The failures of stakeholder capitalism


Those concerned with creating a fairer and more sustainable market system tend to think of things like “ESG” (environmental, social and governance issues) investing and “stakeholder capitalism”. But what they have to start thinking about is power.

Consider Elon Musk’s purchase of Twitter. Tesla ranks above average on many metrics counted by JUST Capital, an influential nonprofit focused on stakeholder capitalism. But its chief executive is preparing to sell a large chunk of his shares in the electric car maker, a company that could actually do some good in the world, to buy a social media platform that has arguably made matters worse. Musk, who plans to privatize it, could, for example, reactivate the former chief Tweeter, Donald Trump.

Casting Musk as the savior of free speech and democracy may sound ridiculous to some. He is a man, after all, who views taxes as a kind of personal assault and yet has benefited from billions in government grants. But that’s not the only recent example of a billionaire posing as an advocate for the public good.

Consider a letter from Carl Icahn, the activist shareholder and veteran of some of Wall Street’s most hostile proxy battles, to grocery chain Kroger last week, in which he slammed the company’s record for corporate compensation.

“What is totally reprehensible is that you managed to personally profit from the extremely high margins caused by the pandemic while reneging on your ‘Hero Bonus’ promise to frontline workers,” he wrote.

Icahn continued, “This mockery of meritocracy is the quintessential example of why capitalism and business get bad press and people become disillusioned with the American dream.”

Always adept at exploiting the politics of the moment, Icahn sees himself as Musk (however unlikely) as an advocate for the little guy. But he’s on to something.

Washington regulators are beginning to sniff out a number of companies perceived to have benefited from the current inflationary pressures in the economy by unfairly increasing their profit margins.

Some big companies haven’t covered themselves in glory, with CEOs bragging about their pricing power during earnings calls.

Yet stakeholder capitalists, “while affirming corporate obligations in many areas, have remained utterly silent” on cases of concentration of corporate power, says Denise Hearn, senior fellow at the American Economic Liberties Project, and competition lawyer Michelle Meagher, co-founder of the Balanced Economy Project. They make a good point.

The pair published an article last week arguing that those who care about fairer markets should focus on monopoly power. “The inherent dissonance between the perpetual quest for scale and dominance, and the recurring market abuses of the biggest corporations, is a conflict that stakeholder capitalism ignores,” they write.

Hearn and Meagher point out that the “fairest” company in America, according to JUST Capital, is Google – a juggernaut charged with antitrust violations on two continents.

Corporate concentration, like profits, has reached record levels in recent years: since 1990, more than 75% of US industries have become more concentrated. The pandemic has only amplified this trend.

Even as ESG investing has increased, so has concentration – along with global mergers and acquisitions, private equity deals and financial engineering like share buybacks. Of course, the wages of the workers too. But it remains to be seen whether the pricing power of labor will survive the next recession.

Corporate power certainly will, and it has political consequences, as Stanford business professor Anat Admati points out in a recent article on what went wrong with capitalism. As concentration has increased, she writes, corporations have made it “difficult for governments and the legal system to protect citizens from undue harm” inflicted by corporations themselves.

While many market participants see government as the problem, Admati notes, they fail to “think about why democratic governments fail” and how companies and their leaders “contribute to that failure” by undermining the “ability, effectiveness and willingness of the public sector to act in the public interest”.

The market power of large corporations, the political power, and the cognitive capture of policy makers is enormous, especially in the United States. But it only takes one or two strong leaders to change things.

I was struck at the University of Chicago Stigler Center’s annual monopoly lecture a few weeks ago by the searing comments of Federal Trade Commission chief Lina Khan and the head of the division Department of Justice Antitrust, Jonathan Kanter. Both stressed the need to look beyond consumer welfare, the touchstone of U.S. antitrust law for more than four decades, to “market realities” when considering regulatory action. .

Both have made it clear that they are ready to “take on the big fights,” as Khan put it, and hold not just companies, but individuals, accountable. Referring to Jesse Eisinger’s eponymous book about the DoJ’s waning will to tackle corporate wrongdoing, Kanter said, “We’re not in the shit club.” Investors, take note.

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