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CFA INSTITUTE RESEARCH FOUNDATION / BRIEF

CAPITALISM FOR EVERYONE

MICHAEL FALK, CFA, AND JOACHIM KLEMENT, CFA Named Endowments CFA Institute Research Foundation acknowledges with sincere gratitude the generous contributions of the Named Endowment participants listed below. Gifts of at least US$100,000 qualify donors for membership in the Named Endowment category, which recognizes in perpetuity the commitment toward unbiased, practitioner-oriented, relevant research that these firms and individuals have expressed through their generous support of the CFA Institute Research Foundation.

Ameritech Miller Anderson & Sherrerd, LLP Anonymous John B. Neff, CFA Robert D. Arnott Nikko Securities Co., Ltd. Theodore R. Aronson, CFA Nippon Life Insurance Company of Japan Asahi Mutual Life Insurance Company Nomura Securities Co., Ltd. Batterymarch Financial Management Payden & Rygel Boston Company Provident National Boston Partners Asset Management, L.P. Frank K. Reilly, CFA Gary P. Brinson, CFA Salomon Brothers Brinson Partners, Inc. Sassoon Holdings Pte. Ltd. Group International, Inc. Scudder Stevens & Clark Concord Capital Management Security Analysts Association of Japan Dai-Ichi Life Insurance Company Shaw Data Securities, Inc. Daiwa Securities Sit Investment Associates, Inc. Mr. and Mrs. Jeffrey Diermeier Standish, Ayer & Wood, Inc. Gifford Fong Associates State Farm Insurance Company John A. Gunn, CFA Sumitomo Life America, Inc. Investment Counsel Association of America, Inc. T. Rowe Price Associates, Inc. Jacobs Levy Equity Management Templeton Investment Counsel Inc. Jon L. Hagler Foundation Frank Trainer, CFA Long-Term Credit Bank of Japan, Ltd. Travelers Insurance Co. Lynch, Jones & Ryan, LLC USF&G Companies Meiji Mutual Life Insurance Company Yamaichi Securities Co., Ltd.

Senior Research Fellows Financial Services Analyst Association

For more on upcoming CFA Institute Research Foundation publications and webcasts, please visit www.cfainstitute.org/research/foundation. FOR EVERYONE

Michael Falk, CFA, and Joachim Klement, CFA Statement of Purpose CFA Institute Research Foundation is a not-for- established to promote the development and dissemination of relevant research for investment practitioners worldwide.

Neither CFA Institute Research Foundation, CFA Institute, nor the publication’s edi- torial staff is responsible for facts and opinions presented in this publication. This publication reflects the views of the author(s) and does not represent the official views of CFA Institute Research Foundation.

© 2021 CFA Institute Research Foundation. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Cover photo credit: © Santiago Urquijo / Moment / Getty Images ISBN 978-1-952927-16-4 CONTENTS

Shareholders and Stakeholders...... 1 From to Stakeholder Value...... 3 Stakeholder Value Approaches in the Wild...... 8 Stakeholder “What Ifs”...... 16 Is Capitalism for Everyone a Radical Idea?...... 19 References...... 19

This publication qualifies for 0.75 PL credits under the guidelines of the CFA Institute Professional Learning Program.

CAPITALISM FOR EVERYONE

Michael Falk, CFA Michael Falk, CFA, is a partner at the Focus Consulting Group. Joachim Klement, CFA Joachim Klement, CFA, is Head of Strategy, Accounting, and Sustainability at Liberum Capital in London.

