Stakeholder Capitalism: An Idea Whose Time Has Come?

Bringing Democracy to the Boardroom

What do BP, Goldman Sachs, Enron, World Com, Bernie Madoff, and a long list of other “malefactors of great wealth” (to borrow a pejorative from President Theodore Roosevelt) all have in common?

            The answer, in a word, is free market “capitalism”, an economic system and a set of social values that has many virtues but also a dangerous defect that could be fixed, if we choose to do so, without having to throw out a basically healthy baby with some oily seawater.  The problem, in a nutshell, boils down to the deference we pay to the interests of capital over the rights and interests of the other stakeholders in our economy and society. 

As every first-year student of economics learns these days, capitalism is supported by an ideology that traces its roots back to the pioneer economist Adam Smith’s “invisible hand” metaphor in The Wealth of Nations, in 1776.  The core assumption of this ideology is that the unrestrained pursuit of our economic self-interests in a free marketplace will ultimately produce “the greatest happiness of the greatest number,” in the utilitarian philosopher Jeremy Bentham’s enduring phrase.

As Smith explained it, “man is…led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”  Smith also provided a gold-plated rationalization that capitalist economists have used ever since to justify unvarnished greed and an unlimited accumulation of personal wealth.  “In spite of their natural selfishness and rapacity…[men] are led by an invisible hand to… advance the interest of the society.”  

Modern economists often become lyrical about “the superiority of self-interest” over altruism in economic life and the virtues of competition and the “profit motive,” while overlooking the fact that Smith’s rendering of the invisible hand was very contingent.  As he put it, the invisible hand is not “always the worse” and “frequently promotes” the general welfare.  But he did not consider this a sure thing.  Many of Smith’s acolytes  also seem unaware of his cautionary warnings, both in his masterwork and in his earlier work, The Theory of Moral Sentiments, where (as a Stoic and a Christian) he stressed the fact that everything in a free market depends on a moral foundation of trust, honest dealing and, as he himself put it, “justice”.  Indeed, Smith was also a proponent of the Golden Rule.

The classical economists who followed in Smith’s footsteps embellished his basic vision in various ways.  One of the most important of the early economists, Léon Walras, claimed that the forces of supply and demand if left alone would work to ensure the efficient use of resources, full employment, and a “general equilibrium.”  In other words, competitive free markets can be depended upon to be self-organizing and self-correcting, and the profits that flow to the property owners – the capitalists – will generate the wherewithal for further growth and, ultimately, the general welfare.  The modern economist Robert Solow summed up what has sometimes been labeled “utopian capitalism” (more commonly referred to as the neo-classical model) as a compound of “equilibrium, greed and rationality.”

One problem with this utopian model, as we have witnessed once again in the financial meltdown of 2008 and in the Great Recession that has followed, is that free markets are very often not self-regulating and are prone to abuses of various kinds, from the sub-prime mortgage fiasco to the disaster-prone operations of BP and Massey Energy.  Unregulated free markets can run amok and become the cause of great social and economic harm.  

A more serious problem with utopian capitalism is that it ignores the pervasive and inescapable influence of wealth and “power” in shaping how real economies work.  In fact, our economy has become a rigged game that is far removed from the idealized model of individual actors with equal power and resources that rationally pursue their self-interests by engaging in mutually beneficial (win-win) exchanges in “efficient markets” with optimal outcomes for all concerned.  Nor are our markets truly “free”.  They are dominated, and manipulated, by huge corporations, with insufficient checks and balances.  The former secretary of labor and now a professor of public policy, Robert Reich, characterizes this phenomenon as Supercapitalism (the title of his most recent book). 

 Among other things, the vast differences in wealth, power, and information among the “actors” in our economy exert a highly coercive influence in the marketplace, and in our political system.  This is clearly evident in our often-corrupt lobbying system, in the revolving-door between our regulatory agencies and the corporate world, in the way we finance our election campaigns, and, not least, in the Congressional roadblocks against such things as health care and financial reforms, energy and climate change legislation, and various other constraints on corporate “freedom”.

