A strong wave of anti-free market thinking and policy proposals are currently dominating the debates over the role of government in society. From calls for greater emphasis on income equality, to “saving” the planet from global warming, and on to demands for increased attention to claimed gender and racial “social injustice” inside and outside the marketplace, the presumptions are that personal and economic freedom cannot be trusted to find solutions to these problems, and that politically collectivist methods must be applied to find answers and bring about the desired outcomes through increased government intrusive “activism.”
A popular and continuing target is the world of business and corporate decision-making. Private enterprise needs to be reined in, it is asserted, due to the narrow and misplaced presumption that earning profits is the business be all and end all. Corporations and other business entities must take on a wider and greater “social” responsibility in designing and directing their activities with the financial and other resources at their disposal.
“Stakeholder” Not Shareholder Corporate Responsibility
To bring about this refocusing, the World Economic Forum, which normally holds its annual conference of political, business and social movers and shakers at Davos, Switzerland, has sponsored a new “white paper” on Measuring Stakeholder Capitalism (September 2020) that presents an agenda for all businesses, everywhere, to follow to bring this about.
The key to the entire project is the underlying idea that corporations should not see their primary responsibility to be the financial betterment of the shareholders who own titles to the company. No, the shareholders and those who manage these companies on their behalf must see that their obligation is to the enterprise’s “stakeholders.”
Stakeholders are all who have any type of “relationship” with the private enterprise, including the company’s employees, their suppliers, those who live in the surroundings of the enterprise’s place(s) of business, or who otherwise may consider themselves impacted in some way by the actions or inactions of the decisions made by the company. Those who take the stakeholder view of corporate and business “social” responsibility, including the authors and sponsors of the white paper, add “the planet” among the stakeholders concerned with the conduct of the enterprise.
Now, it might be reasonably assumed that most businesses, shareholder-owned corporations or otherwise, understand and appreciate that “no man is an island,” and that their long-term viability and profitability is at least partly dependent upon their attitudes and conduct toward those with whom they interact and associate, including the neighborhoods within which they do business.
Common sense informs most businessmen that how they treat their employees can influence the effective cost-management and efficiency of their production, marketing and selling activities. The competitive market can, itself, act as a “nudger” in these directions, since serious failure to do so may result, over time, in loss of better workers to rivals looking to employ value-adding employees.
A businessman may choose not to do so, or not as “actively” as others on the supply-side of the market, but he runs the risk of suffering the costs of fewer good employees, and less interest and willingness on the part of his workforce to want to put in the extra and added efforts for the company to do as well, etc. It is in the employer’s interest to not ignore these things in many, if not most, instances.
In the same way, many enterprises are aware that some of their customers, employees, and suppliers may live in the areas in which they have their facilities and outlets, and that being a “good neighbor” in sponsoring a local baseball little league team or a nearby road cleanup effort, or giving a gift or having a contest for a partial or total scholarship to a college or university in the community are all “good signals” to those upon whom their business is dependent as buyers of their wares or as workers who assist in the company making the profits that enables them to stay in business and create those jobs. “Goodwill” is also part of a company’s brand name reputation in earning profits and market share. It can be thought of as a part of the company’s “advertising” costs, if you will.
Now if this is what was meant by “social responsibility” and a “stakeholder” outlook for a private enterprise, it would be nothing new and could be classified as an element in self-interested good business practice in many situations and circumstances. And it would be considered part of the institutional aspects and activities of “civil society,” in which cooperative voluntarism is seen as the free society’s way of advancing desired goals outside as well as inside the marketplace of supply and demand.
“Stakeholder Capitalism” Instead of Shareholder Capitalism
However, this is not what is meant by corporate “social responsibility” or ‘stakeholder” inclusiveness in discussions of business decision-making and goal-orientation as understood under these headings. What is called for is the “socialization” of private business away from being and viewed as an private enterprise formed and focusing upon the economic and financial betterment of its owners through the production, marketing, and sale of goods and services demanded by consumers in a competitive arena, with a market-generated price system facilitating the capacity for calculating profit and loss as a basis of determining the direction and use of the scarce means of production at the company’s disposal.
Instead, as the Davos Manifesto 2020 declares, in part:
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.
A company serves society at large through its activities, supports the communities in which it works, and pays its fair share of taxes . . . A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility…
A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.
For the members of the World Economic Forum, “‘Stakeholder capitalism,’ . . . positions private corporations as trustees of society, and is clearly the best response to today’s social and environmental challenges . . .” They reject the “shareholder capitalism” advocated by the likes of economist Milton Friedman, and the Chicago School of Economics, who “had neglected the fact that a publicly listed corporation is not just a profit-seeking entity but also a social organism.” (See my article, “Milton Friedman and the New Attack on the Freedom to Choose”.)