SHAREHOLDERS AND and many people regarded as a fat hog to be slaughtered—it was where the was. STAKEHOLDERS Our context today is quite different. There is one and only one social Our greater scientific knowledge regarding cli- responsibility of business—to use mate offers one example of the differences. This its resources and engage in activi- understanding has put a spotlight on factories ties designed to increase its prof- spewing carbon dioxide (CO2), which we now its so long as it stays within the know to be a negative externality. Should the rules of the game, which is to say, “rules of the game” have to change to reflect engages in open and free competi- today’s knowledge that CO is not harmless tion without deception or fraud. 2 but a major, perhaps even the dominant, con- — Nobel Laureate Milton tributor to harmful climate change? Friedman (1962) must be responsible for covering their produc- tion costs, including known externalities. As Is there any doubt about what proper corporate our knowledge changes, externalities must be responsibility is? Should there be any doubt? repriced accordingly. The featured quote from has been debated—and, for that matter, derided— CO2 imposes a long-term cost on society as it more and more during the past decade. Should builds up in the atmosphere and contributes to we not first seek to understand precisely what climate change. If CO2 emissions are not priced, he meant? however, the “spewers” incur the benefits but no costs, while society suffers the damage and First, we should understand that Mr. Friedman becomes responsible for the costs. This dynamic was not anti-stakeholder per se; he was con- could not happen in a fair game. What makes cerned principally about corporate leaders the game fair is putting a price on all known spending other people’s money without con- externalities, a task that almost by definition sent. Second, given what was happening in the falls to . With that and other social world from the 1950s to the 1970s, we might norms achieved, business can maximise its extend Mr. Friedman a little grace. This era was profits. Perhaps Mr. Friedman’s shareholders the height of unionisation in the United States, and everyone else’s stakeholders might be able

CFA Institute Research Foundation | 1 Capitalism for Everyone to share a meal after all. The clients, the employ- • Suppliers’ employees: Another way for a busi- ees, the owners, and society would all be invited. ness to increase its profits would be to pres- Oddly enough, this inclusive guest list forms the sure suppliers into discounting their goods. acronym CEOS. The simplest way for a supplier to make this happen is, again, through its employees. We have now arrived at shareholders and stake- holders cooperating, rather than fighting each • The environment: For the moment, we other. Of course, externalities are just one topic, will move away from the climate debate. albeit a large one, within this dialogue. Also Businesses might use water or air resources topical are employees, suppliers’ employees, cus- in their production of goods without pay- tomers, and the local and larger communities in ing for them and could pollute those public which a business operates. How businesses earn resources. Free production inputs, with the their bottom lines— income—matters. Let us cost of despoilment socialised, are not fair briefly review how a fair game might be viewed, or economically optimal. And although we transparently, as seen from the bottom line: acknowledge that pricing such inputs is a • challenge, we know their price should not Clients/customers: A business might be zero. More and better work must be done produce a product that is desired by its on pricing strategies. customers but has long-term negative con- sequences for them and/or for others. For • The local community: A business might example, who should pay for the long-term require local amenities to operate traffic health costs of tobacco consumption, if not lights, perform road improvements, and the businesses producing tobacco products? provide other public services and could • thereby add to congestion. To what extent is Employees: The simplest way for a busi- the business covering these costs, or at least ness to increase net income would be to pay those in excess of the local tax revenues it employees less or let some go, thereby reduc- produces? Another important question to ing costs. The assumption that an unhappy consider is whether local jobs are created, employee could simply choose to work for the purpose of assessing how those jobs somewhere else for better pay is good in the- translate into local tax revenues. ory but not always possible or economical in practice. Open and free is not Considering all of these stakeholders raises the “always and everywhere.” And lest we forget, question of whether the rules of the game pro- employees’ incomes are what (in aggregate) vide for “sustainable” open and free competition. pay for the proffered by If economics is about the efficient allocation of businesses. As an example, in January 1914, resources, then all costs—whether visible or Henry Ford started paying his autoworkers obscured—must be factored in. When they are a remarkable $5 a day. Doubling the average not, allocations will be distorted. Shareholders wage helped ensure a stable, more loyal, and are not the same people as the other stake- more productive workforce. And it might holders, but do they acknowledge that they have even marginally boosted sales because are in fact in a relationship with the businesses the workers could now afford to buy the cars in which they own shares? We use the word they were making. “acknowledge” because nothing is secret here;