Economist James K. Galbraith, in his systematic indictment of American capitalism, The Predator State, calls our reigning free market ideology a “myth” – “something that is repeated to school children [and the voters] but hardly taken seriously by those on the inside.”  The underlying reality includes “the systematic abuse of public institutions for private profit, or, equivalently, the systematic undermining of public protections for the benefit of private clients.” (Economist Joseph Stiglitz calls it a “corporate welfare state.”)  

To cite one of the more notorious examples of corporate malfeasance, American cigarette manufacturers spent a generation denying the relentlessly accumulating evidence that cigarette smoking is a major cause of lung cancer and other illnesses, all the while continuing to pursue heavy promotional and advertising campaigns and effectively blocking any legislation designed to curtail this insidious addiction.  Fifty years and many laws and lawsuits later, the cigarette manufacturers are now more circumspect and accommodating to various anti-smoking programs, but they are still profiting from a capitalist enterprise that is clearly “harmful” to the general welfare.

Another, more immediate and disturbing example, because of its implications for our general public health, was glaringly illuminated in the recent documentary movie “Food Inc.”  Since the 1950s, the food production industry in this country has become heavily industrialized, with huge Concentrated Animal Feeding Operations (CAFOs) and even more humongous food processing and packaging factories.  But what the public is not allowed to see (except with unauthorized hidden cameras) is a lightly-regulated production system that brutalizes the animals, the farmers, and the workers alike and, more important, sells food products that put the consumers’ health at serious risk.  A tip of the iceberg is the increasing frequency and magnitude of e-coli bacteria outbreaks in recent years, which have resulted in numerous deaths.

To be sure, modern capitalism comes in many different sizes and shapes, from the millions of small mom-and-pop businesses with only a single owner and maybe a few workers to huge international conglomerates with hundreds of thousands of employees world-wide.  But for every Google that promises to avoid doing evil and provides a cornucopia of perks for its employees there are many others that are single-mindedly devoted to what could be called an iron triangle of mutually reinforcing values: (1) maximizing growth, (2) maximizing efficiency, and (3) maximizing profitability.  In the process, these economic Ahabs may short-change their workers and, at times, even their customers.  (Witness how our health insurance companies over the past 20 years have systematically worked to reduce their “risks” by excluding applicants with preexisting conditions, establishing unrealistically low benefit “caps”, cancelling policies when a policyholder gets sick, and other restrictive practices.)

The most serious indictment of free market capitalism, however, is that it has been failing in its basic promise to improve the general welfare.  Here are a few statistics:

• It is no great secret that our official unemployment statistics grossly underestimate the number of Americans who are without work or underemployed.  The true figure may be closer to 25 million of us (and our families).
• About one-third of our population, according to many studies over the past decade or so, are so-called “working poor” who are struggling to meet their basic needs.
• Even those who still have better-paying jobs must work much harder than their parents and grandparents did.  The average household puts in 26 percent more work hours than was the case 30 years ago, and full-time American workers logged an average of 212 more hours during 2007 (or the equivalent of 5.3 more work-weeks) than did workers in the Scandinavian countries.
• Even in 2007, 36 million people in this country were estimated to have experienced “food deprivation” (hunger) at various times during the year, including 16.9 percent of all children.  Now the number is closer to 50 million, including 17 million children.  Food stamp purchases are also at an all time high at about 36 million participants as of 2009, at an estimated cost for the year of about $50 billion.
• The number of people without health insurance in this country was closing in on 50 million before the recent health reforms were enacted, and many millions more had inadequate coverage. The consequences of this national disaster have been showing up in our basic health statistics.  We now rank 45^th among the nations of the world in infant mortality, below such countries as Cuba, Slovenia, Greece, Portugal and the Czech Republic, and our life expectancy at birth is even worse.  We are ranked 50^th behind such unlikely places as San Marino, Monaco, Liechtenstein, and Cyprus, as well as every other developed nation.  Significantly, there is also a difference of 4.5 years in average life expectancy between the bottom and top 10 percent of our population in terms of income, up from 2.8 years in 1980.  

