What role should companies play in society?

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• MARIANNE MAZZUCATO

THE PRIVATE SECTOR is often seen as the heart of wealth creation and innovation, with the success story of Silicon Valley in the late 1990s and early 2000s being a prime example.

In this model, shareholder value is seen as the ultimate measure of a company’s success.

Indeed, the idea that corporations are the most productive actors in the economy has served as a convenient justification for high incomes and great wealth.

Today, however, many businesses also claim to be goal-oriented; they are not only committed to shareholder value, but are dedicated to creating value for stakeholders. This concept, which has been floating around in business schools and corporate boardrooms for decades, holds that the public sector, local communities, philanthropy, labor and others should all be part of business decisions and benefit from it.

It has opened a door to a world in which considerations beyond the interests of investors and business leaders are possible, even necessary.

And yet, stakeholder value has largely followed the same fate as corporate social responsibility (CSR) and environmental, social and governance (ESG) frameworks: its transformative power has been watered down and drained by overuse and the sub-action.

It has been washed. If we’re going to talk about real stakeholder value, we need to reverse two key trends: the financial industry’s propensity to invest in itself and the prioritization of corporate share buybacks.

As these trends reverse, businesses and governments must embrace a new way of creating and delivering value, and it will transform society.

CALM STAKEHOLDER CAPITALISM

When companies talk about providing stakeholder value, they typically frame it as a means to an end: stakeholder engagement as a productive and ethical way to increase long-term shareholder value. But these efforts do not go far enough, for two reasons.

First, the financial sector continues to invest heavily in finance, insurance and real estate, in other words, in itself rather than in things like infrastructure or innovation. For example, the glut of loans in the system, which has only increased during the Covid-19 pandemic, has pushed the amount of private debt, and in particular household debt, to record levels.

And because household consumption has outpaced the rise in disposable income, finance has bridged this gap with credit, supporting the expansion of the financial sector.

Rents and interest payments have increased, encouraging the concentration of income and wealth in the financial sector and in the hands of the wealthy.

But to build a true multi-actor approach, the financial sector must be transformed in such a way as to create value for all.

Second, companies outside of financial services, such as those in manufacturing, spend more on stock buybacks and dividend payouts than on human capital, machinery, and research and development.

While buyouts increase stock prices in the short term, buying back a company’s own stock reduces its means to reinvest in its capabilities and hampers long-term productivity.

Even the 1% tax on share buybacks recently enacted in the United States is unlikely to end the buyout craze.

The combination of these two factors disadvantages most members of society. The insufficient reorientation of finance towards the real economy and labor continues to widen the gap between those who have capital and those who do not.

These trends make it difficult to argue that the social purpose is truly at the heart of the private sector.

Although much has been said about the social goals and responsibilities of corporations, the value they create has not been distributed to all. Indeed, the core elements of shareholder-focused business plans and investment strategies remain intact.

RETHINKING VALUE CREATION

To truly rethink the role corporations should play in society, corporations and governments must radically reconsider how value is created in our capitalist economies: who creates it, who extracts it, and what happens when extraction is rewarded over creation?

A true commitment to stakeholder value requires more than goodwill words, gestures or rhetoric. Purpose needs to be placed at the center of how value is defined in business and government.

In my book “The Value of Everything: Creating and Taking in the Global Economy,” I argue that we need to stop confusing value with price and instead recognize the collective efforts that contribute to value creation.

The rewards must be shared between all the creators of value: public institutions, private institutions and civil society. Otherwise, we end up socializing the risks and privatizing the rewards.

To change, we need inclusive funding and governance structures that drive mission-driven investments that are centered not on shareholder value but on true common good. This is what I call a mission economy, an economy that brings together private goals and public missions.

THE NEXT STAGE OF VALUE CREATION

Asking three questions can help businesses and governments create and equitably distribute public value to help address the great challenges of our time. Some of them are aimed more at companies than at governments, and vice versa, because both have an important role to play. What should we create? How to assess the social impact? How to share?

There is no one form of capitalism. Whether capitalism does “good” or “bad” things in society depends on the concrete configurations of the business models, institutions, and structures of government that make up the system.

Instead of talking only about shareholder value, companies should follow the word by building a true cooperative model of multi-stakeholder capitalism, sharing the fruits of collective value creation.

* Mariana Mazzucato is Professor of Economics of Innovation and Public Value at University College London, where she is the founding director of the UCL Institute for Innovation and Public Purpose (IIPP). She is the author of “Mission Economy: A Moonshot Guide to Changing Capitalism”.

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