Every year in January, some of the world’s most powerful, wealthy, and influential people descend on the tiny resort town of Davos, Switzerland. They represent the pinnacle of business, culture, and politics, and they come for the World Economic Forum (WEF). Together, they spend four days discussing their grand plans to improve society. At least, that’s what observers might conclude, based on the 2021 theme: “The Great Reset.” Klaus Schwab, head of the WEF, insists the COVID-19 pandemic has intensified the need to abandon shareholder primacy. Instead, he argues corporations should use a lens of “stakeholder capitalism,” focusing on their environmental, social, and governance goals.
How climate change affects coronavirus recovery is not immediately clear. Mr. Schwab does call climate change an “environmental virus” in a feeble attempt to square the circle. But we can forgive Mr. Schwab for attaching his worldview onto the necessity of rebuilding a post-COVID world. What’s dangerous is that these are not mere ramblings: he and his compatriots in the WEF are extraordinarily influential. It will harm customers, employees, and shareholders if the WEF trains its cannons on corporate accountability by attacking shareholder primacy.
Dismantling Accountability for the C-Suite
The “Great Reset” is just the latest iteration of “stakeholder capitalism.” As we’ve discussed before, stakeholder capitalism is the latest trendy moniker in corporate social responsibility. Stakeholder capitalism advocates for downplaying shareholders in favor of uplifting “stakeholder interests.” But the term “stakeholder” is too vague to have any real import. There’s no common definitions of “stakeholders:” sometimes as employees, customers, or “society at large.”
So if every group is now priority, but they all have different priorities – who influences corporate decision-making? No one knows. Without shareholder primacy, there’s no mechanism to hold executives accountable to any set of priorities. Shareholders are neutered, and there are too many stakeholders, with too diverse priorities, to hold companies accountable. Even if we could quantify priorities, there’s no feedback loop between corporate executives and, well, everyone else.
In effect, under stakeholder capitalism, the C-suite answers to no one.
Center-left corporate social responsibility advocates have maligned Friedman’s “shareholder primacy” model since its inception. But at the core, the model recognizes profit-making, and the shareholders who own it, is far more than grubby capitalism. It’s a recognition of efficiency: as companies cut costs and satisfied people buy more of their products, they pass the accountability test to shareholders and customers alike. Recognizing that it takes great employees to make these great products (thus increasing profit), the company gives raises and holiday bonuses, and another “stakeholder” leaves satisfied – all because profit-making is the goal. A “Great Reset” that pivots away from this would be counterintuitive.
“Stakeholder Capitalism” – at Whose Expense?
One fundamental assumption of “stakeholder capitalism” is that shareholders are somehow bad, greedy, or both. Especially today, this couldn’t be farther from the truth. Over half – 56% – of Americans participate in a workplace retirement plan. Health Savings Accounts (HSAs), which compound in the stock market to pay for health-related expenses, have increased in popularity. And in 2020, owing to so much market volatility as well as stay-at-home orders, individual investing exploded. While individual investors only made up 10% of the market in 2019, they comprised nearly 25% of trading on volatile days in 2020.
More than ever before, shareholders are you and me: everyday Americans from every income level, background, or socioeconomic status who are taking advantage of the consistent rise in the market to save money and grow wealth. When Klaus Schwab and the World Economic Forum denigrate shareholder capitalism, now more than ever, they’re denigrating regular people. Those people deserve to have their stock market returns, which are funding their retirement or their health accounts, prioritized. Contrary to what Mr. Schwab and his compatriots might say, we don’t need a “Great Reset.” Pursuing one would hurt the very people they claim to want to help.