But this is only half the story.  As the poor have been getting poorer and more numerous in recent decades – since the beginning of Ronald Reagan’s “morning in America” presidency – the rich have been getting richer, and richer, and richer.  During the George W. Bush years, especially, there was a gusher of new wealth at the very top of the economic oil rig, some of it at the expense of the poor and the working class.  Here, again, are some statistics:

• Since the 1980s, some 94 percent of the total increase in personal income has gone to the top 1 percent of the population (about 2.7 million people).  In 2000, the top 1 percent of the population received 20 percent of the total income for the year, while the bottom 80 percent had 41 percent of the income.
• In 2001, the top 1 percent of households owned about 33.4 percent of the total personal wealth in this country (including housing but excluding cars, furnishings and personal items), while the top 20 percent held 84 percent.  The bottom 80 percent combined held only 16 percent of the personal wealth.
• Much has been made about the spread of stock ownership in recent years, thanks mainly to the rise of 401K retirement accounts as replacements for the traditional company-sponsored pension plans that have been rapidly disappearing.  But the reality is that the top 20 percent of households own some 89 percent of all stocks and bonds, while the bottom 80 percent hold about 11 percent (as of 2007).   
• As most of us know, CEO salaries have ballooned well beyond mere greed over the past two decades.  In the 1940s, CEO salaries for large companies were about 20 times that of the average worker, and American companies were very well managed on the whole.  During the past 30 years, the salary gap has progressively widened to about 260 times that of the average worker, with some CEO salaries exceeding 500 times as much.  And this doesn’t count the plethora of perks that many CEOs have received in recent years – such as liberal use of a company jet, accommodations at company-owned apartments and resort homes, country club dues, “financial planning” services, special executive pensions, low- or no-interest loans (sometimes later “forgiven”), and even having the company pay some of their personal taxes. 

In sum, capitalism has not been working as advertised.  A popular metaphor for how the system is supposed to work is that a rising tide will lift all boats.  But what if many of the boats have holes in their hulls?  What if they are sinking even as the tide is coming in?  Or what if the tide is actually going out, as we have observed in this recession?  A more contemporary metaphor, associated especially with the failed promise of supply side economics in the 1980s, is that new wealth at the top would “trickle down” to the rest of us.  But this has clearly not been the case.  Instead of a trickling down of wealth, we have had a bubbling up.  Indeed, in the wake of the controversial bank bailout by the taxpayers the disconnect between Wall Street and Main Street has become even wider as investment bankers have returned to paying themselves billions of dollars in bonuses while many millions of newly unemployed workers have been sinking into poverty.

One time-tested response to various dysfunctions in the marketplace has been to use the government to re-set the rules of the game and serve as a policeman.  Ever since the trust busting days of Teddy Roosevelt more than 100 years ago, progressive reformers in this country have favored the idea that government can be an effective counterweight to corporate power on behalf of the public interest, and the powerless.  Abraham Lincoln may have put it best.  Government, he said, should “do for the people what they cannot do for themselves or cannot do so well for themselves.”

This philosophy reached its apogee during the New Deal in the 1930s and in the liberal era that followed World War Two.  Not only was stringent regulation imposed on private industry, ranging from coal mines to airlines, telecommunications and the banking industry, but a major, “progressive” shift occurred in the tax code that imposed a greater tax burden on the wealthy and provided a significant redistribution of wealth in the form of various safety net programs, among other things. 

When government came to be viewed as the problem rather than the solution, in President Ronald Reagan’s notorious campaign flourish, both the regulatory structure and the safety net began to be deliberately unraveled by conservatives, and, in some cases, even dismantled while our tax policies became much more regressive.  For the wealthy in our society, the last 30 years have been a golden age. (Just look at the mega-mansions these days that rival those of the nineteenth century robber barons, or the growing fleet of giga-yachts and the armada of private and corporate jets.)  But for the rest of us, it’s been an age of fool’s gold.  While GDP per capita has greatly increased since the 1970s, most of us haven’t noticed, as the cost of almost everything that is important – from housing to health care, higher education and transportation – have outpaced the growth in income (especially at the bottom of the financial pyramid).

In the wake of the 2008 financial meltdown and the elevation of Barack Obama and his “change” mantra to power in Washington in the 2008 election, it appeared (at first) that the political tide had shifted once again in a more progressive direction.  But the overarching lesson of the rancorous health care debate, plus the rise of the Tea Party movement and the resurgence of conservative Republican political fortunes, is that the country is deeply divided between those who still see government in a Lincolnian light and those who are hostile to the idea.  If the expectations for Democratic losses in the off-year election this fall are realized, there is likely to be a political paralysis in the next Congress, a default in favor of doing nothing on such imperative issues as climate change and immigration reform.

