26 Jan #105 – Business A Better Way vs Stakeholder Capitalism
ESSENCE: Recently, the CEO of BlackRock, Inc., Larry Fink, came out with his 2022 “letter to CEOs”. In his 2022 letter, Fink focused on “stakeholder capitalism”. We thought it would helpful to compare what he describes as stakeholder capitalism and what we call business a better way. In many ways, they can look and feel the same, but they are not. You will not be surprised to hear us say that what distinguishes business a better way from stakeholder capitalism is its WHY–people vs profit. Every leader of an organization must ultimately choose the “Kingdom” they will pursue. For a faith-driven leader, there are always two choices–the world’s kingdom or God’s Kingdom. Stakeholder capitalism as described by BlackRock is about the world’s kingdom–it is business as usual with a long-term perspective on profit. Business a better way is about God’s Kingdom–with a focus on the stewarding and flourishing of God’s creation for God’s glory.
Recently, the CEO of BlackRock, Inc., Larry Fink, came out with his 2022 “letter to CEOs”. In case you haven’t read or listened to a financial news source in the last decade, BlackRock has more money under management than any other public asset management firm in the world, recently exceeding $10 trillion (yes, the “t” is not a typo) for the first time. Each year Larry Fink writes to the CEOs of the organizations in which BlackRock invests its clients funds. In his letters, he tells them what is currently important to BlackRock and its clients when evaluating investments (no pressure!). In his 2022 letter, Fink focused on “stakeholder capitalism” and even announced that BlackRock was launching a Center for Stakeholder Capitalism.
We thought it would be a good time to compare what he describes as stakeholder capitalism and what we call business a better way. In many ways, they can look and feel the same, but they are not.
Refresher: What is Stakeholder Capitalism and Business a Better Way
Without getting into a history lesson about prevailing management theories, for many years a debate ensued between “shareholder primacy” and “stakeholder” models, with the stakeholder model being predominant. The stakeholder model was one in which a company took into consideration the needs and well-being of not only its shareholders but also its employees, customers, vendors and communities. Caring for all stakeholders was seen as a social responsibility of a good corporate citizen. The predominance of the stakeholder model began to change in 1970 when Milton Friedman wrote a famous article in which he said “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits.” The shareholder primacy model has been predominant for the last several decades. For an excellent history of the debate (as well as an analysis from a corporate law perspective), we recommend The Shareholder Value Myth by Lynn Stout. For an excellent economic analysis of the Friedman doctrine and its problems, we recommend Completing Capitalism by Bruno Roche and Jay Jakub.
In a nutshell, in the 1970’s the debate shifted in part because of frustration with management performance; that shift led to a move to align executive pay with shareholder value; and this, in turn, led to a massive increase in CEO compensation as well as an emphasis on short-term profit management. In recent years there has been a movement back toward a stakeholder model in response to, among other things, vocal criticism of corporate profits, CEO wealth and employee dissatisfaction.
Reflective of that move, in 2018, Larry Fink’s letter to CEO’s emphasized the need for companies to “benefit all stakeholders” because “society is demanding that companies, both public and private, serve a social purpose. . . . Without a sense of purpose, no company, either public or private, can achieve its full potential. ” In 2019, even the Business Roundtable did an about-face by announcing that businesses should be committed to meeting the needs of all their stakeholders (since 1997, the Business Roundtable had endorsed a “shareholder primacy” view of corporate responsibility).
While still calling CEOs to a stakeholder model, Fink’s 2022 letter seems to take a decidedly different approach to the “stakeholder” model from the one he advocated in 2018. Whereas in 2018 Fink emphasized “benefit all stakeholders” as a “social purpose” to be pursued together with “long-term value creation” (of course, we know only one of those purposes can be the ultimate purpose), in 2022 he focuses on “stakeholder capitalism” and is much clearer about its WHY (emphasis added):
Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism. In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.
The 2022 BlackRock letter is much more honest that “stakeholder capitalism” is about Profit as Purpose, but with a longer-term view–unlike the 2018 letter, it is not trying to put a “social purpose” alongside profit. Larry Fink appears to be singing from the same song sheet as Milton Friedman, just in a different key. Whereas “shareholder primacy” often focuses on “short-term” profits, with management held to quarterly expectations and incentives, Fink’s “stakeholder capitalism” takes a more enlightened long-term view toward profitability. When rhetoric is pushed aside, this view of “stakeholder capitalism” justifies serving all stakeholders because it maximizes long-term profitability for shareholders.
Business a better way is about conducting business as God intended in accordance with Biblical beliefs, values and priorities. Isaiah 43:7 makes clear that glorifying God is WHY we were created. As we have emphasized in several prior posts, the purpose of an organization is derived from the purpose of its people. If people are called to glorify God in all they do, then organizations must exist to do the same.
