways to use their power for more than just the bottom line. In 2019, Robert Smith, the founder of the private equity firm Vista Equity Partners and the wealthiest African American person in the United States, committed to paying off the student loans of all 402 students in the graduating class of Morehouse College. In 2020, Jeff Bezos, Amazon’s CEO and the richest man alive, committed to investing $10 billion toward combating climate change. For decades now, Bill Gates has committed his fortune to humanitarian causes through the Bill & Melinda Gates Foundation, with the couple’s contributions rising to $50 billion since 1994.
All these acts—the philanthropy of our richest citizens, the corporate leadership of Goldman Sachs and Walmart—have a strange duality. They are inspiring, but they also highlight the scale of the problems that need solving and demonstrate where government is not doing the job it ought to be doing. It is nothing but admirable that David Solomon is trying to find ways to use his company’s incredible power for good, and these stories show that when people with real power use it for the right reasons, we can get better outcomes. The social contract does not have to keep fraying.
But when it comes down to it, individual philanthropists and companies can accomplish only so much on their own. Their efforts tend to be piecemeal, and they’re eclipsed by the magnitude of the tear in our social contract. It is notable that as Robert Smith was giving away millions, he was also entangled in a criminal tax inquiry for engaging in tax evasion using offshore accounts. And if you zoom out to look at the broader problem of student debt that his donations and foundations are addressing, you can see the limitations of individual action. In 2020, Americans collectively owed $1.6 trillion in student loan debt. This debt can utterly cripple students’ long-term economic prospects, and Smith’s program will be a lifesaver for thousands of students. But it is a drop in the bucket when seen within the scope of the whole debt. Some 43 million students and their families carry that $1.6 trillion in debt. It is completely out of reach for philanthropy. No individual can solve such a problem—not Gates, not Bezos—not if nearly every top billionaire put their whole fortune to the task.
“If you want to see big social and economic change, political change, you have to line up government leadership, business and NGO innovation, and mass mobilization,” said David Miliband, a former British foreign secretary who now leads the International Rescue Committee. “Philanthropy is not anywhere near substituting of the government role.… When government leadership is absent then the middle-tier or even the mass-mobilization tier can step up, but you shouldn’t kid yourself that you’ll ever solve a problem unless government gets with the game.”
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RIGHT NOW OUR incentives pull us toward a more dystopian, Mad Max form of capitalism. The incentives drive companies toward share buybacks instead of investments in workers, equipment, and research and development. The incentives drive businesses to grow bigger through mergers and acquisitions, and then to fire rather than hire. And as we will read, the incentives encourage breaking up unions and sending headquarters to tax-optimized locales instead of to communities that are not in a race to the bottom on taxes. The incentives mean refusing to pay even a cent more for renewable energy than for fossil fuels.
The nightmare is that all this optimization for nonproductive uses of capital and for the short term ensures that the long term will be worse for all of us. The inequality and climate crises we are already suffering from are direct consequences of optimizing for the short-term shareholder gains decades ago. And the problems compound.
One of the criticisms of the old model of stakeholder capitalism is that it did not allow for a coherent set of guiding principles. One of the reasons shareholder capitalism exploded in popularity in the 1980s is that its goals were clear-cut. Shareholder capitalism asks businesses to optimize for a single variable: financial returns to the business (and thus the shareholders). By contrast, stakeholder capitalism forces companies to balance the interests of a number of different groups that often come to the table with competing priorities. The more variables you add, the harder the calculation becomes.
In an ideal world, a business would maximize certain variables—like shareholder value, social impact, and employee well-being—and minimize others, like carbon emissions. But in the real world, those decisions always involve trade-offs. Using offshore havens to lower taxes generates more revenue for the company but takes away funds from government programs that make us safer, healthier, and better educated.
There is no perfect formula for implementing stakeholder capitalism—striking the right balance between those competing interests will require thoughtful conversations with input from across a range of stakeholders. This itself is a shift. There needs to be meaningful communication and negotiation among stakeholders before the social contract will begin to return to any semblance of balance.