2 | CFA Institute Research Foundation Capitalism for Everyone this is not an illicit affair. But do businesses wish Ironically, from a legal perspective, shareholder to take responsibility for all their costs, includ- value maximisation has its priorities in reverse. ing externalities? Do they know what those From a legal perspective, shareholders come costs are? Can they afford them through their last in a bankruptcy setting and are satisfied current revenues or potential price increases? after debtors, tax authorities, and (depending Would potential price increases be accepted? on the jurisdiction) pension claims and wages Those four questions can be answered only by to employees have been satisfied. But this legal including the stakeholders, not just the share- setup is exactly what justifies the shareholder holders, in the information flow and decision- value maximisation approach. After all, if share- making process. holder value is maximised, then all the other claims must be satisfied first. We have not yet defined “sustainable competi- tion.” Regardless, a business’s costs of produc- From an economic perspective, shareholder tion should be its financial responsibility, or we value maximisation makes sense and can be will foster a “them” (entitled) versus “us” (stake- viewed as a form of, or path to, stakeholder value holder) mentality. This split has played a role in maximisation. This concept holds true, however, today’s high level of inequality, which in turn only in a complete with perfect compe- has brought forth arguments against capitalism. tition (Magill and Quinzii 2009). In practice, Evolving the governance focus from being solely few markets are frictionless and operate under on the shareholders to including all stakehold- perfect competition or are even approximately ers is a linchpin in sustainable competition. so. For example, in markets where sharehold- ers are simultaneously employees of a company FROM SHAREHOLDER VALUE and consumers of the goods and services it manufactures, such individuals might be of two TO STAKEHOLDER VALUE minds about how shareholder value should be maximised. For example, an employee of Ford Shareholder value maximisation as the domi- who is also a shareholder might object to cost nant form of was origi- cutting at the company from his perspective as nally developed in the 1930s in the United an employee (because it could cost him his job) States. This principle proved controversial but might agree with the cost-cutting measures almost from the beginning, as manifested in from his perspective as a shareholder who ben- public discussions between legal scholars Adolf efits from higher profit margins. Farrell (1985) Berle and Merrick Dodd (Berle 1931; Dodd gives an even more interesting example, com- 1932; Berle 1932). Berle argued that because of paring a shareholder of Ford who already owns a the separation of ownership and management Ford vehicle with a shareholder of the company in a , the managers’ primary obliga- who does not. The shareholder who already tion is to run the company for the benefit of the owns a Ford could be very much in favour of ultimate owners. Dodd countered that corpora- a high-profit-margin strategy of selling more tions have responsibilities beyond those of the expensive models, while the shareholder who owners and toward other stakeholders in soci- does not own a Ford but maybe wants to pur- ety. Thus, should take into account chase one in the future might be against such a the impact of their actions on other stakehold- premiumisation strategy. ers when determining their course of action.