Perhaps, therefore, it is time to take a serious look at a third way – what might be described as a democratization of capitalism.  This alternative strategy goes under the banner of “stakeholder capitalism,” and it involves a form of self-government that could ultimately serve to align the private sector more closely with the public interest. 

It has been customary in our society to assume that those who put up the capital to finance our business ventures are also entitled to be the owners and controllers or managers, and there are many laws, precedents, regulations, and customs (not to mention economic theory) that support this nexus.  But the fact is that there is no necessary connection between capital, ownership, and control.  These three functions can be decoupled, and there are a great many real-world examples to prove it.

For instance, many public corporations have non-voting forms of stocks and bonds, and much of the short-term financing that is provided to our businesses, large and small, comes from bank loans where the obligations are limited to repaying the principal with interest.  By the same token, the CEO’s of most of our publicly held corporations hold a miniscule proportion of their company’s stock.  

Mainstream economic theory during the past three decades has stressed the primary importance of increasing “shareholder value” and maximizing profits for the company’s “owners”, even if they are only nominal owners.  But there is a very different way of looking at the modern corporation.  I like to call it the “corporate goods” model.   Corporate goods are economic returns that are cooperatively produced by two or more autonomous actors working together – partners, investors, managers, line workers, joint-venture partners, suppliers, distributors, retail dealerships, even the government -- where the net benefits can be divided up in any number of different ways.  Who benefits from these corporate goods and how the profit pie is distributed is ultimately a matter of social (and political) choice. 

As a rule in our capitalist system, the owners, or managers and (maybe) boards of directors decide how the company should be operated and how the pie should be divided (subject, of course, to adversarial negotiations with other stakeholders like unions).   But what if the “payoffs” in the game were routinely subject to negotiation among the players?  What if all the stakeholders were empowered?  What if the principle of mixed government, which goes back to Plato, were to be applied also to the governance of private companies, with the CEO’s being formally answerable to all of the stakeholders?

In this model, all the stakeholders would all have a right to share in the control and management of the organization (in appropriate and not disruptive ways, obviously) and to benefit proportionately – equitably.  Consider this: What if our CEO’s were compelled to consult with the other stakeholders in the company (like the workers) regarding their compensation, rather than entrusting it to a lap-dog board of directors and professional “compensation consultants” with a built-in conflict of interest?” 

There are, in fact, many examples of enlightened companies in our society that have moved in the direction of a stakeholder model.  Corporations like Microsoft, Google and Apple provide generous perks to their employees.   Many more companies have various forms of employee stock ownership and profit sharing arrangements, not to mention 401K retirement plans.  Most of this largesse represents textbook examples of “modern” personnel practices.

Worker suggestion boxes have also been a fixture in large organizations for generations, and management theory as taught in our business schools these days stresses such themes as “self-managed teams,” “decentralized decision-making,” “worker empowerment,” “consensus building,” “flattened organization,” and even “servant leadership.”  Indeed, many studies have confirmed that the best run firms, by and large, are the ones that treat the workers as stakeholders in the organization.  Long-time business writer Andrea Gabor, in her insightful historical study, The Capitalist Philosophers, put it this way:

“To think of an organization as a mechanical device is to discount the value of human creativity and the possibility that organizations can foster a sense of purpose in an almost organic sense.  People are the source of competitive advantage…The conclusions [of a Shell Oil Company management study] put a premium on trust, civic behavior, the development of individual potential, and leadership as stewardship.  In other words, they mark a resounding endorsement of the stakeholder-versus-shareholder-dominated philosophy of management.”

Yet all of these trends relate primarily to internal management techniques and practices.  Much less visible, and certainly less popular, is a more radical form of “stakeholder capitalism” that entails a greater role for various stakeholders in the control – the overall planning and governance -- of a company and (most important) in the basic values that govern its actions.  Stakeholder capitalism in this much deeper sense is preeminently a way to change the power balance in capitalism in the interest of achieving fairness toward all of the stakeholders, including the larger society.

Though the term itself is only now gaining in popularity, the concept of stakeholder capitalism in this transformative definition is not a new idea.  Its roots can be traced back at least to origins of the “corporatist” industrial model first developed in Germany in the 1870s, where workers are given seats on corporate boards under a policy called “co-determination” and where the government may also exert an influence in relation to overall corporate policy. 

