Disruption is Hard: The Limits of Stakeholder Capitalism

Photo by Krisztian Matyas on Unsplash

“If lobbying pays off 20x, why bother with R&D?”
—Shivaram Rajgopal, professor, Columbia Business School

Harvard’s 23^rd Social Enterprise Conference (SECON), organized by Harvard business and public policy graduate students and held last month, promised a lot. The theme was “Disrupting the Status Quo: From Impact to Equity.” Is Harvard the go-to place to learn how to disrupt the status quo? Surely not. But it is the tension between aspiration and practice that often makes the conference so fascinating. Past SECONs have sought to critique philanthropy and question the future of capitalism. What would this year’s conference bring?

As the above quote from Rajgopal emphasizes, in today’s political economy, rhetoric of disruption aside, corporations often generate far greater profits by lobbying for favor than through genuine innovation. For the uninitiated, a 20x return means that for every one dollar you invest, you get $20 back. If lobbying returns $20 per dollar spent, as Rajgopal attests, then why bother with riskier research-and-development?

In short, US capitalism—on its own terms as a supposed engine of innovation—is quite ill. Yet some say business will reform itself. How often have business leaders touted their leadership? And sometimes their social virtue as well? But facts can be stubborn.

Speaking of which, Rajgopal recently examined a wide range of empirical data to see whether corporations that had signed the Business Roundtable’s Statement on the Purpose of the Corporation, which proclaimed corporate fealty to the greater good, treated their stakeholders any better than businesses which had not signed the document. The answer? The results were “sobering,” according to Rajgopal and coauthor Aneesh Raghunandan from the London School of Economics. As they wrote last year:

Relative to within-industry peer firms, we find that signatories of the Statement on the Purpose of a Corporation have higher rates of environmental and labor violations (and pay more in compliance penalties to the Environmental Protection Agency, Occupational Safety & Health Administration, and Wage & Hour Division of the Department of Labor as a result). Moreover, when we turn to carbon emissions—used by many in the asset management industry as the most important measure of firms’ environmental performance—we find that signatory firms have higher levels of emissions, again relative to similarly-sized within-industry peers.

Apparently, it takes more than signing a statement of corporate purpose to change firm behavior. Who knew?

What does disrupting crony capitalism require? This was this theme that Rajgopal and his fellow panelist Ethan Rouen (from Harvard Business School) sought to address in their panel about stakeholder capitalism.

But before turning to that session, it is worth taking a brief tour through the rest of the conference, a conference that routinely gave corporations too much credit for their social missions, even when critiquing corporate greed.

Questions Not Considered 

The Harvard conference organizers often bring together unusual combinations of panelists—drawing on a mix of public sector, business, and nonprofit speakers. Certainly this was the case with a panel on wealth inequality, which included Yahya Alazrak, Executive Director of Resource Generation, a group of young donors who support the development of a solidarity economy; Abby Maxman, CEO of the anti-poverty group Oxfam America; and Ryan Alam, a Senior Vice President at Citi Impact Fund, a $250 million impact investing unit of the $2.3trillion banking conglomerate.

In the panel, Maxman laid out the scale of the wealth gap, citing a recent Oxfam report, Inequality Kills, which found that, between March 2020 and November 2021, 160 million people worldwide had fallen into poverty, even as the wealth held by the world’s 10 wealthiest people had climbed from $700 billion to $1.5 trillion. What was most interesting about the panel, however, was what was not said. Panelists advocated for public policy measures that would raise taxes on the wealthy to reduce wealth inequality, but the economic system responsible for wealth inequality was largely ignored, with no suggestions offered regarding how to change the financial system or the broader economy in order to generate more equitable wealth in the first place.

This proved to be part of a larger pattern. A panel on “reimagining health equity” treated the US healthcare system as if it were only changeable at the margins. Discussion focused on uses for telehealth and how to accelerate an ongoing shift from fee-for-service pricing to value-based pricing (ie, payment based on health outcomes, typically based on results for a given group of patients, rather than payment per procedure). When asked whether systemic change in the US, such as a shift to universal health coverage (like Medicare for All), might be needed to achieve health equity, Elizabeth Fowler, Director of the Center for Medicaid and Medicare Innovation and a veteran of the policy struggle to get the Affordable Care Act passed, offered plaintively that, “I hope we can make it to universal coverage someday.”

A similar pattern emerged in a keynote session on energy transition and equity. Panelists discussed many important matters, including policies that might generate more investment in renewable energy (such as the removal of fossil fuel subsidies), the need to retrain people working in fossil fuels to earn a living in other sectors, and the need to replace an estimated $138 billion in annual tax revenue that is generated by fossil fuels in the US alone. Ashvin Dayal, head of Power & Climate for the Rockefeller Foundation, even lifted up equity and community as considerations, saying, “It is not just about the money; it is about the methodology.” Yet much went unremarked as well.

In particular, is it reasonable to assume that an economy that generated a six-percent increase in global carbon emissions in 2021 is healthy and that the only major requirement is to shift to renewable sources? By the way, a 2019 United Nations report estimated that 7.6 percent annual declines were needed during this decade to keep temperatures from rising by more than 1.5 degrees Celsius.

