Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on February 3, 2020 - February 9, 2020

Every third week of January or so, the World Economic Forum (WEF) holds its annual meeting. This meeting, which is also known as “Davos” — called as such given that it takes place in the charming ski village of Davos — is typically a gathering of the global elite, from heads of state to technologists to corporate leaders and many more, including, at this most recent instalment of Davos, the 2019 Time Person of the Year, Greta Thunberg.

The theme for Davos 2020 was “Stakeholders for a Cohesive and Sustainable World”. Indeed, Davos 2020 saw the launch of what WEF founder and executive chairman Klaus Schwab calls the new “Davos Manifesto”. The Davos Manifesto essentially sets out what WEF and Schwab see as “The Universal Purpose of a Company in the Fourth Industrial Revolution”. As a side note and fun fact, the “Fourth Industrial Revolution” — or at least its popularisation as a catch-all phrase — is attributed as well to marketer extraordinaire Schwab.

The Manifesto states three main points. First, that the “… purpose of a company is to engage all its stakeholders in shared and sustained value creation”. Second, that a company is “... more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system”.

Third, that a company “… acts itself as a stakeholder — together with governments and civil society — of our global future”. In essence, the Manifesto calls for a new kind of capitalism, amidst global societal issues such as climate change and inequality.

The Manifesto can essentially be summed up, according to Schwab, as “stakeholder capitalism”, which “positions private corporations as trustees of society and is clearly the best response to today’s social and environmental challenges”. This idea sounds great and promising and certainly, many — this writer included — find many of its points very attractive. But here is the problem, though.

The two main problems with Schwab’s conception of “stakeholder capitalism” is its placement of companies as “trustees of society” and “the best response” to today’s multi-faceted challenges. Firstly, for some entity or person to be a “trustee of society”, it would be good if that person was democratically elected — at least in a democracy — and be able to be held accountable.

If the CEO of Company X made a killing on a business decision that benefited her shareholders but destroyed the lives of many others who were not her shareholders, she is accountable only to her shareholders by law. She does not need to answer to those who are not her shareholders. Of course, stakeholder capitalism supporters would say, “Well, she should be! Perhaps we need to change the law so that she is accountable to non-shareholders as well!”

This is not realistic, though — businesses which do a ton of good in their own way (though some definitely do a ton of bad) would then be run by people who are better at politics than at business.

Compounding this problem of the lack of accountability is the concentration of power in just a select group of non-democratically elected decision-makers. Global giants such as Amazon.com, Alibaba Group Holding and Microsoft wield so much power, not just commercially but also politically and socially. This was nowhere more evident than when several cities in the US bent over backwards to get Amazon to choose them for its second headquarters.

In principle, those select group of decision- makers making business decisions for their companies may be all good, but should they then be — as stakeholder capitalism would ask of it — trustees of society making critical societal decisions, by the very few for the very many?

The second problem is that many of today’s glaring societal issues — inequality, climate change, corruption, crime, protection of rights — are the domain of governments. These issues are all naturally very complex and figuring out a commercial solution that can solve any one of them is nothing more than a pipe dream.

If stakeholder capitalism holds that it is “clearly the best response” to these challenges, and therefore that companies should lead the way rather than governments, all it does is let governments off the hook and undermine government capacity in the long term. After all, if governments knew that someone else would do their job for them — perhaps even do a better job at it — what incentive do they have to improve?

To be clear, governments are not entirely innocent either. There are governments that would be more than happy to pass stuff they should be doing to some other entity — be it companies, NGOs, universities or even the citizens themselves. But, over the long term, we can only really make serious headway in solving our most difficult challenges if we have effective governments. Giving companies the primacy of solving issues governments need to solve undermines those efforts.

A classic example is corporate social responsibility. CSR sounds great, doesn’t it? Companies with some spare operating expenditure can choose to make donations to underserved members of society, be it in health, education, or whatever other domain they so choose. Here is the thing: If governments were really effective at doing their jobs, you would not need CSR on a systematic scale.

For instance, if a government’s role is to take care of all members of its citizenry — regardless of background, race, age and so on — we would not see targeted CSR for education for the urban poor, or free mammograms for underserved women. Yes, there will be those who fall through the cracks — no government can be 100% effective — but those are not systematic.

We will not have people falling through the cracks who come from a particular demographic group. Similarly, if governments were really great at providing high-quality education, the market solutions (private schools or CSR funding for schools in poor areas) would be very limited in their scope.

Ultimately, one of the key responsibilities of any government, particularly democratically elected ones, is to deliver social justice for their citizens. CSR, or even personal philanthropy (consider large foundations such as the Bill & Melinda Gates Foundation or the Chan Zuckerberg Initiative) are built on principles of generosity. But generosity, however sincere, is not justice, as Anand Giridharadas, author of Winners Take All: The Elite Charade of Changing the World, so powerfully puts it. Attempting to substitute generosity for a perceived inability to deliver social justice only undermines that social justice in the long term.

To be clear, it is certainly better for society if companies, dominant participants in the global economy, cared about social issues, governance issues and environmental issues beyond their bottom lines. And those companies are even more to be respected if they are willing to take hits to their bottom lines to better serve those societal issues.

There are those who will point out that companies that carry out their ESG (environmental, social and governance) responsibilities also tend to do better financially. Maybe, but let us not mistake correlation for causation. Do you perform better financially because you are committed to your ESG responsibilities? Or is the correlation only because companies that do well have the ability or resources to do good?

All this is to say that while companies certainly need to do their part in helping solve some of society’s most urgent issues, to think of them as trustees or as “the best response” is misguided. The responsibility, as it always has been, remains with the actual trustees of any society: the government. Companies and NGOs should complement governments but they should not substitute for them. Generosity is not justice; only justice is justice.


Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division

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