Capitalism needs an upgrade: On the 50th anniversary of Milton Friedman’s landmark essay, the onus is on stakeholder capitalists to get their act together

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Martin Whittaker, just capital
Martin Whittaker.
  • Martin Whittaker is the CEO and cofounder of JUST Capital, a nonprofit that tracks and ranks corporations on stakeholder performance issues of greatest importance to the public.
  • Sunday is the 50th anniversary of the Nobel laureate economist Milton Friedman’s famous article on shareholder primacy, often referred to as the “Friedman Doctrine.”
  • Whittaker argues that C-suites, their boards, and investors should use the “total stakeholder return” framework to champion stakeholder capitalism. The total stakeholder return is an easily measurable way for companies to create value for their stakeholders — including workers, customers, communities, environment, and shareholders.
  • The approach would also help CEOs and board objectively allocate resources, measure progress, and compensate and judge success. 
  • Whittaker says a powerful theory like total stakeholder return can reshape business as we know it, rebuilding "healthier companies and a more robust economy."
  • Visit Business Insider's homepage for more stories.

Fifty years of shareholder primacy has generated an enormous amount of wealth for many people and thrust corporate America to the commanding heights of the global economy.

It's also pushed American society to the brink, to the point where faith in capitalism itself is eroding, 40% of all Americans are unable to afford a $400 emergency, and millions of full-time workers at our largest publicly-traded corporations rely on food stamps to survive.

We can and must do better. Capitalism needs an upgrade if it's to survive the next 50 years.

That is why, on the 50th anniversary of the late Milton Friedman's famous New York Times Magazine article, "A Friedman doctrine — The Social Responsibility of Business Is to Increase Its Profits," I'm calling for a fresh approach to business leadership based on a "total stakeholder return" model. 

The Friedman Doctrine's time is up

Friedman's essay captures nicely the philosophy that brought us to where we are. I've spent the better part of 25 years in the ESG world, including six as the CEO of JUST Capital, fighting, as a believer in capitalism, to broaden our thinking on the role of business and finance in society. To do that, it's important to have an appreciation for why Friedman and his peers in the Chicago School became so influential. 

In 1970, Friedman was not yet the icon he'd become. His NYT essay was essentially an adaptation of a chapter from his book, "Capitalism and Freedom," published eight years prior and in turn based on speeches he gave in the '50s.

We're still talking about that essay, though, because not long after it was published, corporate profits slowed and the United States' trade deficit increased. Even though Friedman's ideas had been around for decades, America was finally primed to give his laissez-faire approach a try. It stuck. 

In the same way that historical context inspired adoption of the Friedman Doctrine, so the legacy of the 2007-08 financial crisis, mounting environmental concerns, and now the immediate twin effects of a once-in-a-lifetime pandemic and a reckoning on racial equity has Americans once again reconsidering how we do business.

With faith in capitalism running so low, is now the time to change our thinking on how we run our companies, how we define success, and who gets to sit at the table? We think so. 

This is what Americans want 

Friedman argued that CEOs pushing for "social responsibilities" rather than profit maximization were in effect imposing a tax on their shareholders and customers.

In this line of thinking, investments that are not critical to returns, like investing in workforce equity across race and gender or efforts to reduce pollution, are clear violations of fiduciary duty, and a perversion of business' role in a democracy.

That thinking may have struck a chord in 1970. In today's competitive environment, however, it is manifestly short-sighted — improving your workers' quality of life is tied directly to increased productivity and adopting climate-friendly technology can cut energy costs and drive new revenue lines.

Just as importantly, it's also what Americans overwhelmingly want. 

Our polling, done in tandem with The Harris Poll, suggests that a substantial majority of the public — regardless of background, age, location, or political ideology — supports the idea of companies creating value for all their stakeholders. Last year, our survey respondents prioritized key stakeholder issues with the following order of importance​: workers (35%), customers (24%), communities (18%), environment (11%), and then shareholders (11%).(Percentages reflect relative prioritization of these stakeholder categories based on representative survey populations.)

To be clear, this does not mean that the stakeholder necessitates sacrificing your company's financial performance for a perceived moral good, or otherwise cloaking profit maximization beneath a soft, PR-friendly mask; on the contrary, our research suggests companies that lead in meeting the needs of all their stakeholders have outperformed the laggards by almost 30% over the past 4 years — and by double-digit margins throughout the pandemic. They also have lower risk profiles, decreased market volatility, shallower drawdowns and greater profitability. 