Maybe more green power is all that is needed, but possibly, independent of the energy source mix, the dynamics of energy and resource consumption in a growth-oriented capitalist economy ought to at least be considered. That didn’t occur. And neither climate justice activism nor proposals like a Green New Deal—to say nothing of more far-reaching, transformative proposals—were even mentioned.

 

The Problem with Contemporary Capitalism—from a Capitalist Perspective  

For a conference about disrupting the status quo, many of the panelists were far too careful to avoid any positions that might prove to be—well, disruptive. This made the session on stakeholder capitalism in which Rajgopal and Rouen participated stand out. Ironically, the two business professors were surely among the most conservative panelists at the conference. As Rajgopal pointed out in the session, “Both of us are B school professors. Profit is not a bad word.” Yet they differed from many other panelists in not assuming that the structure of business qua business was sustainable.

Indeed, Rajgopal was alarmed. “We need to do something. You don’t want crony capitalism,” he warned. Rajgopal noted that the rise of information technology firms with monopoly power means that traditional Chicago-school, Milton Friedman-backed neoliberalism cannot even work in theory. Firms in Friedman’s view are supposed to be price takers and rule takers—in other words, they must accept the market price and rules as given, and have no ability on their own to influence prices or government rules. But clearly, as Rajgopal pointed out, “Google, Amazon, Facebook are not rule takers. It is time to intellectually question the Friedman thesis.” Rajgopal added that the climate crisis makes the question of corporate governance more pressing, leading him to “sympathize more with the so-called stakeholder view than I used to.”

Rouen offered another reason why corporations must be involved in addressing the climate crisis. Rouen observed—accurately, if disturbingly—that, “We are more a plutocracy than a democracy in terms of whose will gets addressed.” Rouen also noted that corporations have transnational structures; national governments, by definition, do not. “If you bet on governments, we will be waiting a long time.”

The transnational potential of business to “do good” is obvious. Rajgopal observed, “Coca Cola has a massive distribution network” that possibly could be mobilized to, for example, distribute vaccines for COVID-19. But he added that he did not expect companies like Coca Cola to lobby for anyone but themselves.

Can a reformed “stakeholder” capitalism make a difference, even in theory? Rajgopal observed that for stakeholder capitalism to be meaningful, government must act. Despite Rouen’s observation about government’s limits, Rajgopal did not see a way forward without a strong government role: “Somebody needs to standardize the standards. You can’t keep government out of this.” He even went so far as to suggest that addressing the climate crisis may soon require that governments collect national carbon emission data that are as stringent as the current (albeit flawed) measures of gross domestic product (GDP).

A second challenge: it’s hard to determine what stakeholders want. Stakeholders don’t vote, and even shareholders often don’t directly vote their shares. Most often, asset management firms—especially the Big Three of Blackrock, State Street, and Vanguard—vote on shareholders’ behalf. For this reason, Rajgopal said, it was important for firms to clearly define what they mean by social impact. He contended that saying a firm is “good to everybody” often means it is “good to no one.” By contrast, if firms indicate that their impact goal is labor, the environment, or something else, then at least “some of the reporting issues go away. Let’s say it is labor, it is far easier to rate that if you’re so inclined.”

For his part, Rouen said a big step forward would be better disclosure about such matters as how firms treat their workers and how they act in the environment. Rouen conceded that such measures are imprecise. Still, he added that no set of measures is ideal. Even financial accounting, he noted, is still evolving. “It won’t be perfect, but we can start to implement best practices,” he said.

 

Closing Thoughts

Disruption may be hard, but major changes are possible. While it didn’t come up at the conference, Rouen last year coauthored a paper on employee ownership that speaks to the possibility of change. In an article coauthored by Thomas Dudley of Certified Employee Owned, Dudley and Rouen conducted a thought experiment—what would happen to the nation’s wealth distribution if ownership of 30 percent of all private company shares were redistributed to employees?

The answer is that the net wealth of the average Black family would rise more than fourfold—from $24,100 to $106,271—while the wealth of the top one percent of Americans, who currently have an average of $28.4 million in assets, would fall a modest 14 percent to $24.4 million, on average. Families of high school graduates would also see their households’ average wealth rise from $21,000 to $84,000.

Might such a wealth transfer occur? Evidently, a redistribution of wealth on this scale would face major political hurdles. But it is not impossible.

Often, existing structures are treated as if they are immutable. There are reasons for this. As Rajgopal and Rouen point out, even seemingly modest reforms in corporate governance within capitalism are far more difficult to achieve than many advocates of stakeholder capitalism would like to admit. Still, it is also true that, historically, so many social changes—transformative changes—were unthinkable until they happened.

At the Harvard conference, participants considered where the status quo might be disrupted to achieve better social outcomes, even if their answers were often unsatisfying. A key lesson is perhaps an old one: the most important step in disrupting the status quo is imagining that a different future is truly possible.