‘The  primary social responsiblity of business is to make a profit.’
Milton Friedman

‘We deplore the the false dichotomy . . . that good stakeholder relations undermine the optimization of long-term shareholder value.’
David Wheeler and Maria Sillanpää

International political discourse today is dominated by what might be called’the globalization debate’. Proponents of free and flexible markets cite the recent dynamism of the US and UK economies as proof that globalization — popularly accepted as meaning the global extension of free-market principles — can only be a good thing. Globalization’s detractors, however, contrast the harsh social inequalities of Anglo-American experience with the supposedly greater cohesion and stability of ‘stakeholder’ economies, of which Germany, France and Japan are commonly cited as examples.

The choice: liberalize or be excluded from global markets

Increasingly, globalization appears to present governments worldwide with Hobson’s choice:  deregulate, liberalize your national markets and cut government spending, or find yourself excluded from global financial markets. Opponents of globalization argue that liberalization exposes emerging economies to the risk of volatile capital flows and economic turbulence, recently witnessed in Thailand and, somewhat earlier, Mexico. These critics maintain that more attention should be paid to non-economic indicators, such as social stability and environmental protection, than to raw economic data on growth and unemployment.

Is creation of value for shareholders the sole aim of business?

At a national level, the globalization debate is often linked to an underlying, historical conflict between divergent business philosophies. The traditional free-market view is that creation of value for shareholders should be the sole and overriding criterion for all business decisions. The  emergent ‘stakeholder’ approach, in contrast, requires managers to take into account a company’s ongoing relations with its employees, customers, suppliers and general public, in addition to the shareholders.

Supporters of the free-market, shareholder-based view also support globalization because they see it as the worldwide expansion of pro-business principles. However, even within the supposed bastions of free-market economics  (the USA and the UK), there is a powerful opposing voice from stakeholder proponents. Thus, in the USA, a decade of Reaganomics was followed in 1992 by a Democratic administration in which the Secretary of Labor, Robert Reich, was an avid promoter of stakeholder views. In the UK, Tony Blair explicitly cited stakeholder economics in his successful 1997 campaign to end 17 years of Conservative rule. It is ironic that these two countries, most frequently cited as archetypes of the free-market principles inexorably conquering the world, are themselves governed by  leaders who based their electoral campaigns on stakeholder principles.

The popular debate can be summarized thus: should the rest of the world follow the USA and the UK into a global, fully liberalized and interconnected market ?  Are the ‘free-marketeers’ right when they focus all their efforts in making sure shareholders are happy, leaving society on its own to benefit from the ‘invisible hand’?  Or are the ‘good corporate citizens’ right to insist that the best way to assure long-term business success is to make sure all your stakeholders are happy?  These respective views were vigorously contested in the major international policy forums throughout 1997, from the World Economic Forum in Davos to the G-7 Summit in Denver and the World Bank/IMF Conference in Hong Kong.

Arch-capitalist Steves Forbes writes:

‘It’s no longer fashionable to advocate big government, so the liberal faithful are raising a new banner. It’s called stakeholder capitalism . . . a system in which the politicians and social engineers achieve their goals through . . . laws and regulations . . . But look at the bottom line: In the US, after a decade of painful restructuring . . . the unemployment rate has remained at around 6%. And in the “stakeholder” economies?   In France, unemploment is 12%, in Germany 11%, and Japan is mired in a deep recession. Some models.’

How should economic performance be judged?

However, when Bill Clinton tried to get his fellow heads of state at the 1997 G-7 Summit to publicly agree that America’s recent economic performance was pretty wonderful, he encountered a grumbling reluctance, particularly from the French, and many contrary and confounding statistics were cited. One French minister observed that the USA had well over a million men behind bars, and pointedly concluded that such a system was ‘not for us’. Another widely noted US trend was the concordance of corporate downsizing with increased profits. Profits of the US Fortune 500 increased by 13.4 per cent in 1995, the fourth straight year of double-digit increases, while average wages adjusted for inflation declined by 3 per cent between 1979 and 1995, and pay inequality increased. Whereas the average American CEO’s pay equalled that of 41 workers in 1960, a CEO today brings home as much as 157 of his or her employees. Challenging figures were also presented from Europe: an economic survey released in 1997 revealed that the UK’s impressive growth and unemployment statistics were belied by appalling figures on child poverty. While unemployment-ridden France had only 14 per cent of its children in poverty, booming Britain was plagued with levels of 34 per cent.

