Let’s Talk About Evolving American Capitalism Part 4: What Must We Ask Ourselves to Truly Evolve?
By: Gabe Kwakyi
Tags: Esg, Corporate Governance, Triple Bottom Line, Capitalism, Stakeholder Capitalism

The final installment of the Evolving American Capitalism essay series imagines a set of questions that I believe are essential for our society to most effectively direct our evolution of American Capitalism.

During the process of introspecting on the state of American Capitalism, researching what frameworks already exist that show how American Capitalism is evolving, and lastly exploring how corporations have shown their evolution — and stumbling blocks to evolving American Capitalism, I went from a stage of pessimism, to hope as I saw a cauldron of ideas and actions that have been burbling away for years now.

I loved reading about how companies of all sizes, industries and leadership styles have made a point to integrate societal profit tenants into their operations without regulation, informed by critical events such as the release of the UN’s Sustainable Development Goals, the murder of George Floyd, the shifting demographic sea change of boomers to millennials, and the general scientific consensus on the damage done to the environment by means such as greenhouse gas emissions, deforestation, and excessive water usage. Particularly encouraging was seeing the shining examples of companies who have taken the additional step of rooting societal profit goals directly into their business models and values systems, such as Toms, Seventh Generation, Ecosia, Patagonia, Dr Bronner’s, Etsy, Novozymes, and Airbnb.

That said, by and large the evidence I found reveals that the vast majority of the vast majority of companies’ attention and resource allocation still remains heavily focused on prioritizing dollar profits for shareholder return. Supporting the health, happiness, and wellbeing of employees, customer communities, and the environment is still a tertiary consideration that receives a fraction of the same attention and resources as shareholders’ interests.

This leads to the foundational question which must be asked in order to set the guideposts for American Capitalism to evolve and successfully balance the needs of a broader set of stakeholders:

How much growth of dollar profits is enough?

The reality is that there is no current answer to this question. This question is seldom even posed in the first place.

Why?

For a variety of potential reasons:

A question like this has never permeated the corporate values system, considering that it necessarily raises the specter of putting limits on growth, which is anathema to entrepreneurs/investors, who typically want the maximum return possible on their investments. If 100% growth can be achieved, can 200%? 500%? 1,000%? If in shooting for the moon a business reaches the extra-terrestrial surface, then the next move will be not to appreciate reaching the moon, but rather to immediately prepare to reach the stars. This question smacks too much of socialism, which since the cold war through contemporary times has been labeled a dirty, no-good word; fine in Europe, but a non-starter in American society. The cost externalities of unfettered growth have never been realized (or truly listened to), until just recently. If a business’s operations actually did capture the negative societal cost externalities in dollar profit terms, in a short-term time horizon. If pollution, after being produced in the morning from a smokestack were to by end of the business day immediately sicken or kill 10% of the factory workers, then the business would have already adjusted operations or innovated to address such costs/risks and reduced overall inequality of non-shareholder stakeholder value.

The absence of an answer, or even discussion of this question since perhaps the Great Depression/World War 2 set in motion an avaricious time bomb, that only accelerated in 1970 with Milton Friedman’s doctrine.

Milton Friedman: advocate of shareholder supremacy

So why might now be the right time to try to diffuse the time bomb of greed by answering this question?

As highlighted in part 1 from my personal experiences, the year 2020 has created the space and necessity for a deep societal introspection, due to intermittent quarantining and the resulting slowdown of everyday distractions, as well as the rise of the BLM movement, and the rapidly approaching deadline to prevent irreversible climate change-related damage.

The year 2020 has also illuminated the sea change in values that is happening, as a result of the rolling over of population generations that are ceding/rising to purchasing power, and with them their decision-making authority in this country.

On the outgoing side, the baby boomers came of age eager to maximize their advantage in the “golden age” of US global economic manifest destiny/dominance, with the rapid expansion of the middle class for millions of Americans and with it enough money to afford the conveniences produced by rapid technical innovation. This created a drive for suburban migration, which in turn enabled a sequestering and disengagement from the societal stakeholders of gender/sex/race/class/environment. By eliminating the focus on these fellow societal stakeholders and concentrating on themselves, the baby boomers’ (especially white males) desires contributed the fuel necessary to propel Reaganomics, de-regulation, corporate growth, and Milton Friedman’s doctrine of shareholder supremacy.

Yet those coming of age now — Millennials — arguably have a much different set of values and desire. Millennial values are increasingly shown to be more sympathetic, connected, and considerate for the other societal stakeholders, even as this generation has begun to taste the fruits of the working world/wealth transfers, and faces the pains of taxation.

Millennial traits like higher empathy for those who have not/less were fueled by an exposure to a global recession, rising student debt and flat incomes, and the sweeping double-edged sword of globalization (cheap goods vs job transfers).