A somewhat different model was developed by the Japanese after the Meiji Revolution, which led to Japan’s rapid industrialization during the nineteenth century.  The so-called Zaibatsu (now called Keiretsu) that still dominate some large Japanese companies even today are family-owned firms that have reciprocal ownership arrangements with other institutions, like banks and insurance companies, and are also subject to strong governmental “guidance”.

But perhaps the best historical model for stakeholder capitalism can be found in the United States itself.  Though mostly forgotten now, in the decade or so immediately after World War Two, when there was still a carry-over of wartime patriotism and a strong sense of community in this country, large American corporations commonly practiced a “good neighbor” policy and their CEO’s were viewed as “corporate statesmen.”  There were no formal institutional distinctions, but managers and boards of directors were highly attuned to maintaining good public relations and keeping their workers happy, and they generally acted accordingly.  Moreover, the public expected socially responsible behavior and punished firms that were tone deaf.  In other words, a different kind of corporate and societal culture existed, and this significantly influenced the behavior of our large business firms.  (Robert Reich calls it a “not quite golden age” because it was certainly not a golden time for blacks and women.)

One indicator of the close relationship between public expectations and the way private industry conducts itself is the findings of an international public opinion survey back in the mid-1990s regarding public perceptions of corporate ownership.  When survey respondents were asked “whose company is it?” (stakeholders or shareholders), the percentage breakdown in Japan was 97-3 in favor of the stakeholder model.  In Germany the percentages were 83-17.  However, in the U.S. and the U.K the results were reversed.  It was 24-76 percent and 29-71 percent, respectively, in favor of the shareholders.  These differences in public attitudes correspond to cross-national differences in corporate cultures, and in corporate behavior.

In more recent decades, the idea of stakeholder capitalism has had its ups and (mostly) downs in this country.  The general idea, if not the term itself, was widely touted during the 1970s and 1980s by management gurus like Peter Drucker, W. Edwards Deming, Tom Peters, and Russell Ackoff.  Their basic argument, in a nutshell, was that private businesses are human organizations that, in turn, are parts of the larger society.  They do not exist in a moral, economic or political vacuum.  Whether they recognize it or not – and they certainly should – all large businesses depend on a network of relationships and constituencies.

Some proponents of stakeholder capitalism have tended to treat the idea as a stark alternative to shareholder interests.  But this adversarial view is a false dichotomy.  Shareholders are obviously also vitally important, especially in an era of large capital needs and fast-moving global financial markets.  Ideally the shareholders and the other corporate stakeholders should have a shared sense of purpose and a close alignment of interests.  Ideally, stakeholder capitalism would address a fundamental moral problem with conventional capitalism – being fair to all of the stakeholders -- and would provide a more equitable sharing of the costs and benefits.  (The pros and cons of the concept were debated in a 1997 book, Stakeholder Capitalism.)

There are some outstanding examples these days of companies that try hard to be good neighbors, if not actually following the stakeholder capitalist model explicitly, such as Proctor and Gamble, Microsoft, Unilever, Nordstrom, and others.  But this is not the rule, and stakeholder capitalism is certainly not taught in our business schools, although there are signs that the business climate may be changing.  At Harvard Business School, one of the leading institutions for training our future business managers, about half of the 2009 graduates (over 400) took a public oath at an unofficial pre-graduation ceremony at which they pledged to uphold high ethical standards.  Among other things, the graduating students promised to “serve the greater good” and avoid “decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.”  A fine thing, if these future captains of industry actually practice what they’ve pledged.  But we must also guard against the other half of the graduating class that didn’t sign up and are, apparently, unrepentant capitalists.     

In theory, stakeholder capitalism sounds straightforward.  All of the stakeholders in a company – investors, managers, workers, suppliers, joint venture partners, customers, and, of course, the community at large should have a voice in influencing key decisions, policies and practices.  The problem, of course, is how to implement this ideal in a way that avoids creating a managerial nightmare – a Gordian knot that makes the company rigid and inflexible, and where various stakeholders focus on their own interests and become obstacles to needed change.  (Labor unions in this country, for instance, have too often played an adversarial role, although many companies have also provoked it.)  The fear is that “democratization” of business firms will degrade their efficiency and effectiveness in our intensely competitive global environment.  Globalization is the new reality that American companies back in the 1950s did not (yet) have to deal with.