CFA Institute Research Foundation | 3 Capitalism for Everyone

Another practical aspect of the shareholder After all, the shortcomings of pure shareholder value maximisation approach is that most share- value maximisation have been exposed sev- holders own not only one but a portfolio of eral times in the 20th and 21st centuries, most . Shareholders thus want to maximise the recently during the financial crisis of 2008, value of their portfolio, not of each individual when mortgage lenders were providing loans to stock. As Azar (2016) shows both theoretically households that were eventually unable to ser- and empirically, the result is increased pressure vice them. Lending to low-income households on management and directors to reduce cut- (or in extreme cases, so-called NINJA loans throat competition and instead eliminate inef- to households with no income, no job, and no ficiencies from a lack of coordination. This need assets) was not only legal but also perfectly in for coordination between firms, however, opens line with maximising shareholder value for the up the possibility that corporate executives mortgage lender because the lender typically cooperate with each other for their personal sold the mortgage to other parties rather than benefit rather than competing for the benefit taking on the risk of getting the money back. of shareholders. In essence, corporate agents Of course, in the long run, these lending prac- such as executives and directors might create a tices destabilised the entire housing market and separate interest group that influences the firm’s eventually the global . The example of actions and has incentives that are not necessar- NINJA loans shows how, at the extremes, share- ily aligned with those of shareholders (e.g., with holders and stakeholders are no longer distinct respect to executive compensation). and separate. What is bad for one is bad for the other. Two strands of literature have therefore devel- oped. One tries to reduce or eliminate the prin- Meanwhile, extreme stakeholder value maximi- cipal–agent problems and align the incentives sation approaches have failed as well. In Japan, of managers with the goals of shareholders (see corporations were managed not only to maxi- Zogning 2017 for a recent literature review). The mise shareholder value but also with respect other criticises shareholder value maximisa- to the corporation’s public image and in accor- tion, calling it an erroneous target, and instead dance with the needs of lenders and competi- emphasises approaches that try to explicitly bal- tors. The famous keiretsu system of corporate ance the interests of different stakeholders (e.g., crossholdings (often centred on a major lending Laplume, Sonpar, and Litz 2008). The literature institution) ensured that lenders and competi- on stakeholder value maximisation generally tors had significant influence on a corporation’s finds that managers have sufficient discretion to management. This system of crossholdings con- maximise across the combined goals of differ- tributed heavily to the creation of zombie firms ent stakeholders at once (McVea and Freeman after the Japanese bubble of the 1980s burst 2005) and that stakeholder value optimisation because it prevented insolvent companies from can be superior to shareholder value maximisa- defaulting on their and filing for bank- tion. This argument between shareholder value ruptcy. The result was an increasingly sclerotic optimisation and stakeholder value maximisa- corporate system that was unable to reform tion is ongoing, but the fronts have softened, itself. The problem with ruling by committee and in practice, compromise solutions that try is that when everybody is in charge, nobody is to balance both approaches have become more in charge. Japan’s businesses have for too long prevalent. been ruled by committees.

4 | CFA Institute Research Foundation Capitalism for Everyone

Enlightened Shareholder Value The process might differ, but the end Maximisation result is the same: a family that maximises the overall happiness of all its members. In 2002, Michael Jensen introduced a compro- Arriving at this point, though, requires the mise approach to corporate management that three Cs: clarity, communication, and com- has gained popularity and was in fact encoded promise. Ironically, in his second assump- as the legal standard for corporate management tion, Jensen’s enlightened shareholder value in the United Kingdom in the Companies Act maximisation provides a method by which a 2006. Jensen (2002) calls his approach “enlight- corporation can do this. ened shareholder value maximisation” and bases this approach on two core assumptions: 2. Society benefits most if total firm value is maximised. Jensen argues that maximising 1. A corporation must have just one goal to total firm value also maximises societal ben- behave purposefully. Jensen argues that one efits. After all, a firm’s value is maximised if cannot optimise multiple goals at the same the corporation produces goods and services time because these goals might conflict with valued by customers. Creating highly valued one another and thus make choosing impos- products and services thus enhances over- sible for management. In the worst case, all welfare and firm value. Jensen is quick Jensen argues, trying to maximise multiple to acknowledge, however, that this claim goals at the same time allows management holds true only in the absence of externali- to avoid accountability and exploit different ties and frictions. If companies do not have stakeholders to its own advantage. to bear the full cost of their actions, such as being able to pollute the environment with- In our view, this assumption is flawed. One out consequences or exploit slave labor in of us (Klement) is a trained mathematician, sweatshops, they can generate excess profits and stating that a corporation can maximise at the expense of society. Similarly, if com- only one goal betrays a lack of mathemati- panies have power or monopsony cal knowledge. Different goals and their power, or if they form illegal trusts to stifle trade-offs can be combined into a single competition, they can extract profits from overarching goal in many ways. For exam- society and make society worse off while ple, we know from our own experience that maximising their own value. families typically are not run as paternal dictatorships—nor are they the pure chaos In practice, these externalities and frictions sometimes depicted in TV dramas. Instead, are not the exception, as economists have family members talk with each other about historically assumed, but the norm. Take their individual goals and needs. These the tobacco , for example. Tobacco discussions typically lead to compromise companies sold products that were highly solutions intended to make everyone in the valued by customers but that also killed family happier. To arrive at these compro- them. The costs of treating cancer and other mises, a family can use a formal structure, illnesses caused by smoking were borne by such as a family meeting to decide where health insurers and taxpayers (who had to to go on vacation next summer, or it can pay for government-sponsored health insur- use informal dinner table conversations. ance, such as Medicare and Medicaid in the

CFA Institute Research Foundation | 5 Capitalism for Everyone

United States). For decades, the tobacco thereof on that given day. This optimization industry managed to maximise firm value at problem is constrained by the fact that a team the expense of society and other businesses. has only so much talent at its disposal. Teams Similarly, companies that pollute the envi- can shift their defensive alignments depending ronment can often get away with doing so on the opposing batters and their tendencies. for a long time before the detrimental effects The pitchers can alter their pitching strategy of their actions become visible or costly. In depending on the situation on the field and on the United States, President Richard Nixon the opposing batter’s strengths. These changes introduced the Environmental Protection are interdependent and require trade-offs Agency in 1970 in reaction to decades of pol- between conflicting sub-goals, all to achieve the lution of rivers and the air by corporations. overarching goal of winning the game. The pollution had became so bad that some rivers in the United States caught on fire. Jensen defines enlightened shareholder value maximisation as whatever a corporation needs The fight against , monop- to do to maximise long-term firm value. By add- sony, and externalities is clearly not over. ing the qualifier “long-term” into the mix, Jensen At the time of writing, the US Congress is manages to integrate shareholder value theory investigating large tech companies such as and stakeholder value theory in an elegant way. Google, Facebook, and Amazon to deter- He recognises that stock markets might be for- mine whether they have effectively become ward looking but not omniscient. Share prices monopolies that artificially constrain com- might not reflect the long-term consequences of petition. Venture capitalists refer to a “kill corporate actions but instead focus too much on zone” in which they will not invest because the near term. Similarly, stock markets are typi- of what is essentially a stranglehold by the cally very bad at accounting for externalities and tech majors. And the debate about CO2 the long-term costs these impose on society. This emissions and climate change shows that is because they are not supposed to take these significant externalities, created by some elements into account in a share price unless a corporations, are still not priced in markets particular externality is charged to the company. and impose long-term costs on society. Thus, the enlightened manager recognises that Flawed as these two core assumptions might be maximising long-term firm value by exploiting in our view, Jensen arrives at a model for enlight- workers, polluting the environment, or focusing ened shareholder value maximisation that we only on short-term profits is impossible. Some think has some merit because his model takes less-enlightened managers might think that into account the flaws of his basic assumptions. delaying the day of reckoning forever is possible, and indeed, one loophole of Jensen’s definition Most importantly, Jensen recognises that share- of enlightened shareholder value maximiza- holder value maximisation is a goal, but his the- tion is that if a manager can avoid being held ory provides no guidance as to how to achieve accountable forever, the result is the maximisa- this goal. For instance, in baseball, the goal of tion of shareholder value. We believe that this each team in every game is to score more runs is a dangerous game to play and, in the end, not than the opposing team. But this goal can be in the shareholders’ best interest because in achieved in several different ways: either better many cases—although nobody knows exactly offense, better defense, or some combination when—these externalities will come back to 6 | CFA Institute Research Foundation Capitalism for Everyone stalk a company. And when the backlash comes, (e) the desirability of the com- the share price will suffer dramatically and pany maintaining a firm value will decline, costing shareholders— for high standards of business typically far more for companies with years of conduct, and misdeeds in their history than for companies that tried to do the right thing. Therefore, with (f) the need to act fairly between enlightened shareholder value maximisation, a members of the company. corporation’s management and board of direc- Note how the requires the directors of tors must actively make trade-offs between UK companies to maximise the benefits for short-term and long-term goals and consider members (shareholders) while simultaneously the long-term impact of their actions when for- considering the long-term consequences of mulating a strategy. corporate actions and especially their effect on This focus on long-term firm value maximisa- significant other stakeholders, such as employ- tion has become more popular during the past ees, suppliers, customers, the community, and two decades, and in the United Kingdom, it is the environment. Directors who fail to live now the legal foundation on which corporate up to these standards can be sued by affected leadership is assessed. The Companies Act parties and face fines or even a ban from tak- 2006 enshrined enlightened shareholder value ing on future directorships if found guilty. The maximisation in UK with Article United Kingdom certainly is not some kind of 172(1), which defines the duties of company corporate-governance paradise, yet regulators directors as follows: and corporate leaders alike have recognised that shareholder value can be maximised only if the A director of a company must act impact of any decision on other stakeholders is in the way he considers, in good taken into account before the decision is made. faith, would be most likely to pro- mote the success of the company Using a stylised family analogy, this approach for the benefits of its members as a enshrines in law the idea that the primary wage whole, and in doing so have regard earner and his or her goals remain the most (amongst other matters) to – important priorities for a family. But this person must assess the impact of his or her goals and (a) the likely consequences of any actions on other family members and take into decision in the long term, account the long-term consequences of his or her actions. So for example, if a husband is the (b) the interests of the company’s decision maker, he is incentivised to act based employees, on the famous maxim of “happy wife, happy life” (c) the need to foster the com- if he does not welcome dramatically unpleasant pany’s business relationships surprises. with suppliers, customers and others, Stakeholder Value Maximisation (d) the impact of the company’s Enlightened shareholder value maximisation is operations on the community not the same as stakeholder value maximisation. and the environment, In the United Kingdom, the board of directors

CFA Institute Research Foundation | 7 Capitalism for Everyone remains the sole decision maker and is account- local authorities, in their efforts to keep costs able to shareholders. Typically, the board of low for consumers, slowly drained the coffers directors is devoid of both employee repre- of the utility companies. In an effort to keep sentation and any political interference from the government from accruing too much debt, . the government under Margaret Thatcher in 1979 curtailed the ability of water utilities to In fully fledged stakeholder maximisation issue debt, which would accrue indirectly on the regimes, different stakeholders are directly government’s balance sheet. The result was that involved in the corporate decision-making by 1980, investment in infrastructure by water process and, together with management and utilities was approximately one-third of what it independent directors, are accountable for the had been in 1970. corporation’s actions. Underinvestment in infrastructure meant an The main risk of directly involving stakeholders increase in spillages and a persistent decline other than the management and directors of a in water quality in British lakes and rivers. In company in the corporate decision-making pro- effect, water utilities became beholden to spe- cess is that it opens the door to rent-seeking— cial interest groups and political interests. And that is, the abuse of corporate resources by these diverging interests in turn led to a decline these stakeholders. We have shown how the in the utilities’ profitability and eventually a United Kingdom incorporates the interests of decline in their ability to fulfil their ultimate external stakeholders into the decision pro- goal of providing clean drinking water and pro- cess. In the past, the United Kingdom has cessing sewage. used direct stakeholder value maximisation approaches, with terrible results. The Water Episodes like this have given stakeholder value Act 1973 essentially nationalised water utilities maximisation a bad reputation. In the next in the United Kingdom and put them under the section, however, we look at stakeholder value management of regional water authorities. The maximisation approaches that work and what members of these regional water authorities we can learn from them. were appointed by the Secretary of State for the Environment, Food and Rural Affairs. The STAKEHOLDER VALUE idea was that water utilities run for the benefit of shareholders would have an incentive to pol- APPROACHES IN THE WILD lute the environment and—because they have a natural monopoly in the communities in which A prominent approach to stakeholder man- they operate—would overcharge customers for agement of corporations is Germany’s system. drinking water and sewage treatment. After World War II, Germany had to rebuild its entire economy from scratch. On the political At first, the newly nationalised water utili- front, and under the supervision of the occu- ties paid more attention to the cost of water pying powers (United States, United Kingdom, and the environmental impact of the actions France), West Germany introduced a social of the utility companies. As inflation acceler- market system that combined ele- ated during the 1970s, however, politicians on ments with a strong social welfare system. The the left increasingly pressured the water utili- key to this system, which bridged the differ- ties to avoid hiking their charges. In response, ences between the free market capitalism of

