“Without monetizing impacts, we’re left with the illusion that businesses have no impact. Companies that show big profits can have enormous negative effects on society. They’re just cheating because they’re operating in a context that doesn’t price all those impacts.”
A history of shareholder capitalism
Since 1970, the western world has been operating under Milton Friedman’s idea of shareholder capitalism. Friedman, an American economist and statistician who received the Nobel Prize, “declared the purpose of business and its role in society as limited exclusively to increasing earnings for directors and shareholders, termed shareholder primacy. For the past 50 years, businesses have been legally bound to maximize profits, meaning business directors are not allowed—at risk of legal action—to make decisions that take into account the environment, the financial well-being of employees, or the health of the communities they operate in unless that choice is the most profitable choice.”
Shareholder capitalism calls for maximizing one and only one purpose - profits for a company’s shareholders. This narrow perspective of a company’s purpose has led to a “mix of soaring short-term corporate profits, astronomic executive pay, that led to stagnant median incomes, growing inequality, periodic massive financial crashes, declining corporate life expectancy, slowing productivity, declining rates of return on assets and overall, a widening distrust in business.”
The shift from shareholder to stakeholder capitalism
A growing movement has taken off and has called attention to how the old system of shareholder capitalism cannot survive in the long run. We’ve been seeing a shift from shareholder to stakeholder capitalism. Last year, the Business Round Table, whose members are CEOs of major U.S. companies, released a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.
Stakeholder capitalism is a form of capitalism in which companies seek long-term value creation by taking into account the needs of all their stakeholders, and society at large. This type of system calls on businesses and organizations to consider not only their shareholders, but also their employees, customers, communities, and the environment.
In the past 50 years, the world has become more global and interconnected than we could have ever imagined. This past year’s pandemic has been a lesson in how our individual actions can have long-ranging consequences on others across the world. Companies no longer have the luxury to ignore the external impacts of their actions. George Serafeim has an idea to hold companies accountable. Serafeim is revolutionizing the way businesses calculate their success. “Profit and loss aren’t enough, says the Harvard Business School professor. Serafeim aims to do what no one has done before: Put a dollar value on the impact of products and operations on people and the planet, then add or subtract it from companies’ bottom lines.”