Horror writer Stephen King once wrote "sooner or later, everything old is new again." Since Donald Trump’s reelection, U.S. stock markets and investor confidence have been on a tear. The reason is simple. After a decade of companies apologizing for not being progressive enough on causes ranging from the environment to diversity initiatives to support for Palestine, investors know corporations can once again unapologetically focus on delivering value for shareholders.
The horrors of stakeholder capitalism are finally over.
In 1970, famed economist Milton Friedman wrote that "there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
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Over the next 44 years, American business focused on shareholders. Their European counterparts did not. Across the pond, Europeans embraced stakeholder capitalism — which is something of a misnomer, since it isn’t really capitalism at all. It’s a theory, propagated by Klaus Schwab and the World Economic Forum, that holds that the purpose of a corporation is to maximize value for all stakeholders — community members, activist groups, non-profits, government agencies, etc. — not just shareholders.
American capitalism produced superior stock market returns and broad-based societal gains. The U.S. GDP has grown 16 times since 1975; Europe has grown just 11 times. Per capita income tells a similar story, with U.S. per capita income dwarfing Europe by a ratio of almost 2:1.
But improving people’s fortunes wasn’t enough for many progressive institutions. After the Great Recession, European sovereign wealth funds, Ivy league endowments, blue state pension funds and ESG promoting asset managers like BlackRock demanded American companies earn their social "license" by using corporate power to shape society in ways these elite, left-leaning institutions felt wise.
The stakeholder camp was especially emboldened when Trump first took office and pulled out of international agreements like the Paris Climate Agreement and UN Human Rights Council. Business was now supposed to do the work government would not. In response, the Business Roundtable, a group of 200 CEOs of U.S. companies, radically changed the purpose of a corporation in 2019. Now, businesses had a "fundamental commitment to all of our stakeholders," not just shareholders alone.
The impact was immediate. American businesses were at the mercy of progressive stakeholder activists that were much noisier than the everyday shareholder.
Oil and gas companies could no longer focus on providing affordable, reliable and abundant energy sources to the American public. Instead, they had to apologize to activist groups for their carbon emissions and construct net-zero goals without concern for what future energy needs might be.
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Internet companies could no longer connect social graphs of people online and provide a public square to debate ideas. Now, they were forced to apologize for "misinformation" and "hate speech" on their platform, the definition of which varied depending on the political cause du jour.
Consumer companies, from beer companies to entertainment powerhouses to retailers could no longer simply advertise their wares. Instead, they had to apologize for not being diverse, equitable, or inclusive (DEI) and bow to organizations like the Human Rights Campaign, which demanded more LGBTQ+ marketing campaigns and gender transition guidelines.
Companies could no longer support the military or the police. Instead, companies began apologizing for their role in perpetuating systemic racism and donating hundreds of millions of dollars to organizations like Black Lives Matter to pay tithes.
But the tides have turned. The aims of stakeholder capitalism to produce maximum returns with maximum societal benefits was fantasy. The outcome was more akin to horror. Companies wasted billions of dollars on stakeholder-favored ESG and DEI programs that didn’t deliver shareholder value, and in many cases, destroyed it. Nor was society any better off. Inflation was high, wage growth was low, and consumer confidence was muted. Society was more polarized than ever heading into the election.
But freedom is in sight. Looking ahead, companies are beginning to unshackle themselves from the burdens of stakeholders. Unpopular programs like ESG and DEI were already on life support prior to Trump’s election. Now the plug is being pulled. Trump signaled that he would eliminate ESG considerations in retirement plans and clamp down on ESG shareholder proposals. Companies like Tractor Supply, Harley-Davidson, Miller-Coors have already eliminated their ESG and DEI programs. And they did so without apology.
Markets are responding favorably. American capitalism is again on the rise. The old ways of doing business are new again. Hopefully, more companies will follow suit. The last thing the stakeholder capitalism horror series needs is a sequel.
