Stakeholder Capitalism Is Smart Capitalism
Following the example of Henry Ford, capitalism should generate corporate profits while also benefiting the people who make that profit possible.
Capitalism is the engine of growth and progress around the world. Even a nation with a highly centralized power structure like China has immersed itself in capitalist production to keep pace with the growth of its population. Over the past 40 years, China has used capitalism to lift 800 million of its people out of extreme poverty. India is transforming itself in much the same way. Third-world nations are experiencing an overall decrease in the rate of poverty as well. Thirty years ago, 50% of the people in the poorer nations of the world lived in extreme poverty. By 2012, that percentage was down to 21% and, to date, extreme poverty prevails among only 8% of the world’s population.
Capitalism has lifted billions out of poverty. Yet it also has generated enormous inequalities of income and wealth. If we want capitalism to prevail against those who see only the latter reality, capitalism needs to adapt by going back to some of the principles that made it great in America even a century ago. At the dawn of the automotive age, Henry Ford found a way to make a profit he shared with those who created it: not just for the CEO and the company’s shareholders. Ford paid his workers much more than the prevailing wage to give them enough discretionary money to be both devoted to his company and able to buy his cars themselves.
This was stakeholder capitalism in a nutshell. Make a profit while nourishing the world that yields that profit.
Fast-forward to the postwar years, from the mid-1940s to the early 1980s. American business found the confidence to build trusting relationships with employees, shareholders, customers, communities, suppliers and markets. It wasn’t the challenge it represents today. America owned most of its markets. It was riding the wave of growth that followed its own industrialization during the war and then the rebuilding of Europe. Dozens of businesses paid workers generously, and wisely, to eliminate the need for unions. Eastman Kodak Co. paid its workers high wages and offered large bonuses around the end of each year that kept the community vibrant. Workers spent those bonuses at thousands of businesses that were nourished by the corporation’s profits. Employees and the community thrived along with the corporation.
When global competition began to emerge and encroach in the 1970s, American business assumed a defensive crouch. By the early 1980s, shareholder primacy became the template for private sector leadership: Cut costs, stagnate wages and export jobs in order to boost profits in a world where price rather than innovation became the battleground. What came next was 30 years of destructive consequences: income inequality, a hollowed-out middle class and increasing consumer debt.
Stakeholder capitalism emerged, not as disguised private-sector socialism but as an embrace of values that had made the free world strong half a century earlier: a common-sense stewardship over employee well-being, community vitality, environmental responsibility and trusting partnerships with suppliers and shareholders benefiting even more handsomely. In point of fact, stakeholder capitalism is not intending to shift appropriate safety net money from the government to the business community. But it is demanding that business pay its workers (at the lower end of the scale) at least "fair wages." Fair wages are now calculated by local counties and the information is available to everyone. The net effect is a reduction of the grossly inefficient government process that makes safety payments through tax revenues. That's what happens today in many cases: businesses pay exploitative wages, below fair wage levels. In the end, the intent of stakeholder capitalism is to reclaim the wisdom of leadership that ruled with Henry Ford as well as in the 1950s and 1960s. The idea is simple: If your markets aren’t robust and growing, if your employees aren’t happy and creative and prosperous enough to see a path toward a better life, your company can’t survive. It can force success for a while, but its profits won’t be sustainable. Meanwhile, society becomes destabilized and democracy becomes diminished.
You don’t salt the earth while you’re harvesting your corn. That’s what stakeholder capitalism means. It’s capitalism being its wisest self, what it once was and can be again. Many companies embraced stakeholder capitalism years ago and are thriving: Costco, Starbucks, Home Depot, Southwest, Dell, PayPal, Unilever, Microsoft, Mastercard and more.
If you have doubts, here’s a shining example: Over seven years, Kohlberg Kravis Roberts (KKR) transformed CHI Overhead Doors by investing Total Quality Management (TQM) kaizen principles into its operations. In the process, it created a case study of stakeholder capitalism. It multiplied profits and at the finish line, when KKR and the employees sold the company, the workers were rewarded with bonuses beyond their wildest dreams. It took KKR a long time, with unswerving dedication and a willingness to win the hearts of workers. There were years of persuasion and serving the needs of those employees before asking them for the solutions only they could provide. Eventually, these workers came up with ideas for redesigning processes that launched the company into the forefront of their market. No competitor could deliver its product in a way that competed with the quick turnaround that CHI Overhead Doors made a new industry standard.
After those years of TQM implementation, employees were awarded astonishing bonuses, some in the seven figures. CHI Overhead Doors embraced the lives of employees, suppliers, customers, shareholders and the community, and it found itself reaping enormous profits as a result. Stakeholder capitalism is nothing more than smart capitalism. It has its eye on the long-term future, not the next quarter. And it’s here to stay, because only stakeholder capitalism can create the most prosperity for the most people. It will eventually be the way all capitalism works — because the hard truth is that it’s the only way capitalism can survive. And good capitalism is exactly what the world needs.
Peter Georgescu is chairman emeritus of Young & Rubicam and author of three books, including Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation.