Topic

Business

Creating value for stakeholders and the world.

Stakeholder Capitalism

In 1970, economist Milton Friedman popularized the concept of shareholder theory, which states that a business’ sole social responsibility is to maximize its returns for shareholders.

Five decades later, it’s clear that Friedman was misguided. Climate change and rising economic inequality have shown that businesses' responsiblity cannot be exclusive to its investors.

And it’s not just inequality – overall net worth has plummeted across almost all wealth brackets. Neal Gabler, writing for The Atlantic, reports:

Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile.

It’s time for a new model of economic success. Enter stakeholder capitalism, which suggests that businesses need to expand their social commitment.

Stakeholders include shareholders, but also employees, vendors, contractors, customers, government, and even the earth itself. In short, a stakeholder is any entity that contributes to the success of a business and therefore deserves to be better off for having done so.

Stakeholder capitalism isn’t a utopian vision or an impractical dream, it’s the only sustainable way forward for us. And it’s taken root in a big way: In 2020, the World Economic Forum added it to its "Davos Manifesto," the set of guiding principles for its annual meeting in Davos. It was the first update to the manifesto in over 40 years.

Here's Deborah D'Souza reporting on it for Investopedia:

[The Davos Manifesto] now plainly states at the top, "the purpose of a company is to engage all its stakeholders in shared and sustained value creation" and says companies should have zero tolerance for corruption, uphold human rights, and pay their fair share of taxes.

In short, we need to ensure that everyone can benefit from the vast wealth that's been created since the dawn of the industrial era. The accesibility of modern advances like cell phones, vaccines, and cars that contribute to our quality of life is not enough – overall economic security needs to improve as well.

As clichéd as it is, the idea that each of us is better off when we pursue collective success is also radical, given how significant a departure it is from the way western cultures have prized individualism.

But consider, for a moment, the following analogy: A group of 30 people each write their name on an index card and have one person randomly spread the cards throughout the room. Then, everyone is tasked with locating their index card as quickly as possible.

What’s the best way to do this? One option consists of every person running around checking each card until they find their own again.

But there’s a better way: If each person simply picks up the nearest index card and returns it to its owner, the group can accomplish this task in a fraction of the time and with less effort.

This is a simple example, but if we apply its lesson to the rest of our lives and society, we quickly discover that everywhere we look, we are richer and happier when we think of others first.

And when we invest in the success of every stakeholder around us, we plant the seeds for a brighter, more sustainable future together.

Growth for the Sake of Growth

Starbucks makes it easy to load money into its app to use at a future date. So easy, in fact, that it's holding about $1.6 billion of its customers' money, interest free.

This makes Starbucks look kinda like a bank that sells coffee – and a pretty lucrative one at that.

McDonalds owns most of its buildings. And since ~85% of its locations are franchises, it gets much of its income from leasing its property to franchisees.

This makes McDonalds look a little bit like a real estate company that happens to sell burgers and fries.

And airlines? Their loyalty programs often have valuations that are higher than the value of the actual companies that run them. This means that airlines actually have a negative valuation, at least if you analyze them in an overly reductive way.

They make their money selling miles to credit card companies, not from flights.

As organizations grow, they have a tendency to find ways of sustaining themselves on activities that are adjacent to or otherwise removed from the value they originally offered.

This isn't inherently bad. But if you get distracted by growing for the sake of it, you can start to lose sight of your mission. As environmentalist Edward Abbey pointed out, “Growth for the sake of growth is the ideology of the cancer cell.”

So stay true to your north star – whether that's bringing something innovative to market, delighting others with your art, or opening doors so that others can enjoy the same level of success as you.

You might even discover you grow faster that way.

Fast Food

Henry Ford had the famous insight that if you assign each factory worker one task, you can dramatically increase production capacity.

Today, in most industrial systems across every market, this is the norm.

Richard and Maurice McDonald brought this idea to the food industry in 1940, and pretty soon, every major city in America had a McDonalds serving perfectly identical hamburgers and fries.

Fast forward over half a century, and we've now seen that an incredibly efficient system like this has some drawbacks. For one, when meals are created on an assembly line, they start to lose the personal touch that makes food so socially important.

Sweetgreen, a fast casual chain which serves salads and other bowls of fresh food, offers a partial antitode to this: In contrast to Chipotle, for example, only one employee assembles the entirety of each customer's meal in front of them.

It's a subtle change. But it adds just a little bit of humanity back to the industrialized process when someone can say, "Here, I made this for you."

Hat tip to Emily Heyward for the Sweetgreen example, from her book Obsessed: Building a Brand People Love from Day One.

Bureaucracy

Bureaucracy evolves as a defensive mechanism. As an organization acquires greater assets and reputation, it makes sense to implement procedures to protect them.

If you work in a hospital, there is a long list of things that need to be checked off before the scalpel comes out. When the stakes are high and making a mistake is easy, it's worth sacrificing efficiency.

If you're operating on a patient's right leg, how do you know if it's your right or your patient's right? If two Jane Smith's are scheduled on the same day, which one needs the lung transplant and which one is getting her gall bladder removed? And what happens when the assistant gets distracted by an emergency and forgets to swap out the surgery plan from the previous operation?

For those who work in this kind of environment, drawing an 'X' on the limb that needs amputating, handing out wristbands, and asking the patient for their date of birth a third time are essential practices.

There's a cost, however, to adding this kind of bureaucracy when it's not necessary.

Bureaucracy feels safe, because it is.

But if the resulting inefficiency steals precious time from the things that matter most, suppresses staff morale, and makes you less nimble in a constantly changing world, it might be time to reconsider your process.

Selling Pickaxes

Initial success doesn't guarantee future results.

Online mattress retailer Casper announced this week that it's being acquired by a private equity firm. The startup popularized direct-to-consumer mattresses in a box, went public at a $1.1 billion valuation, and then plummeted to around $575 million after its IPO.

Selling mattresses online is pretty easy (as of 2019 Casper had 175 competitors). But making a profit doing so is hard. In the third quarter this year, Casper lost a staggering $25.3 million, putting it in the majority of online mattress companies that have yet to make a profit.

Where's the money in the industry going? A big chunk of it is going to the online mattress reviewers, who receive free mattresses from companies to test. These sites typically receive around $50 for every referral they make that results in a purchase (and sometimes as much as $250).

Derek Hales, the creator of one of the most successful mattress review sites, Sleepopolis, apparently made $100,000 from just a single mattress company in 2016 through his referrals. He is more profitable than most of the mattress startups he's promoting.

In a crowded market, sometimes selling pickaxes to gold miners is a better strategy than actually mining for gold.

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