To make those discussions more productive, there are concrete steps we can take to map out a company’s footprint. A good first step would be to quantify the impacts, both positive and negative, of a business’s decisions on various stakeholders. Today, businesses have countless metrics for measuring shareholder value. There is return on assets, return on equity, price/earnings ratio, internal rate of return, gross and net margins, and on and on. An entire industry is built around accounting metrics for measuring shareholder value. We need similar standards for calculating stakeholder value. Douglas Alexander, a British Labour Party politician and cabinet member, suggests creating the equivalent of generally accepted accounting principles (GAAP) for corporate impact.
“To measure both the positive and the negative externalities of major corporations we need a common metric or common language by which to be able to undertake those comparisons,” Alexander told me. The next generation “in survey after survey say that they want value aligned with values. They want to be confident that when they get up in the morning, they don’t then go and work for a company or invest in a company through their pension plan that right now is at odds with their own values and their conception of how they would like the world to be. There’s a sig
nificant opportunity for developing common standards that will allow a more transparent account of where businesses are having a negative impact and where businesses are having a positive impact.”
One possibility is to use the tax code to drive behavior change. In the same way that GAAP provide a structure for determining a company’s tax burden, structures could be created that implement a similar set of measures for stakeholder impact and then provide the data to adjust a company’s taxes higher or lower. Companies respond to incentives, so we need to provide incentives for them to stop the race to the bottom on everything from environmental damage to workers’ rights.
Former Bank of England governor Mark Carney has suggested that this approach be extended to executive compensation as well, saying that banks should link executive pay to climate risk management. The more a company does to contribute to goals set out in the Paris climate accord, the more its executives get paid.
Economic inequality and environmental destruction are concrete problems, and addressing them this decade and beyond will require equally concrete strategies. For a company to actually understand the positive and negative impacts of its decisions, it needs data. Without metrics, stakeholder capitalism will remain a squishy phrase that companies will use in public relations campaigns but not pursue in the boardroom. But it is fully within these businesses’ power, and society’s power in the digital era, to log and report and respond to such data on a broad scale.
To that point, however, we cannot expect companies to enact such reforms all on their own, especially when incentives remain misaligned. Many business leaders will relish the opportunity to pursue more sustainable, socially responsible business models, but many will not. And we must recognize that there are limits to what business will accomplish of its own accord. Capitalism is a system driven by incentives rooted in compensation, taxation, and share price, and the way to enlist our most powerful capitalists and their companies to act in the interests of citizens and governments is to rewire their incentives. Make it in the financial interests of executives, their boards, and their shareholders to be better to their stakeholders.
We must use public policy to compel data collection and transparency on social impact and then have rules to force the re-internalization of those costs into the business. In some cases (such as with Walmart), that will bring long-term economic benefits to the company. In others, it definitely won’t, but it will shift the market with new incentives that are more in balance with the social contract.
Real change also requires that the other key signatories in the social contract—governments and everyday citizens—actually have enough power to help drive the choices and actions of business. Governments and labor need greater force and effect. But right now they are floundering. How did they get that way? And what is the route back?
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THE GOVERNMENT: BILLIONS OF PEOPLE ARE GOVERNED MORE BY COMPANIES THAN BY COUNTRIES
At the crack of dawn on Wednesday, September 20, 2017, Hurricane Maria made landfall in southeast Puerto Rico. With 150-mile-per-hour winds, it was the strongest hurricane to hit the island in nearly a century. Within twenty-four hours, the storm had deluged some parts of Puerto Rico with more than thirty inches of rain. The island’s power grid and communication networks, which were already in poor condition before the storm, were knocked off-line. More than half of Puerto Ricans—some 1.9 million American citizens—were left without access to drinkable water. Some towns saw 80–90 percent of their buildings leveled by the storm.
There is no time that people need their government more than after a natural disaster strikes. It takes an incredible amount of resources and coordination to rescue victims, distribute food and water, clear debris, and bring critical infrastructure back online. Only the government has the mission, resources, and capabilities to do this work. In the wake of Hurricane Maria, Puerto Rico needed exactly this kind of rapid, all-hands response. But the United States government failed to deliver—and it failed spectacularly, resulting in thousands of avoidable deaths.