Business and financial leaders are increasingly recognizing this. They also agree that stakeholder capitalism, in which companies broaden their purpose to align value creation for all stakeholders, offers a better path forward. That's why it's been embraced by the World Economic Forum and more than 200 executives in the Business Roundtable, and encouraged by skyrocketing flows of capital into ESG-oriented investment products. 

Critiques get at the biggest issue — we need a new TSR 

If stakeholder capitalism is to take root in any serious way, however, it must take a leaf out of the shareholder playbook and provide a clear, concise and common framework for measuring and defining success. This is where that idea of total stakeholder return comes in. 

Currently, commitments to stakeholder-based approaches are either too vague and ideological, or too mired in an alphabet soup of metrics, standards, and frameworks only loosely connected to the underlying needs of stakeholders and the true process of long-term value creation. No wonder so many are confused. 

It's also no surprise that when attacks on the stakeholder model come, they are often based on a misunderstanding (or a misrepresentation) of what stakeholder capitalism stands for and what it's trying to accomplish.

Take for example the recent critique of stakeholder capitalism by Harvard Law School's Lucian Bebchuck and Roberto Tallarita. Their logic is that either the stakeholder model is pure window dressing, and doesn't actually require companies to change course in any way (hence the lack of board consultation among signatories of the BRT statement); Or, if it is genuinely to drive impact, it necessarily comes at the expense of shareholders, and is therefore anti-fiduciary, anti-free market, and some sort of dressed up socialism — Friedman's worst nightmare.

Such a binary perspective is not what informed proponents of the stakeholder approach actually believe.

A common stakeholder framework anchored to a Total Stakeholder Return model would address this.

What a stakeholder model would look like

Priority No. 1 is the development of a common understanding of what stakeholder "value creation" actually means, how we can measure it, and what outcomes we seek to create for each of the core stakeholder categories.

Enshrined within a new operating framework, this would put stakeholder capitalism on a practical, solid foundation and ensure the metrics used to measure it are actually producing positive outcomes for each stakeholder. 

This common stakeholder operating framework would also help investors and boards anticipate future drivers of value, over the long term, and process an ever-widening set of factors that weigh on expectations about future company performance.

In a world where intangible value makes up over 84% of all enterprise value on the S&P 500 (up from just 17% in 1975), a stakeholder operating framework provides a better model for understanding the relative value created by investments in intangible assets linked to stakeholder value creation, including brand recognition, customer loyalty, and most importantly, human capital — employee and contractor training, education, loyalty, engagement, health, etc; all 'value creation' for workers under the stakeholder model. 

Implemented correctly, a total stakeholder return approach would help CEOs and boards make decisions on allocating resources — should we buy back shares or lift wages? Invest in worker upskilling or a new supplier diversity initiative?

It would help the market measure progress and judge success. It would help bring greater discipline to the process of allocating capital among stakeholders to diversify sources of value and return. And it would help us to uncover false narratives — such as the perceived trade off between profits and wage levels. 

Companies are already asking themselves these questions. I spoke to Humana CEO Bruce Broussard back in July, and he explained how he and his leadership team are constantly in a balancing act between appeasing investors in the short term while still investing in the long-term health of the company.

The point, though, is that we need to have companies approaching how to strike this balance with the same metrics, beyond just measuring returns to shareholders. 

If enough companies embraced this new version of TSR, the SEC would eventually come in to deem what is material and what would need adjustment, and what would need to be disclosed in public filings.

Rethinking the role of a corporation in society 

It took decades for Friedman and his peers' ideas on free market capitalism to go from the margins to the mainstream, and through the '80s and '90s, politicians, judges, CEOs, and academics reshaped corporate America around them.

Today, support for stakeholder governance has reached critical mass. The team at JUST Capital, along with our board and network partners, and ideological allies like former Delaware chief justice Leo Strine, are envisioning a world where theory can once again reshape how we do business, but this time in a way that benefits all Americans through healthier companies and a more robust economy.

Switching to total stakeholder return as a new paradigm can bring us one step closer.

Martin Whittaker is the founding CEO of JUST Capital and is responsible for the overall leadership of the organization. He is also cofounder and a board member of the CREO Syndicate, a family office investment network; a board member of the Carbon Disclosure Project US; a member of the Forbes Finance Council and Forbes Contributor; and an advisor to Mission Driven Capital Partners, a private equity firm.

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