Stakeholder capitalism depends on full disclosure from corporate America

The writer, founder of education non-profit Rumie, is a former chief investment officer for sustainable investing at BlackRock

The annual letter written by Larry Fink, chief executive of the world’s largest asset manager BlackRock, to the CEOs of America’s biggest corporations is always closely scrutinised. This year’s missive, published in January, was no exception.

Fink continued a theme he’d broached before, arguing for what he calls “stakeholder capitalism” as the best way of tackling pressing societal challenges, including climate change. This is a rejection of Milton Friedman’s argument that businesses should prioritise profits for shareholders above all else.

It is not “woke” for a company to focus on all of its stakeholders instead of shareholders alone, Fink told recipients of his letter. Indeed it can surely only be to the good for capitalism to better serve the public interest — especially for the youngest, poorest and most diverse communities in the world, who are also those most exposed to the risks of continued inaction on the climate crisis.

Since Fink first asked CEOs to embrace “social purpose” in his 2018 letter, PR, marketing, revenues and profits from environmental, social and governance (ESG) products have soared — but so have carbon emissions, inequality and a host of other social ills that these products are meant to address.

Too frequently in corporate life, “purpose” and profit do not overlap sufficiently to drive any meaningful change on the timelines required.

Business today is like a competitive sport where players can score points and win by playing dirty. Corporations are playing the game in ways that harm the public interest, driven by a complex web of legal obligations and financial incentives designed to extract profits over purpose at every turn.

Existing models of stakeholder capitalism require people who have done business in certain ways their entire careers to embrace “social purpose”, even though they remain incentivised to do the opposite. So here’s an idea: why don’t we move to a model based on mandatory compliance?

In competitive sports, when a game turns dirty, we ask expert referees to enforce the rules. By switching to a model of stakeholder capitalism that is based on mandatory compliance and enforced by impartial referees, we increase its chances of success by applying a simple, common-sense aphorism: trust, but verify.

This requires governments to step in and ensure that the game is played fairly. Unfortunately, there is a significant barrier. Dirty players can pay the referees, undermining their impartiality and protecting loopholes that boost short-term profits but harm the long-term public interest.

In the wake of the US Supreme Court’s Citizens United decision in 2010, unknown amounts of untraceable corporate spending intended to influence elections and legislation have been sloshing around the system. It is no wonder that a majority of Americans feel that the economy is rigged to favour the wealthiest and most powerful.

The majority of both Democrats and Republicans support a constitutional amendment that would in effect overturn the Citizens United decision — a rare issue on which there is bipartisan agreement among Americans. Yet even as America’s largest corporations prepare glossy corporate social responsibility reports and marketing campaigns trumpeting social purpose, they fight off shareholder resolutions demanding greater disclosure around their political spending and lobbying activities.

This discrepancy is odd. If you were interested in cleaning up a basketball game, would you care more about the talking points players offered on the importance of good sportsmanship in interviews or whether or not they’re secretly paying the refs behind the scenes?

To be clear, the government does not actually have to build the solutions we need. There is a difference between government as provider and government as regulator. Government should no more build electric vehicles than referees should take free throws. But if the referees don’t call the fouls and enforce the boundaries, who will?

We are at an important fork in the road. If stakeholder capitalism fails, the political foundations of the system itself are at risk. I believe in the power of capitalism, but it must better serve the interests of all stakeholders. In pursuit of that goal, those with a voice and a platform should ask corporate America to help ensure the success of stakeholder capitalism by disclosing clearly how much it is paying the referees. Even better, they could start a campaign to stop these payments entirely.

Climate Capital

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