Thanks to “the Greta Thunberg effect,” the world has been reminded “that adherence to the current economic system represents a betrayal of future generations, owing to its environmental unsustainability.” Stakeholder capitalism offers “a new measure of ‘shared value creation’ [that] should include ‘environmental, social, and governance’ (ESG) goals as a complement to standard financial metrics.”
Business Governance for Society and Saving the Planet
That is what the World Economic Forum-sponsored Measuring Stakeholder Capitalism report is all about. The report offers four principles: Governance, Planet, People, and Prosperity, with the order clearly implying the ranking of importance. Governance comes first because it lays out the fundamental idea that in the selection of those in positions of corporate responsibility and in their instituting the enterprise’s activities, the goal is the company’s obligation to stakeholderism. By accepting the “challenge” of seeing the corporation’s responsibility to be the fulfillment of the agenda and targets of stakeholderism, the company takes on not only the ethical obligation to follow this mission, but if added into as chosen legal responsibility as part of the institutional basis of the enterprise, it might be held accountable in a court of law, with possible penalties for not meeting the goals and purposes of “the plan.”
The corporation’s responsibility to “the Planet” is explained as acceptance of the premises of and the target goals of the Paris Agreement on Climate Change, with the participating corporations expected to report annually, along with all other aspects of Stakeholder Governance, on how much they have been moving in the direction of meeting the final 2050 goal of net-zero fossil fuel emissions, with a specific date when the company will have reached the target.
They must also demonstrate what they have done with the corporation’s financial resources and investments to create cleaner water and air, preserve the soil, and bring about a greater “harmony with nature” in general. Companies must report their reductions in annual land use and animal input consumption covered by “a sustainability certification standard or formalized sustainable management program.”
Stakeholder Capitalism Means “Living Wages” and Gender/Race Quotas
The responsibility of any participating private enterprise toward “People” goes far beyond such traditional notions as honesty and fulfillment of any and all contractual obligations concerning work conditions, wages, and the like concerning those they employ. No, Stakeholder Capitalism requires provision or support for all employee health costs, including “the mental, physical and social well-being of all people in their operations and value chains.” Companies would be obligated to have announced targets for employee skills training and reports on how much of the company’s payroll has been applied for this purpose. There must also be reports on the percentages of employees based on gender, race and age, and they would be expected to meet targets to assure “equity” in the hiring and retaining of workers in these gender, race, and age categories.
In addition, companies are required to report on wage ratios of difference in salaries between employees in general relative to corporate executives, including the CEO. And similar reported ratios of difference among wages paid to gender, racial and age groups working for the enterprise. There must be targets to reduce any unjustifiable divergences based on the idea of similar pay for similar work. Also, enterprises must enthusiastically support and foster worker collective bargaining; that is, to happily accept and work with established labor unions across the board.
Wages paid should not be based on supply and demand as competitively determined on the market. Instead, the benchmark and basis of employment salaries would be a “living wage,” or “a wage sufficient to meet the basic standards of living, which will vary by country, local living standards and need.” As the report argues, “Companies that offer a living wage to workers and employees can help lift households and communities out of poverty. A living wage provides a benchmark for responsible employers who respect human rights and who choose to pay their employees a rate that meets the basic cost of living in the region they operate in.”
Stakeholder “Prosperity” Equals Social Justice Jobs and Taxes
Under the “Prosperity” heading, mention is made to more, better and less expensive goods and services manufactured and marketed by business enterprises. But the real meaning is expressed as, “to ensure that all human beings can enjoy prosperous and fulfilling lives and that economic, social and technological progress occurs in harmony with nature.” So, prosperity is defined more in terms of how many jobs the company has created each year, the wages and fringe benefits received, and the gender and racial diversity practiced that assures a “living wage” or better material well-being for all connected with the company. The company’s annual report should “include additional narrative on how a company’s economic contributions support vulnerable and under-represented groups in society.”
Finally, one essential indicator of the enterprise’s contribution to “prosperity” is:
Reporting of total tax paid provides global information on the company’s contribution to governmental revenues through the different forms of taxation imposed on it. This reporting provides information on the company’s global tax profile and on the various categories of taxes that support governmental functions and public benefits . . .
Taxes are important sources of government revenue and are central to the fiscal policy and macroeconomic stability of countries. They are acknowledged by the UN to play a vital role in achieving the SDGs. They are also a key mechanism by which companies contribute to the economies in which they operate, as government revenues support public infrastructure and services. Total tax paid is a comprehensive measure of the tax payments that companies make to governments at all levels to fund government operations, public infrastructure and essential services.”
Stakeholder Capitalism Equals Central Planning
The essence of Stakeholder Capitalism is to confine and obligate each and every business enterprise to serve a set of goals and targets independent of and superseding any reasons for which some existing company had been brought into existence by its owners, or might have been brought into existence if Stakeholder norms and constraints were not limiting the purposes for which a future enterprise might have been organized.
That is, private individuals would no longer be at liberty to form a business according to their own purposes and plans, their own chosen procedures and projects. Nor could they proceed to invest and allocate the financial and real resources at their disposal to manufacture, market, and sell a particular good or service as they considered best to attain the goals they have in mind.
No, all of their activities would be confined within and expected to conform to the agenda laid out in the Stakeholder manifesto and measurement matrix. Existing and future enterprises would be reduced to production entities answerable to meeting the articulated Stakeholder central plan targets and criteria to which everyone and everything in society is to be subordinate.
The Central Plan says that the world is faced with global disaster from climate change – and thank goodness for “the Greta Thunberg Effect,” without which we might never have had our consciousness raised to face the danger and admit our sorrowful failure to appreciate it! So, everything any enterprise does must be constructed to reduce global fossil fuel emissions, reduce use of land and animal resources, and assure a “harmony with nature.” (See my article, “Impeachment at Home and Climate Hysteria Abroad”.)
Notice that the relative costs of alternative sources of energy that may face a company in determining the most productive and efficient way to power their production activities are irrelevant. The idea that the climate change warriors might be wrong or overestimating the possible danger facing the environment, or that attempting to meet the Paris Accords benchmark of net-zero fossil fuels emissions might be impossible without serious economic consequences that should not and cannot be ignored, never enters the discussion.
Stakeholder Capitalism is Really Economic Fascism
The central planners know that global warming is this real danger, they know what needs to be done, and the world of business is to march to the climate social responsibility drummer, with no dissent allowed without the offender facing social and possible legal consequences for violating or failing to meet the impressed measurement benchmarks.
The private enterpriser is transformed from the independent entrepreneur or the corporate executive working for and responsible to the shareholder-owners who have hired him to profitably manage and direct the corporation, into enterprise managers answerable to and dictated by those imposing the Stakeholder norms, standards and measurements of required performance and achievement. In the 20th century, such an arrangement of private businessmen required to follow the orders and dictates of central planners was known as economic fascism.
In Omnipotent Government (1944), Austrian economist Ludwig von Mises, explained the characteristics of the German fascist form of central planning:
The German pattern . . . maintains private ownership of the means of production and keeps the appearance of ordinary prices, wages, and markets. There are, however, no longer entrepreneurs but only shop managers . . . These shop managers do the buying and selling, pay the workers, contract debts, and pay interest and amortization. There is no labor market; wages and salaries are fixed by the government. The government tells the shop managers what and how to produce, at what prices and from whom to buy, and at what prices and to whom to sell. The government decrees to whom and under what terms the capitalist must entrust their funds and where and at what wages laborers must work. Market exchange is only a sham. All prices, wages, and interest rates are fixed by the central authority . . . This is socialism in the outward guise of capitalism. Some labels of capitalistic market economy are retained but they mean something entirely different from what they mean in a genuine market economy. (p. 56)
Stakeholder Planning and its Counterpart in the Soviet System
It might be said that participation in Stakeholder Capitalism is “voluntary,” a decision by private enterprises and corporations to elect to follow the norms, goals and benchmarks out of a sense of “social responsibility” beyond the mere self-interested pursuit of profits and avoidance of losses. But once a number of “socially conscious” businessmen and corporate executives actually or seemingly run their companies on this basis, it is not a great leap to assume that the “voluntary” becomes increasingly the called-for “required,” and finally to be compelled and imposed by government in the name of “society’s” interests and needs over that of selfish and ignorant businessmen and corporate shareholders not willing to forego their narrow and misplaced desire to run their enterprises the way they want for “short-run” maximizing of profits.
Lip service is given in the World Economic Forum report to “reasonable” shareholder returns and longer-run economic productivity and profitableness by looking beyond and in place of everyday market-based supply and demand, and profit and loss guided by competitively formed prices on the market through a wider sense of “social responsibility.”
