Opinion: Stakeholder capitalism and the ESG path to socialism

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This week, the World Economic Forum is planning to hold its annual meeting in Davos. Thanks to Omicron, however, we have been given a six-month reprieve from elite “world leader” conferences and the collectivist policies they enact. This year’s meeting, now postponed to mid-year, will focus on how to accelerate “stakeholder capitalism” and its cousin ESG (short for “environmental, social and governance”), two related movements that reduce economic freedom, which is the key to prosperity and bring us closer to a new form of socialism.

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What do these two terms actually mean? The definitions are fluid by design, but, broadly speaking, “stakeholder capitalism” means that companies should not just focus on maximizing returns for owners, but rather use their company’s resources to solve social problems, thereby maximizing benefits for different “stakeholders” (i.e. their employees, customers, suppliers, communities and countries). ESG is an even more nebulous concept linked to a wide range of causes ranging from climate policies to “diversity” initiatives. There is more than 600 ESG reporting standards in use today, many of which conflict with each other.

The fuzzy nature of the ESG framework raises a number of fundamental questions. What social and stakeholder “ends” should be maximised? How should CEOs and boards reconcile all the causes and interests of different stakeholders? And how do boards assess the effectiveness with which CEOs maximize social or stakeholder welfare, since stakeholder preferences and demands are often in conflict? A sufficiently imaginative CEO can argue that almost everything creates stakeholder value for at least one group.

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Economic freedom and market forces already answer most of the problems raised by proponents of ESG and stakeholder capitalism. Any successful business, big or small, must consider the interests of its employees, customers, investors and the communities in which it operates. Companies that don’t do this don’t perform as well or are eliminated in competitive environments. This is one of the great virtues of capitalism that proponents of participatory capitalism often overlook.

Adam Smith, 18th century philosopher and founder of modern economics, Noted the advantage that individuals acting in their own interests can have over society. “It is not from the benevolence of the butcher, brewer, or baker that we can expect our dinner,” he wrote, “but from their concern for their own interests.” Simply put, businesses and entrepreneurs can only succeed by benefiting their customers unless the government gives them special privileges.

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The quality of food and level of service we receive from our favorite restaurant is not the result of a kind act on the part of its owner, but rather the owner’s pursuit of success. By caring for their employees (by paying competitive salaries and benefits) and their communities (through sponsorships and other grassroots initiatives), businesses and entrepreneurs lay the foundation for success, which depends on satisfying the desires and customer needs.

But what’s true for small businesses is also true for Kevin Johnson at Starbucks, Satya Nadella at Microsoft, Tim Cook at Apple, and any other successful business leader. Their businesses can only achieve lasting success by providing customers with quality products and services at a price they are willing to pay. And if they do, they are likely to maximize the value of their owners’ shares. Incidentally, many of these “owners” are pension funds that invest the savings of regular workers.

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If, as a society, we want better social outcomes, including greater economic growth, better living standards, more happiness, greater income mobility and better environmental outcomes, then as research clearly shows , we should primarily rely on the markets to make economic decisions. In short, we need more capitalism, which relies on the bottom-up forces of workers, entrepreneurs, investors, business owners and families deciding where to invest their labour, savings and entrepreneurial energies. Top-down regulations dictated by irresponsible politicians, bureaucrats and interest groups will not get us what we want. Decentralized voluntary action will do that.

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It is worth remembering that ESG and stakeholder capitalism are really nothing new. They used to be called “corporate social responsibility” (CSR) and Milton Friedman warned of this 50 years ago. “Few trends could so deeply undermine the very foundations of our free society as the acceptance by corporate leaders of a social responsibility other than to make as much money as possible for their shareholders,” he said. writing. “If businessmen are civil servants rather than employees of their shareholders, then in a democracy they will, sooner or later, be chosen by the public techniques of election and appointment.”

Words that couldn’t be truer today.

ESG and stakeholder capitalism movements will ultimately see governments, unelected bodies such as the Canadian Securities Administrators, and special interest organizations like the former Governor’s Glasgow Financial Alliance of the Bank of England Mark Carney for Net Zero pressure, and if necessary, forcing corporations to choose the “appropriate” way to go. In many ways, these movements are simply different approaches to socialism. Instead, governments own the factors of production and seizing the pinnacles of the economy, ESG and stakeholder capitalism use the regulatory state to control corporations for their own political ends and vested interests.

At a time when global elites are justifying mass social change in the name of public health and a more “equitable” future, it is time to acknowledge the socialist nature of their arguments and the inevitable stagnation and increased poverty that even a milder, milder socialism would impose on citizens wherever it takes root.

Niels Veldhuis and Jason Clemens are economists at the Fraser Institute.