Stakeholder capitalism and ESG—the road to socialism

This week, the World Economic Forum planned to hold its annual meeting in Davos, but thanks to Omicron, we’ve received another six-month reprieve from lectures by elite “global leaders” and the collectivist policies they promulgate. This year’s meeting, now deferred to mid-2022, will focus on how to accelerate “stakeholder capitalism” and its cousin ESG (short for environmental, social and governance), two related movements that diminish economic freedom, the key to prosperity, and push us closer towards a new brand of socialism.

What do these two terms actually mean? The definitions are fluid by design, but broadly speaking, according to stakeholder capitalism, businesses should not purely focus on maximizing returns to owners but rather use the resources of companies to solve social problems, thus maximizing benefits to various “stakeholders” (i.e. their employees, customers, suppliers, communities and countries). ESG remains a subjective concept used for a wide range of causes from climate policies to “diversity” initiatives. There are more than 600 ESG reporting frameworks in use today, many of which conflict with one another.

The vague nature of the ESG framework raises a few fundamental questions such as which social and stakeholder “ends” to maximize—how should business leaders and boards of directors balance all of the causes and interests of different stakeholders? And how do boards of directors evaluate how effectively CEOs maximize social or stakeholder welfare, since the preferences and demands of stakeholders often conflict? In this context, a CEO can claim almost anything creates stakeholder value for some groups.

More importantly, economic freedom and market forces already address most of the issues raised by ESG and stakeholder capitalism proponents. Any successful business, small or large, must account for the interests of its employees, customers, investors and the communities where it operates. Businesses that fail to do so are not as successful or get weeded out in competitive environments. This is one of the great virtues of capitalism that proponents of stakeholder capitalism often overlook.

Adam Smith, the 18th century philosopher and founder of modern economics, noted the benefit that individuals acting in their own self-interest can have on society. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” he wrote, “but from their regard to their own interest.” Simply put, businesses and entrepreneurs can only succeed by benefiting their customers—unless granted special treatment by government.

The quality of food and level of service we receive from our favourite restaurant are not the result of a kind act by its owner but rather the owner’s pursuit of success. By caring for their employees (by paying competitive wages and benefits) and their communities (via sponsorships and other local initiatives), businesses and entrepreneurs set the foundation for success—satisfying customer wants and needs.

The same goes for Kevin Johnson at Starbucks, Satya Nadella at Microsoft, Tim Cook at Apple or any other successful business leader. All should focus on maximizing returns to owners by providing customers with great products and services at a price they’re willing to pay with great service and continuous innovations. Incidentally, many of those “owners” are pension funds, which means it’s the savings of regular workers.

If we as a society want better social outcomes, including greater economic growth, better living standards, more happiness, greater income mobility and better environmental outcomes, then as the research clearly shows, we should primarily rely on markets to make economic decisions. In other words, we need more good old capitalism, which relies on the bottom-up forces of workers, entrepreneurs, investors, business owners and families making decisions about where to invest their labour, savings and entrepreneurial energies. Not more top-down regulations dictated by unaccountable politicians, bureaucrats and interest groups.

Finally, it’s worth remembering that ESG and stakeholder capitalism are really nothing new—they used to be called Corporate Social Responsibility (CSR) and Milton Friedman warned against it 50 years ago. “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,” he wrote. “If businessmen are civil servants rather than the employees of their stockholders then in a democracy they will, sooner or later, be chosen by the public techniques of election and appointment.”

Words that couldn’t be truer today.

The ESG and stakeholder capitalism movements will ultimately see governments and unelected bodies such as the Canadian Securities Administrators and special-interest organizations such as former Bank of England governor Mark Carney's Glasgow Financial Alliance for Net Zero pressure, and if necessary, force businesses to choose the “appropriate” ends for businesses to achieve. In many ways, these movements are simply different approaches to socialism—instead of governments owning the factors of production and commanding heights of the economy, ESG and stakeholder capitalism use the regulatory state (government) to control businesses for their own political and special-interest ends.

At a time when global elites are justifying mass social change in the name of public health and a more “equitable” future, it’s time to recognize the socialist nature of their arguments and the inevitable stagnation and increased poverty it will impose on citizens wherever it takes root.