Millennial traits like social liberalization have been fueled by constant immersion vis-à-vis social media with a broader set of stakeholders and their struggles:

Blooming acceptance of the LGBTQ community and the legalization of gay marriage.

Expanding protection of racial minorities and the widespread changes in response to the ongoing murder of unarmed colored people by police.

Racial/gender/sex bias in corporate hiring.

The mind-numbing reckoning of humanity’s negative impact on the environment, and the limited time to redress that damage.

The generation immediately rising to replace the baby boomers (and the next, Generation Z) is actively demonstrating how they support the broader stakeholders they share society with, from leading the rejection of the rising tide of populism in the defeat of Donald Trump as United States president, to donating significant swaths of their wealth to philanthropic initiatives, to exercising their influence as employees over corporate agendas.

A new generational shift is well underway

For these reasons and more, it seems that the time is right to address the ticking time bomb of greed, and face the question of how much growth of dollar profits is enough.

To be clear, the goal of posing this question is not to topple the incentive structure for risk-takers and innovators that is central to capitalism, by imposing heavy-handed regulations that limit the ability for risk-takers to be rewarded for their innovation and compensated for their risk.

The context of the question should be understood as a seeking of reasonable balance of benefits between all parties, according to their support of the business.

Therefore, let us consider a revision to the question at hand:

How much focus should each of a company’s stakeholder earn of a company’s resources, measured in priority, time, and dollar profits?

In answering this question, the voices of all relevant stakeholders must be heard from and contemplated. Unilateral moves are unlikely to succeed long-term. Attempting to address the proper evolution of capitalism by unwieldy government propositions alone will not work (as evidenced by the 1992 law limiting annual executive pay to $1 million, which was circumvented), nor will fully trusting companies to decide their own timeline and set of actions for evolving American Capitalism (as evidenced by companies such as Apple’s hoarding of $236 billion in off-shore tax havens).

To best serve the health and happiness of society, we must gather representatives from entrepreneurs large and small, investors employees, consumers, Non-Governmental Organizations (NGOs), and government.

Though discussion involving all stakeholders may sound like an impossible feat in today’s highly polarized political climate, it is essential for America to identify the best solutions.

Together we must face the tough questions that can help us guide the future of corporate governance:

How might we empower all of a company’s stakeholders to influence what percentage of a corporation’s resources are allocated to initiatives focused on each stakeholder, with protection for the voices who have historically had the least emphasis? What percentage of executive pay should be tied to ESG targets, alongside dollar profit targets? How can we encourage innovative new business models and corporate governance structures? Should we expand legal recognition for alternative models to LLC/C/S corporations, such as Benefit Corporations, Social Purpose Corporations, Cooperatives, and Steward Ownership? Should companies that generate societal profits receive preferential treatment from a legal standpoint? Should these new models be granted incentives in some way to encourage their adoption, such as the 501c3 benefit offered to non-profits? What should the benchmark for excellence be in the percentage of a company’s dollar profits invested into philanthropic initiatives? Should these expectations change if the company’s shareholders give significantly via their earnings from the company, such as those wealthy individuals who signed on to the giving pledge?

Together we must face the tough questions that can help us analyze our past norms of corporate governance, and plot the best path forward:

What do the voices least listened to historically have to say about historic corporate practices? Should limits be re-imposed on political donations? Should more restrictions be implemented on the revolving door between politics and corporate lobbying/interests? How should abusive tax havens be handled? Tax loopholes? Excessive stock buybacks and dividends? Should the law limiting executive pay to $1 million be revised to a ratio against non-executive pay? Should the ratio be 250x? 100x? 50x? How might any change be circumvented in the future, like the original ’92 law? Is there a better way to accomplish the underlying goal of reducing inequality in corporate pay? What tax rate is reasonable for individuals and corporations, to balance wealth creation with the health and happiness of society? How should long-term, capital gains income be taxed vs short-term, normal income?

These questions will not be easy one to answer, because as with complex systems, the environment that the ideas will apply to is a complicated and multi-dimensional one.

For instance, paying employees more or hiring more employees is one positive idea for a company’s non-shareholder stakeholders. Yet, in a complex system, there can be significant, unintended consequences of any change. For instance, while many corporations can and do afford to pay employees highly (especially tech companies), deploying more capital to raises and hiring could create a barrier to hiring that could bring harm to small and medium businesses, non-profits governmental organizations, who do not have the same resources to compete with.

Nevertheless, the time is right. Let’s build on the growing sentiment that capitalism is not working for society and strike while the momentum that 2020 — the year of reflection is hot. Let’s devote ourselves to the evolution of American Capitalism, and the salvation of our society. We can do this. We need to do this. So let’s get to it.