The irony of sages of the West offering stakeholder capitalism to Asia

Given Asian corporate governance issues, the West’s stakeholder campaign merely offers gleeful Asian tycoons new opportunities to financially underperform
Meanwhile, CEOs who support the campaign have been found to furlough staff and cut benefits amid the Covid-19 crisis while paying dividends to shareholders

Tilak K. DoshiandPeter Coclanis

Published: 10:30pm, 8 Nov 2020

Why you can trust SCMP

Last month marked 50 years since Milton Friedman published in The New York Times Magazine his epochal essay “The social responsibility of business is to increase its profits” – making clear his idea that “the business of business is business”. But there is little cause to celebrate his defence of shareholder capitalism.

In a repudiation, the influential US Business Roundtable adopted in August last year 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”.

The stakeholder campaign, with its advocacy for sustainable development, corporate social responsibility (CSR) and environment, social and governance (ESG) guidelines has been long in the making. The 1973 Davos manifesto proclaimed that management must also serve employees and societies, as a “trustee of the material universe for future generations”. More recently, World Economic Forum founder Klaus Schwab called for a “Great Reset” of capitalism as countries struggle to recover from pandemic lockdowns.

In January this year, the forum made “stakeholder capitalism” the theme of its annual Davos meeting, discussing it with nearly 3,000 global leaders, including 53 heads of state. In April, it released its “stakeholder principles in the Covid era”. In September, the forum’s International Business Council published a white paper titled “Measuring stakeholder capitalism: Towards common metrics and consistent reporting of sustainable value creation”, with metrics in four categories: corporate governance, planet, people and prosperity.

Primatologist Jane Goodall, a UN Messenger of Peace, speaks at the World Economic Forum in Davos, Switzerland on January 22, at a session dedicated to finding solutions to achieving sustainable development. Photot: AFP

Having seemingly won the battle in Western corporate boardrooms (western Europe’s “social-democratic” corporations have long had management boards which include powerful trade unions), the idea of stakeholder capitalism has now been brought to the East.

Schwab said in a recent Nikkei Asian Review interview that “Asia may be philosophically more prepared for the stakeholder concept than the West … Asia puts emphasis on collectivity, while the West is very much influenced by individual freedom”. Asian companies, like their Western counterparts, must show they are “trustworthy”, that they do not merely maximise profit but “also really care about people, staff, suppliers and customers”, he added.

Asia Impact: How Corporate Governance Can Make or Break Companies

It would seem curious that a Western campaign against CEOs slavishly maximising profits for shareholders is appealing to Eastern collective sensibilities. To anyone familiar with the accounts of irreproachable Asian tycoons – “Asian Godfathers” is Joe Studwell’s colourful term – running public-listed businesses as personal fiefdoms in Hong Kong and Southeast Asia, the irony would not be lost.

For those aware of corporate governance problems in archetypal Asian conglomerates, it seems clear that giving CEOs more responsibility over such disparate issues as minimum wage, structural racism, gender balance and climate change will only worsen the situation.

Capitalism is in crisis: It cannot be business as usual any more

By rejecting the seemingly narrow view that companies exist to provide goods and services at the best combination of price and quality, the stakeholder critique misses the point about Friedman’s shareholder criterion: The term “stakeholder” is redundant because any successful company would satisfy the needs of its customers, attract a productive labour force, have competitive and reliable suppliers, and a good relationship with the community. Companies that thrive are those that best meet these needs within existing laws and without breaching fiduciary trust.

Asian shareholders, like their Western counterparts, give short shrift to financially underperforming companies. As long as companies perform within expectations, achieving ESG or CSR criteria would, of course, be welcome (“good PR”, if one were cynical). But in the main, Asian shareholders – like savvy investors anywhere – would want competitive returns on their investments. There is no data on well-arbitraged global capital markets that suggest that any investor would want anything less than the going risk-adjusted rates of return on investment.

Ironically, it was in Hong Kong that Friedman found the apotheosis of competitive capitalism, as shown in his popular Free to Choose documentary first aired 40 years ago. Now, it seems the sages of the West have come bearing “stakeholder” gifts of corporate governance that offer gleeful Asian tycoons new opportunities to financially underperform.

In further irony, The New York Times has reported that prominent corporate signatories to the US Business Roundtable’s stakeholder capitalism statement have responded to the Covid-19 crisis by furloughing workers and cutting benefits, while continuing to pay dividends to shareholders. These proponents of stakeholder capitalism are clearly making haste slowly.

Dr Tilak K. Doshi is managing director at Doshi Consulting, a Singapore-based research consultancy. Peter Coclanis is director of the Global Research Institute at the University of North Carolina

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