There are certainly no all-encompassing answers to this dilemma, but an overall solution begins with a shared understanding among the stakeholders that their own interests and the future success of the company are closely linked.  This implies a commitment by the stakeholders to equitably share both the gains and the pains.  In practice, both capital and labor may need to moderate their expectations to assure long-run viability for the company.  A clear test case of this stakeholder model is the “new” Chrysler and “new” GM.  Having passed through the valley of corporate death, these companies have been compelled to make deals that give the workers and the government major ownership stakes, along with the bondholders in the case of GM, in return for various stakeholder sacrifices.  Many people will be keenly interested in the longer-term outcome of this crisis-driven experiment.

But there are also some encouraging examples of a more voluntary path to stakeholder capitalism.  One small scale illustration, and a remarkable success story, is SRC Holdings – a micro-conglomerate that was started 28 years ago as a small engine remanufacturing firm in Springfield, Missouri.   Today SRC consists of close to 60 deliberately small niche business ventures (from only a few workers to a few hundred), that are models of entrepreneurship coupled with shared ownership, close teamwork, and highly efficient and profitable operations. 

            The founder and still CEO of SRC (for Springfield Remanufacturing Corporation), Jack Stack, has dubbed his operating method “open book” management, because he and each of his individual company managers regularly share the financial results in monthly meetings with their workers.  Stack calls this highly unusual form of transparency a “unifying factor.”  It goes far toward giving all the workers a sense of ownership and allows them to participate in making decisions, even about such things as profit sharing -- or not sharing when times are tough.  Everyone is keeping score.

            Staying small is also very important for SRC’s varied enterprises.  “It’s very, very hard to get passion in an organization if it’s over 400,” Stack explains.  “You really lose the touch in terms of the teamwork that you need to succeed.”  Equally important, Stack believes, is the fact that his company’s history of growth and entrepreneurship has created a career ladder, so that workers can move up into management roles and can even take on the challenge of managing a startup venture.  As Stack sees it, “it’s not only about jobs; it’s about opportunities.” 

Another, very different example of stakeholder capitalism suggests that it may also be possible to scale it up.  The Organic Valley Family of Farms (and its CROPP farmer cooperative) may be the best thing that has happened to small family farms in this country in the past 100 years.  Most farmers today, especially small farmers, are in thrall to the huge, powerful food conglomerates – General Foods, General Mills, Nabisco, Swift, Smithfield, and others – and are at their mercy when it comes to the prices they receive for their produce and the level of debt they are required to take on in order to be “efficient” and “competitive”.  Organic Valley is changing this exploitative dynamic.

In essence, Organic Valley is a kind of hybrid cross between a member cooperative and a textbook for-profit business venture.  It was founded initially by a small group of Wisconsin farmers as a dairy cooperative back in 1988, and it continues to this day to be controlled and managed by its farmer-members.  Now numbering more than sixteen hundred farms nationwide with annual revenues of more than $520 million, Organic Valley is managed in a remarkably democratic fashion.  The CEO is one of the founding farmers.  The board of directors is elected by farmer-members, and each of the company’s product lines (referred to as product “pools”) is actively guided by farmer committees that are also elected.  The CEO, George Siemon, likes to call it “a social experiment disguised as a business.”

In many other respects, the administrative structure, with a staff of over 500 people, looks like any other for-profit organization.  Indeed, it has an aggressive development strategy.  But there are some important distinctions.   One is that, instead of creating their own processing, packaging, and transportation facilities, Organic Valley has worked out an extensive network of joint venture (contract) relationships with existing operators around the country.  Another difference has to do with how the profits are divided up.  First the company pays dividends to non-voting Class E stockholders who helped to finance the development of the company, along with other deferred debt obligations.  After that, 90 percent of the remainder is distributed equally among the farmer-members and the staff, while 10 percent is donated to local community development projects that have been nominated by farmers and staff members. 