The government’s response to Hurricane Maria was a disaster from the start. It took four days for the first shipments of food, water, and equipment to arrive on the island. Senior government officials did not visit Puerto Rico until five days after Maria made landfall, and the president did not attend a meeting on the federal response to the disaster until day six. It took eight days for the White House to waive a decades-old shipping regulation that limited which vessels could transport supplies to the island, and it took thirteen days for the USNS Comfort—one of the navy’s two hospital ships—to reach Puerto Rico. The ship was equipped to care for 250 patients at any one time, but it admitted an average of only six people per day. By the two-week mark, the Pentagon had deployed nine thousand troops to the island, approximately half as many personnel as it sent to Haiti in the first week after that country’s 2010 earthquake. The government was slow to clear roads, distribute food and water, and bring remote parts of the island back online.
All the while, Puerto Ricans were struggling to survive. Weeks after the storm, more than half the population still lacked electricity and cell service, and hospitals were triaging victims amid power outages, evacuations, and dwindling supplies. One cardiovascular surgeon in San Juan put the situation bluntly: “If you are sick in Puerto Rico, the best thing is to get on a plane and abandon the island.” The island’s power grid would not be fully restored for eleven months, and two years later, tens of thousands of Puerto Ricans were still living under tarps. At that point, the US government had still not funded a single permanent road reconstruction project.
Several key factors contributed to the government’s poor response to Hurricane Maria. One was straight-up bad luck. Maria came on the heels of two similarly powerful hurricanes—Harvey and Irma—that had devastated the US Gulf Coast. Hurricane Irma had brushed Puerto Rico, leaving its power grid damaged. The Federal Emergency Management Agency (FEMA), the branch of the US government responsible for disaster response, found its resources stretched thin by the time Maria bore down on the island.
Another factor was Puerto Rico’s colonial history. Officially, the island is a territory, not a state. Some 3.2 million people live in Puerto Rico—a population larger than that of Iowa, Nevada, Arkansas, or seventeen other US states—but they cannot participate in presidential elections, and their sole representative in Congress is not allowed to vote. Even though the people of Puerto Rico are Americans, many on the mainland do not see them that way. A poll taken days after Hurricane Maria made landfall found that almost half of all Americans did not know Puerto Ricans were citizens of the United States. Had Maria hit the mainland—like Harvey and Irma—the American public and federal officials would no doubt have clamored for a stronger response.
The island was also in poor financial condition before the storm made landfall. Beginning in the 1950s, the US government attempted to stimulate the Puerto Rican economy by offering tax breaks to companies that set up shop on the island. One provision eliminated corporate taxes on profits made in US territories, which brought pharmaceutical companies and other manufacturers to the island, jolting the local economy into overdrive. However, after the tax break was repealed in 1996, businesses fled as quickly as they had arrived. The Puerto Rican government started borrowing money from Wall Street. As the island’s economy ground to a halt amid mass emigration and the financial crisis of 2007 to 2008, the banks encouraged officials in San Juan to borrow more and more. Eventually, the debt became crippling. The government ran out of money to maintain roads and pay out pensions. Hospitals closed, and the power grid fell into disrepair. On the eve of Hurricane Maria, the Puerto Rican government had barely enough money to keep itself up and running, much less bring an entire island back to life.
Regardless of Puerto Rico’s precarious finances and shoddy infrastructure, the responsibility for responding to Hurricane Maria ultimately fell on the federal government. It failed. FEMA’s recovery plan for the hurricane was a
logistical catastrophe. Officials did not account for the scale of the storm’s destruction, and they were slow to adapt to the reality on the ground. They did not have enough personnel; they underestimated the amount of food, water, and equipment survivors needed; and they did not anticipate how hard it would be to get those supplies to the people who needed them.
Large, established organizations like FEMA and the Red Cross have the mission and resources to respond to a disaster the size of Hurricane Maria. At the same time, there are numerous parties to coordinate. The response to Hurricane Maria involved not only FEMA, but also the Defense Department, the Puerto Rican government, the Red Cross, the National Guard, and countless other agencies and private-sector groups, each performing its own set of functions. When you deploy such a complex system in a large-scale disaster zone, important things are bound to slip through the cracks. One of the many issues neglected in Puerto Rico was food relief.
Three weeks into the recovery effort, FEMA estimated that it needed to provide the people of Puerto Rico with 2.2 million meals per day. But it was distributing only two hundred thousand per day at the time. Two-thirds of those were MREs, or “meals ready-to-eat,” the prepackaged, built-to-last rations that troops eat on the battlefield. The remaining third, the only hot meals that FEMA was able to distribute, came from an outside nonprofit called World Central Kitchen, led by chef José Andrés.
