Capitalism is in trouble – at least judging by recent polls.
Amajority of American millennials rejectthe economic system, while 55% of women age 18 to 54say they prefer socialism. More Democrats nowhave a positive view of socialismthan capitalism. And globally, 56% of respondents to anew survey agree“capitalism as it exists today does more harm than good in the world.”
One problem interpreting numbers like these is that there are many definitions of capitalism and socialism. More to the point, people seem to be thinking of a specific form of capitalism that deems the sole purpose of companies is to increase stock prices and enrich investors. Known as shareholder capitalism, it’s been theguiding light of American businessfor more than four decades. That’s what the survey meant by “as it exists today.”
As ascholar of socially responsible companies, however, I cannot help but notice ashift in corporate behavior in recent years. A new kind of capitalism seems to be emerging, one in which companies value communities, the environment and workers just as much as profits.
The latest evidence: Companies as diverse as alcohol makerAB InBev, airlineJetBlueand money managerBlackRockhave all in recent weeks made new commitments to pursue more sustainable business practices.
The purpose of business
Nearly 50 years ago, economist Milton Friedman proclaimed that the sole purpose of a business is “to use its resources and engage in activities designed to increase its profits.”
Within a decade, Friedman’s claimbecame accepted wisdomin corporate boardrooms. The era of “shareholder primacy capitalism” had begun.
One result has beenremarkable growth in the stock market. But critics argue companies and the “shareholder value theory”are also complicitin exacerbating manyeconomic,socialandenvironmentalproblems, such asincome inequalityandclimate change.
They also note that putting profits first actuallyharms shareholdersin the long run by encouraging managers to take actions that may eventually reduce earnings.
Many consumers, workers, and socially conscious investors have also noticed these shortcomings and increased pressure on corporations to change.
For starters, more Americans no longer find it acceptable for companies to exclusively seek profits. A2017 pollfound that 78% of U.S. consumers want businesses to pursue social justice issues, while 76% said they would refuse to buy a product if the business supported an issue contrary to their beliefs. Almost half the respondents said they had already boycotted a product for that reason.
Workers increasingly expect their employers to share their values. A2016 studyfound that most Americans – particularly millennials – consider a company’s social and environmental commitments when deciding where to work. Most would also be willing to take a pay cut in order to work for a “responsible” company – and are demanding their current employers behave that way.
For example, workers at online furniture company Wayfairrecently walked outwhen they learned it had sent beds to detention centers at the U.S.-Mexico border. More than 8,100 Amazon employees signed an open letter supporting ashareholder resolutionurging the retailer to do more to address climate change.
Finally, investors arebecoming more socially awareand putting more of their money behind businesses that behave in sustainable and responsive ways. At the beginning of 2018, portfolio managersheld US$11.6 trillionin U.S. assets using environmental, social and governance criteria to guide their investments, up from$2.5 trillion in 2010.
Laurence Fink, founder and CEO of BlackRock, the world’s largest asset manager, summed up the growing sentiment when he said in 2018, “To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
The corporate response
Presumably realizing how important these constituencies are to their bottom lines, businesses are paying attention.
Shareholder capitalismis this year’s theme at Davos, the global gathering of the world’s elite in the Alps. And last year, the leaders at some of the world’s largest companies said thatthey are ditchingshareholder-first capitalism and instead embracing a corporate purpose that seeks to serve all constituents. The sentiment is hardly isolated.
Dick’s Sporting Goods, Kroger, Walmart, and L.L. Bean, for example, responded to growing concerns over mass shootings by restricting the sale of guns. Procter and Gamble, a major sponsor for U.S. Soccer, expressed support for the quest of the women’s team for equal pay and donated $500,000 to help narrow the pay gap with men.
Airlines including American, United, and Frontier refused to knowingly fly children separated from their parents at the border following outrage over the Trump administration’s policy. And even though Amazon shareholders rejected the worker-supported shareholder resolution described above, Amazon set stronger goals for reducing its carbon footprint after the resolution was introduced.
These actions have sometimes hurt the bottom line. The decision to restrict gun sales cost Dick’s Sporting Goods$150 million. Deltalost a $50 million tax breakin Georgia after severing ties with the NRA.
Companies are also setting tougher social and environmental goals for themselves and then reporting their successes and failures. Tesla, Unilever, Nike, and Whole Foods are among nine companies with annual revenues of at least $1 billion that “have sustainability or social good at their core.”
In 2018,86% of Standard & Poor’s 500 companiesreported on their environmental, social and governance performance and achievements, up from less than 20% in 2011.
And companies have found that putting more emphasis on social justice can pay off. Unilever, for example, said in 2017 that its “sustainable living” brands, such as Ben & Jerry’s, Dove and Hellmann’s, are growing much faster than its other brands. Companies with the best scores on their sustainability reportsgenerally perform better financiallythan those with lower scores.
The end of shareholder capitalism?
Skeptics can be forgiven for believing these corporate “changes” are not real or are simply public relations stunts designed to appeal to a new generation.
Businesses can, of course, say they will be responsible citizens while doing the opposite. Few sustainability reports in the United States areexternally audited, and the companies are asking us to take them at their word.
Even if they are well-meaning, intentions are not enough to create systemic change. A 2017 study showed that many companies with climate change goals actuallyscaled back their ambitions over timeas the reality clashed with their lofty goals.
But businesses can’t afford to ignore their customers’ wishes. Nor can they ignore their workers in a tight labor market. And if they disregard socially responsible investors, they risk bothlosing out on important investmentsand facingshareholder resolutionsthat force change.
The shareholder value doctrine is not dead, but we are beginning to see major cracks in its armor. And as long as investors, customers, and employees continue to push for more responsible behavior, you should expect to see those cracks grow.
This is an updated version of an article originally published on July 24, 2019.