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Charles Hampden-Turner
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In the new breed of capitalism, shareholders come last

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Stakeholder capitalism, which is rising to a position of ever-increasing influence, can best be described as ‘the extended family’ way of working, write Dr Charles Hampden-Turner and Raymond Abelin.

There are two distinct forms of capitalism emerging in the world today – shareholder capitalism and stakeholder capitalism. The former seems to be in serious trouble and the latter is rising to a position of ever-increasing influence.

However, historically, they are legally and morally different. We will highlight these differences.

Historical origins

Shareholder capitalism grew up in an era of high risks. The first steel industries, chemical industries, power companies were all high-risk, high-reward ventures, and investors wanted a good return for what they had hazarded.

But the nations that chased the leaders like France and Germany faced lower risks.

That such industries were possible had been demonstrated by the leaders; and a broad alliance of banks, engineers, trade unions, universities and governments chased them leaders and closed the gap.

Because the risks were lower, shareholders were not needed and banks typically invested long-term at lower rates of interest.

Legal origins

In the UK and the USA, the sole owners of a company are its shareholders. Everyone else is an agent, hired contractually to do a specific job for which they are paid.

Countries like Singapore, South Korea, China and Malaysia want their indigenous populations to benefit, hence the influence of shareholders is much less.

Any residues are the property of shareholders and where those profits are large, the owners are enriched, although some of the money will be re-invested.

In stakeholder economies, those who operate the business day-by-day retain most of the influence by being physically present, and because many shareholders are foreigners.

Countries like Singapore, South Korea, China and Malaysia want their indigenous populations to benefit, hence the influence of shareholders is much less, while the influence of employees, suppliers, customers, the government and local lenders is higher.

Elements of shareholder capitalism

  • Owned by investors, depending on the class of shares and the priority for repayment
  • Business exists to make money and boost consumption
  • Each company competes with other stakeholders for a larger slice of the pie, using its market power and competitive position in that industry
  • Emphasis is on the short-term since shares are typically held for less than one year
  • The purpose of life is to get money and spend it
  • What matters is harvesting gains and the shareholder is your boss who siphons off too much
  • Wealth is created by single companies owned by shareholders
  • There is endemic scarcity, what one owner wins the other loses
  • Pension funds typically invest less than 1% of their portfolio in any one company and hence do not care for particular companies
  • An appropriate metaphor is ‘the money machine’
  • Shareholders are largely passive and mostly absent
  • CEOs and very senior managers are grossly overpaid to assure their prime loyalty is to shareholders
  • A company treating its employees, suppliers, and customers unusually well can become a takeover target for a raider offering these monies to shareholders instead
  • Wealth is made by direction, by carefully calculating your own gain
There is no wealth for anyone until managers have inspired employees, employees have served customers, and these customers have upped their purchases and provided revenue.

Elements of stakeholder capitalism

  • Owned by contributors, that is, employees, customers, investors, suppliers, the government, and the community
  • Money exists to make business and to boost production
  • Each company cooperates with other companies to make the pie larger and the network or eco-system more profitable for all concerned
  • Emphasis is on the long-term because many stakeholders have committed their lives and careers
  • The purpose of life is to be productive and earn your keep
  • What matters is growing the market and the shareholder is your colleague who re-invests in the company
  • Wealth is created by networked companies which co-create
  • There is potential abundance as more knowledge is generated
  • Activist investors including employees, banks and suppliers hold large percentages of shares and care very much
  • An appropriate metaphor is ‘the extended family’
  • Stakeholders are largely active and mostly present
  • Stakeholders are paid according to the relative value of their different contributions
  • Stakeholding companies try to prove that this expenditure is justified by the higher innovation and productivity that has been generated among people
  • Wealth is made by indirection, by serving others and being repaid

But perhaps the clinching consideration is that in the wealth creating process, shareholders come last.

This does not mean they are least important. It means there is no wealth for anyone until managers have inspired employees, employees have served customers, these latter have upped their purchases and provided revenue.

It is from this revenue that shareholders are paid their share. It follows that that cutting employee costs, paying suppliers late, preying on your customers, and avoiding taxes are all self-defeating. It makes everyone else poorer and in the end harms shareholders too.

Conscious Capitalism, a book published by Harvard Business School Press, likens the maximising of shareholder value to cancer in the human body where cancerous cells grow aggressively at the expense of surrounding tissue.

Such cells are ultimately suicidal because they destroy there host body and perish with it.

All companies begin as stakeholders, typically owned by founders and their families but when they make an IPO (initial public offering) they pass into the control of shareholders.

At this point, they turn themselves into money machines for their owners and in too many cases cease to sustain those stakeholders essential to innovation and productivity.

The rise of the B corporation

The crisis of shareholder capitalism has led to a new corporate form in the USA called the B Corporation or Benefit Corporation.

This voluntarily alters its articles of incorporation to pledge itself to serve all stakeholders, shareholders included. It will prosper through serving customers via well-paid employees and happy suppliers, which will generate more for all concerned.

Companies “conscious” of their commitment to all their partners were over ten times more successful than the Standard and Poor’s Index of relative profitability of America’s leading corporations, a truly amazing feat.

There are now 206 B-corporations and these are growing by 10% a month, certified by the B-Lab. Eleven states in the USA have passed legislation to encourage the B-form. In nineteen more, legislation is pending.

Just how much more the stakeholder corporation makes for its willing participants is detailed in Conscious Capitalism.

They selected 28 corporations for their voluntary ethical commitment to stakeholding. They hoped to show that such companies were as profitable as the average company that you could serve stakeholders and that shareholders would not lose thereby.

What they found was that companies “conscious” of their commitment to all their partners were over ten times more successful than the Standard and Poor’s Index of relative profitability of America’s leading corporations, a truly amazing feat.

This sample included Whole Foods, Harley Davidson, UPS, LL Bean, Patagonia, Trader Joe, Southwest Airlines, Jet Blue, IKEA, Costco, Johnson and Johnson, Wegmans, Pedigree, Toyota (USA), Community Bank and so on.

Raymond Abelin is a visiting scholar at SKK University, South Korea. He was deputy director and later director of Nanyang Technological Centre’s Technopreneurship Program in Singapore from 2006 -2009. 

Dr Charles Hampden-Turner is a global expert in the area of people & culture. He has authored nine books, including the widely acclaimed Vicious & Virtuous Circles, and is the co-founder of Trompenaars Hampden-Turner. He is also a headline speaker at Talent Management Asia 2015.

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Talent Management Asia is a two-day annual event focused on global best practice HR strategy. To review the topics and agenda, check out the stellar speaker list and reserve your seat visit www.talentmanagement.asia before it’s sold out.

For more information please contact Carlo Reston on +65 6423 0329 or carlor@humanresourcesonline.net.

 

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