Deriving purpose from its people, we believe an organization faithfully “doing right” through business a better way glorifies God principally by lovingly and generously serving people and stewarding all creation: (1) providing opportunities for individuals to be more fully human by expressing aspects of their God-given identities in creative and meaningful work, (2) providing opportunities, goods and services, on a sustainable basis, that enable families, communities and the world to flourish, and (3) creating a culture of Shalom built on Biblical principles of relationships, community and human dignity that is conducive to the flourishing of all people it touches–all its stakeholders.
Refresher: The Importance of Asking “WHY”
If you have been reading these posts, there is one word you may have become tired of hearing–“WHY”. We have repeatedly come back to the importance of motivation and purpose. Over and over, we have emphasized Matthew 6:24 and the idea that a person can have only one primary identity and an organization can have only one ultimate priority:
No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.
We have consistently asserted that if maximization of profit is the “end” to which a business is managed, then by definition, people (aka, “stakeholders”) can never be more than tools of production to be managed toward that end.
As it says in 1 Samuel 16:7, “But the Lord said to Samuel, ‘Do not look on his appearance or on the height of his stature, because I have rejected him. For the Lord sees not as man sees: man looks on the outward appearance, but the Lord looks on the heart'”. Faithfully “doing right” means doing the right thing, in the right ways, and for the right reasons. Doing the right thing for the wrong reasons looks good and probably “does good”, but it is missing business a better way–it is missing God’s heart for our work.
Profit is like oxygen. You absolutely need it to win the race. But that’s not the objective. The primary objective of business is serving others to the glory of God. (Ken Eldred)
Business a Better Way vs Stakeholder Capitalism
You will not be surprised to hear us say that what distinguishes business a better way from stakeholder capitalism is its WHY. Whatever is an organization’s PURPOSE–maximizing profit (whether short-term or long-term) or serving people–that becomes the key metric for decision-making and the key motivation for action.
One of the five “mind-shifts” on the path to business a better way is “GREED IS NOT THE CREED”. It is the most important–and probably the most difficult–of the five “mind-shifts”, because it requires changing the heart of the organization. It involves the reversal of people and profits in their “business as usual” roles of a means and the end–putting profit in its proper place as a means rather than the PURPOSE. With this “mind-shift”, the purpose of the organization becomes serving people to maximize human flourishing. We love this quote from Ken Eldred:
Profit is like oxygen. You absolutely need it to win the race. But that’s not the objective. The primary objective of business is serving others to the glory of God.
In BlackRock’s description of stakeholder capitalism “a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders“. An organization faithfully “doing right” through business a better way will also “create value for and be valued by its full range of stakeholders“, but it will NOT doing so “in order to deliver long-term value for its stakeholders“, even if that may be a by-product. Long-term value for shareholders is A GOAL of business a better way because shareholders are one of the stakeholders that must be served–that must flourish–but it is not THE GOAL and they are not the ultimate “SO THAT”. Subtle distinction? Perhaps. Important distinction? Absolutely.
Every leader of an organization must ultimately choose the “Kingdom” they will pursue. For a faith-driven leader, there are always two choices–the world’s kingdom or God’s Kingdom. “Stakeholder capitalism” as described by BlackRock is about the world’s kingdom–it is business as usual with a long-term perspective on profit. Business a better way is about God’s Kingdom–focused on eternal rewards. Choose wisely.
PERSONAL NOTE (from PM): In several posts I have talked about the book Completing Capitalism by Bruno Roche and Jay Jakub. The authors describe how the Mars Corporation (their employer) did a study to ensure that Mars was not extracting an unfair amount of profit any stage of the value chain, thereby weakening the chain. This resulted in the development of an entirely new business model–the Economics of Mutuality (a very Biblical principle!). In post #082 (Culture and Capital), I talk about mutuality as an important element of good stewardship. Like caring for stakeholders, mutuality can be pursued for “worldly” reasons or Kingdom reasons, and I believe that makes a big difference.
From a worldly perspective, mutuality can be justified on a purely utilitarian basis as being good for long-term profitability, because it recognizes the complex ecosystems within which the organization operates and helps ensure sustainability and resilience of the ecosystems, which is good for the long-term profitability of the business. I suspect Larry Fink would like this form of mutuality. From a Kingdom perspective, mutuality is simply the “right thing” to do because it is the Golden Rule from Luke 6:31 AND it is good long-term stewardship of the organization’s broad capital, whether or not it can be shown to result in greater long-term profitability. It all comes down to heart.