 But by far the most important achievement of Organic Valley is the prices that are paid to the farmers.  They are much more stable and much more generous than is the case with conventional agricultural prices.  Take dairy prices for example.  In 1989, conventional milk prices fluctuated around $12.30 per hundred pounds (abbreviated as cwt), while the one-year-old Organic Valley paid its farmers a flat, stable $14.30 per cwt.  For the next 18 years, the milk prices that conventional farmers received followed a saw- tooth pattern that averaged about $13 but fell as low as $10.57 per cwt at one point, while Organic Valley prices followed a smoothly ascending curve (part of it to offset higher costs for organic farmers).  In 2008, when conventional milk prices ended the year at about $16.75 per cwt, Organic Valley farmers were receiving an average of $24.75.   Even allowing for the higher expenses for organic growers, the difference is analogous to a living wage versus the minimum wage, given the slim margins for most small farms these days.  In other words, the higher prices you may pay for Organic Valley products also directly benefit our hard-pressed small farmers.

As is true everywhere else in the organic food business these days, sales and prices at Organic Valley are under tremendous pressure due to the recession.  The company has had to trim its sails a bit, but it is still on course with a stakeholder business model that promises a much brighter future for the beleaguered small family farm in this country.  It’s a model that is both ecologically sustainable and economically fair for the farmers.  CEO Siemon speaks of having a more complex business model with “a triple bottom line” – profits, planet, and people. 

There are, to be sure, many issues and many subtexts related to the concept of stakeholder capitalism.  Here I will mention just a few.

One of the most challenging problems, already noted, is how to engineer greater stakeholder participation in the management process without diminishing the effectiveness of the organization.  SRC Holdings and Organic Valley show that there are responsible ways to do this, and that it can even improve the effectiveness of the organization.  Indeed, many of our better-managed companies have already created more or less formal ways of networking with various stakeholders.  Expanding and strengthening this model going forward is likely to be an evolutionary process, with a learning curve over time for developing new attitudes and new roles.  

A second problem has to do with augmenting the voice of consumers and the public in corporate governance, beyond traditional market research and sales “signals”.   Consumers often need an ombudsman.  Likewise, shareholders have only just begun to take back control over the many rogue CEOs that have been lining their own pockets in recent years at the expense of their fiduciary responsibilities.  In fact, the Securities and Exchange Commission recently announced a plan to give major shareholders greater ability to nominate candidates for corporate boards, a step in the right direction, along with the recent legislation that would allow for (non-binding) shareholder votes on executive compensation packages. 

Another issue has to do with the problem of pain sharing when times are bad, an especially acute concern during these troubling times.  For instance, the all too common practice these days of locking out “surplus” employees without any prior notice or severance pay is fundamentally unfair.  Another difficult problem, especially for the many millions of small businesses that operate on tight profit margins, is how to juggle the objective of paying fair compensation – a living wage – with keeping operating costs in line.  A flattened compensation structure is an obvious starting point, and so is a more generous minimum wage that all businesses must pay.  But there are no all-purpose answers to the problem without something more comprehensive, like a low-wage supplement that is subsidized by a rebate of employment taxes, as proposed by economist Edmund Phelps.

Finally, how can a business be fair-minded toward its stakeholders and still survive in the face of sometimes ruthless global competition from countries with rock-bottom wages.  This has been a formidable problem for American businesses during the past 30 years.  Yet, despite these challenges, stakeholder capitalism could certainly be greatly expanded if we make it our goal as a society to do so.

Though the financial meltdown and the Great Recession have made it abundantly clear that unregulated “free market” capitalism is not the answer going forward, effective regulation by a dysfunctional and too-easily-corrupted government may not be the solution either.  Perhaps stakeholder capitalism is the light and the way. 

Originally Published in the Fair Society Blog 2012.

Peter Corning is the author of the forthcoming book, SYNERGISTIC SELECTION: HOW COOPERATION HAS SHAPED EVOLUTION AND THE RISE OF HUMANKIND (World Scientific, 2018), and THE FAIR SOCIETY: THE SCIENCE OF HUMAN NATURE AND THE PURSUIT OF SOCIAL JUSTICE (University of Chicago Press, 2011).  He is also the director of the Institute for the Study of Complex Systems, a one-time science writer for Newsweek and professor in Human Biology at Stanford University, and the author of several previous books.  His website can be found at www.complexsystems.org