In 1997, The Business Roundtable, an organisation consisting of chief executives of most of the largest companies in the US ranging from Apple to Walmart, issued a statement declaring that shareholder profit is the sole purpose of a corporation. Now it has changed its mind.
Its most recent statement on the topic states:
“while each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”
This is to say that companies should advance not just the interests of shareholders, but also employees, customers, the environment and the communities they operate in. Nancy Koehn, a historian at Harvard Business School, described this as a manifestation of a shift in the zeitgeist that has dominated our economic life since the adoption of Milton Friedman as the ruling economist of the day in the 70s.
Some of the executives are more blunt (or honest) than others regarding this. Jack Welch, the former CEO of general electric from 1981-2001 said the principle of shareholder profit maximisation as the sole purpose of a corporation was the “dumbest idea ever”. Similarly, Xavier Huillard, the CEO of the Vinci group, the largest non-Chinese construction company in the world called the principle “totally idiotic”.
The chief economics commentator of the Financial Times, Martin Wolf, recently published an article in which he “reluctantly” came to the conclusion that “capitalism is broken”, because corporations only seek to maximise shareholder profit. He states:
“Shareholders are least committed, because, unlike employees, dedicated suppliers and the locations in which businesses operate, they can divest themselves of their engagement in the company in an instant. Shareholders are the least knowledgeable, because they are not engaged in the activity of the company.
…contrary to economic wisdom, shareholders are not the bearers of the residual risks in the business… employees, suppliers and locations also bear substantial risk… stock markets allow shareholders to diversify their risks across the world, something employees, for example, cannot hope to do… Moreover, everybody else is at risk from shareholders’ opportunistic behaviour. This has to weaken the commitment of everybody else.
…given the mantra of shareholder value maximisation and the inability of shareholders to monitor management, rewards have increasingly been linked not to the performance of the business in delivering on its purposes, but to accounting profits and the share price. Yet both are subject to manipulation. Some would argue that the result has been excessive remuneration… and chronic under-investment, too.”
It seems we are in an ‘emperor has no clothes’ situation of epic proportions. Everyone accepts that the shareholder profit maximisation as a principle is not working – even those for whom it is working for better than for anyone else. Yet it remains the principle that our global economic system is based on.
It is hard to overstate how much this principle has shaped our economy. In 1970 New York Times times published an article by Milton Friedman titled “The Social Responsibility of Business is to increase its profits”. It argued that the sole purpose of a business is to maximise shareholder value, and has been described as the most read article ever written by a Nobel Laureate economist.
“Theory of the Firm” from 1976 by Michael Jensen and William Meckling, argued that the fundamental problem corporations seek to tackle is to get directors and executives to maximise shareholder profits, and this is the most cited paper in business literature. There is no single goal that our societies are more programmed to achieve than this.
We are at a stage comparable to the Soviet Union’s collapse, that Russian linguist Elena Gorkhova described as the following:
“The rules are simple: they lie to us, we know they’re lying, they know we know they’re lying, but they keep lying to us, and we keep pretending to believe them.”
The difference is no one is even pretending anymore.
From The Totalitarianism Of The Shareholder Into A Cooperative Stakeholder Democracy
The last century was characterised by a struggle of democracies vs authoritarian states; it saw the collapse of most monarchies, fascist regimes, the European imperialist empires and the USSR. It also saw the birth of the first parliament elected by universal suffrage in Finland in 1916 and the creation of the first parliament elected transnationally in the European Union in 1979. Currently, around 4 billion people live in (more or less imperfect) parliamentary democracies.
There is also a struggle going on between democratic and authoritarian businesses, between cooperatives owned democratically by their members and shareholder businesses where votes are bought.
These two struggles are intertwined – the Labour movement that drove the change that resulted in universal suffrage also started the cooperative movement. One cannot truly exist without the other – democracies where economic ownership is concentrated turn into oligarchies, and cooperatives cannot truly practice their principles of autonomy and democracy in a dictatorship.
Currently, 150 years after the first cooperatives were established, around 1 billion people are members of cooperatives – three times more than the number of people who own shares.
However, going from 1 to 2 billion won’t take another 150 years -in fact around 20 years is a more realistic estimate. Cooperatives outperformed their conventional corporate competitors during the financial crisis and have been expanding rapidly ever since. For example, the number of people served by credit unions worldwide has reached a record high 274 million in 2019, 50% more than a decade ago and 40 million more than in 2016.
If credit unions continue to grow by 50% every 10 years, they will add nearly 300 million more people to the cooperative movement in the next two decades. In developing countries, the expansion can often be dramatic – for example in Rwanda the number of members in cooperatives grew from around 200 000, in 1994, to around 5.3 million, greater than a 25 fold increase in 25 years.
However, alongside the growth of conventional cooperatives there will be a more transformative process occurring – that of global platform cooperatives. Resonate, a Spotify alternative that is cooperatively owned by listeners and musicians is a great example. People can join it from anywhere in the world, at any time of the day. Another is Coop Exchange, an app that will enable people around the world to invest in cooperatives around the world. The app itself will be a cooperative.
Unlike traditional cooperatives that have a clear geographic location and opening hours, everyone in the world with an internet connection is always just a few clicks away from joining. As more people can join a greater number of cooperatives, it will become easier to withdraw to a greater degree from the current capitalist system into the new cooperative ecosystem. If there are more musicians on Resonate, it is easier to find music to listen to.
If there are more credit unions, it is easier to find one near you. The ecosystem can snowball into a force that introduces greater democratic accountability to an economy desperately needs it.
This will help create a global ecosystem of cooperatives, a counter-economy based on mutual self-help. People can earn money in a worker cooperative bakery, save that money in a credit union and invest some of it in new bakery cooperatives through Coop Exchange, buy their food from a local cooperative grocery store and listen to music through Resonate while residing in their cooperative housing.
Co-operatives can come to dominate economic life and deliver real democratic accountability within our economies. As more people choose to withdraw to a greater extent from the conventional shareholder economy into the cooperative ecosystem, it will gradually reach a critical mass to absorb the former, similar to how shareholder capitalism itself replaced earlier economic models.