What do production-related statistics measure?

Stakeholder proponents argue (perhaps out of necessity, given the undeniably vigorous growth of the US and UK economies) that traditional indicators of economic success, such as GDP, are inherently misleading. In the words of political economist Hazel Henderson,

‘Economic growth as measured by the traditional gross domestic product (GDP) has driven societies off course by not also including measures of the environmental and social quality of life . . . Statistics reflect a society’s values and goals – “cultural DNA codes” — that become the key drivers of  economic and technological choices . . . Costs of GDP-measured growth are now obvious:  pollution, depleted natural resources, holes in the ozone layer, and disrupted communities.’

Henderson goes on to welcome the arrival of many new economic and social indices which take into account a country’s human resources and physical infrastructure (as is sometimes said, a country’s ‘net worth’), such as the World Bank’s Wealth Index or the UN’s Human Development Index. The World Bank’s figures suggest that at least 60 per cent of the wealth of nations can be attributed to human and social resources, with only 20 per cent coming from produced assets.  Despite this, economists and government policy-makers have traditionally focused exclusively on the statistics related to production. Henderson believes that ‘the debate over what we mean by wealth and progress has only just begun . . . It requires excellent research and surveying, and collating the diverse indicators and data already languishing at many  public agencies . . .’

Measuring the returns on stakeholder-oriented investment

The role of statistics in the globalization debate is mirrored on the company level by a debate about the balance-sheet measurement of the benefits of a ‘stakeholder’ business philosophy. Sceptics argue that stakeholding is a fuzzy, faddish concept, which reduced to its essentials means nothing more than the attempt to divert profits from the rightful business owners — the shareholders. Thus, the anti-stakeholding lobby maintains that it is not possible to calculate stakeholder value or returns on stakeholder-oriented investment. Armies of consultants have set out to prove otherwise. Thus, in the UK, SCA Management Consultants sought to measure stakeholder value by analysing a combination of corporate reputation, employee salary growth and charitable giving. The companies which came out at the top of these rankings appeared to create value by motivating employees and establishing good community relations and reputations. Thus, Marks & Spencer and Boots outperformed their competitors  Sears and Burton on both stakeholder and shareholder value.

Similarly, authors of the popular US business book, Built to Last, James C Collins and Jerry Porras, published research which indicated that ‘visionary’ companies (whose leaders were motivated by ‘more than just profits’) significantly outperformed competitors which were more exclusively focused on profits for shareholders. The somewhat paradoxical implication is that a clever investor will prefer to acquire shares in a company which is not obsessively and exclusively concerned with raising its share price in the short term. This would explain why the legendary billionaire and long-term investor Warren Buffett became so much richer than Milton Friedman.

A limited role for private initiative . . .

Even the strongest supporters of stakeholding accept that private initiative can only complement, and never replace, the role of governments. Only government can define the state’s role in providing a decent living for its citizens. Although many companies have already found the path of corporate citizenship through ‘self-enlightenment’, tax incentives and exemptions and liberal regulatory policies can provide a powerful additional stimulant.

. . . and for national governments

However, since globalization sharply limits the scope of action of national governments, pro-stakeholder policy-makers have realized that global social objectives can be achieved only within a more regulated international capitalism. Transnational corporations and financial markets will not submit to re-regulation in any individual country. Companies can easily relocate, and investment capital can vanish overnight  For stakeholder proponents, it would thus seem to be an all-or-nothing game: stakeholding must either become an international principle or risk being swept away by the tide of globalization. Achieving a world of corporate good citizens may seem utopian, but perhaps it is the only way to preserve our social and environmental wealth in a world of downsized governments.

Professor Volker Rittberger teaches political science at the University of Tübingen (Germany); he has been a visiting professor at Stanford University and the New School for Social Research (USA), as well as a Senior Fellow at the UN Institute for Training and Research. Berthold Rittberger worked most recently as a consultant at UNESCO in the division of Youth and Sports activities. Guillermo Jiménez is Head of Division at the International Chamber of Commerce (Paris).