But look at what is wanted as the basis for business decision-making and its measurement under Stakeholder Fascism, and we are back to the world of Soviet-style central planning. The Soviet central planning agency, GOSPLAN, would design five-year central plans to which all the state-owned enterprises were expected to follow, with the production targets which they were ordered to match. So many tons of steel, or so many harvested acres of wheat, or so many pairs of women’s shoes, or bottles of vodka, or so many pieces of “socialist realist” visual art, or so many arrests and imprisonments or executions of labeled “enemies of the people” (the latter was a part of the central plan during Stalin’s time).
Were the shoes actually wanted by Soviet citizens and if so, in what styles, sizes, and for what seasons? Who wanted that Soviet socialist “art” other than the ideologue propaganda chiefs of the Communist Party, and was that really the highest valued use for those artists’ talents, assuming they had real talent? What were those tons of steel being produced for, and how was it known that that was the total tonnage quantity needed, and in what forms of it to manufacture the products actually wanted by Soviet consumers?
It was all “planned chaos” due to the fact that there were no real markets upon which resources, raw materials, capital equipment, land, and labor skills might be appraised in terms of their opportunity costs in alternative employments as captured in the market-formed prices for their uses, based on people expressing what they actually wanted as consumer goods and the relative values they place on them in the form of demand prices to purchase them.
Instead, Soviet supplies were mismatched with demands, there were no ways of knowing if the least costly ways of producing goods were being employed, or whether different types of skilled and unskilled labor were in jobs where their most highly valued uses were found to be. The Soviet economic system was inefficient, wasteful, corrupt, and bankrupt.
The Irrationality of Stakeholder Planning
Now look at the goals and targets of “measured” Stakeholder Fascist central planning. “Socially responsible” enterprises must set and meet annual targets for reducing their metric tonnage use of “greenhouse gases,” whether or not it is rationally cost-efficient looking over alternatives and trade-offs between energy sources. The firm must meet the goal of net-zero emissions by a particular date, regardless of its economic feasibility or efficiency.
Hire so many men and women, whites, blacks, Hispanics, and other relevant groups within the area(s) in which the firm operates, regardless of market-based needed skills, education, and experience. Spend a certain portion of the enterprise’s payroll on employee training and education, whether the firm actually needs more trained workers during a given period.
Pay wages reflecting a “living wage,” separate from whether the employees’ value-added are consistent with a labor cost of that amount, along with healthcare and other social needs of existing and potential workers and in conditions that make all of the enterprise’s “stakeholders” to be in “harmony with nature.” Set and limit wages among segments of the enterprise workforce to meet salary targets for greater income equality.
An important task for Stakeholder enterprises is to see that they are paying their “fair share” of the tax burden, reflecting the firm’s revenues, size, and profits. Taxes are not the minimum necessary for a legitimate limited government to properly secure the rights and liberty of its citizens. No, firms are seen as revenue cows to fully feed the interventionist and welfare statist regulatory and redistributive purposes of those in government receiving and disbursing the taxes taken from those who are the producers in society.
Historian Jerry Z. Muller has recently warned of “metric fixation” in his book, The Tyranny of Metrics (2018); that is, the attempt to reduce everything to quantitative measures that seem to offer objective criteria to judge and evaluate what is being done, how much, and by whom. But it is a false rationality precisely because it replaces in the context of business and enterprise the only signaling measures that, in fact, enable determination of what it is people want, how much they value it, and who and at what cost could others bring what is demanded to market and efficiently supply those goods and services: the competitive price system of a functioning free market.
Stakeholder Fascism Means the Loss of Liberty
But if Stakeholder Fascism, if fully implemented by being insisted upon by pressure groups and imposed by government, is just the latest label for economic fascism, it follows that it means not just the loss of economic rationality due to the removal of the competitive market. It also means the loss of personal and economic liberty.
Stakeholderism declares that you do not own the business you thought was yours. No, its justification for existing and operating must be found in its subservience to those setting the “socially responsible” goals for its use. Those who think they own the company or corporation are reduced to those obedient “shop managers” about whom Mises referred under German National Socialism.
There are no mutually and voluntarily agreed to associations and exchanges. There are the work, wage and employment benchmarks insisted upon by the economy-wide Stakeholder social engineers dictating and directing what all of us can do as employer and employee, borrower and lender, investor and businessman, supplier and demander.
The goods we may purchase and use, the quality and standards of living we may enjoy, the position and station in society that we might attain, and the costs and availability of everything that we need, desire, and want will be decided for us in the name of “saving the planet,” and insisting upon arbitrary notions of “diversity” and “inclusiveness,” and imposing capricious ideas concerning income fairness and equity.
Like other forms of imposed central planning over the last one hundred years, Stakeholder Fascism would only lead to tyranny, poverty, and the greater loss of liberty and freedom to choose.
This article was originally published at The American Institute for Economic Research.