8 | CFA Institute Research Foundation Capitalism for Everyone the United States and the social welfare state generally one of consensus building and consen- of France, was intensive coordination between sus decision making, where actions are taken only different actors. Politicians recognised that in a after management, employee representatives, world where the owners of capital and the own- and shareholder representatives have agreed on a ers of labor were in a competitive relationship common path forward. with each other, the differences between them could lead to significant disruptions in soci- This consensus-driven approach avoids adver- ety. Similarly, if politicians and business lead- sarial relationships that can lead to a complete ers acted against each other, rather than with breakdown of corporate activity (see the mas- each other, both the state and the businesses sive strike actions in the United Kingdom in would eventually suffer. This focus on coopera- the 1970s or those in Italy, France, and other tion (versus competition) and communication European countries throughout the decades). between different stakeholders is the main driv- The occurrence of large and long-lasting strike ing force behind Germany’s business model and actions by unions in Germany (as well as in has been a key recipe for the country’s dramatic Austria and Switzerland, which have similar rise from the ashes of World War II to become governance structures) is significantly lower the world’s fourth-largest economy. than in France or Spain, as shown in Figure 1. And although unionisation is higher in France The first step toward a stakeholder value maximi- (33%) and Belgium (41%) than in Germany sation system in German corporations took place (20%), it is by no means five times higher—even in 1951 with the Montan-Mitbestimmungsgesetz if one adjusts the data for differences in unioni- ( Management Law). This law laid sation, strike rates are still much higher in the groundwork for employee representation France and Belgium than in Germany.1 on the boards of directors of listed corpora- tions (Bottenberg, Tuschke, and Flickinger Additional measures indirectly strengthened 2017). In 1976, the Mitbestimmungsgesetz the interests of other stakeholders. For example, (Codetermination Law) guaranteed employees Germany has strict separation of management of listed companies up to one-half of the seats and governance. Members of a company’s man- on the board of directors. This employee repre- agement board (equivalent to the executive board in US companies) are not allowed to serve sentation on the board of directors ensures that corporate management’s actions are supervised on its board of directors. The role of the man- by employees of the firm and that employee agement board is solely to execute the strategy interests are reflected in corporate strategy. and run the day-to-day business. Meanwhile, With this employee representation, however, the role of the board of directors (called the comes the risk of adversarial relationships and supervisory board in Germany) is to monitor corporate capture by unions. To avoid this sce- and control a company’s executives—that is, nario, a legal mandate is in place for indepen- governance in UK/US parlance. By establish- dent directors to act as a balancing mechanism ing a hard dividing line between executives (Interessenausgleich) among the interests of and independent directors, the German system employees, management, and shareholders. In strengthens the power of shareholders because practice, this balance requires intensive commu- managers who act in a dual role on both the nication and compromise from all participants. 1 The culture of German boards of directors is Jelle Visser, “Union Membership Statistics in 24 Countries,” Monthly Labor Review 129 (January 2006): 38–49. CFA Institute Research Foundation | 9 Capitalism for Everyone FIGURE 1. DAYS LOST TO STRIKE ACTION PER 1,000 EMPLOYEES, 2009–2018

France Belgium Canada Spain Finland Ireland United Kingdom Germany United States Austria Poland Sweden Switzerland

0 20 40 60 80 100 120 Days

Source: WSI. executive board and the board of directors can These families often rely on the company’s divi- become careless and benefit themselves rather dends and profits as major sources of income than acting in the interest of shareholders. and are unable and unwilling to sell their shares. As a result, these blockholders often have a Finally, German companies tend to have a more strong influence on corporate management that concentrated shareholder register, with family is more long-term oriented than that of man- owners, , and other corporations having agement and smaller shareholders. substantially larger stakes in publicly listed cor- porations than is typically the case in the United All these peculiarities of the German corpo- States and the United Kingdom. Note that share- rate governance system have different strengths holder concentration can have both advantages and weaknesses. The potential strengths are and disadvantages; it is not an unambiguous (Bottenberg et al. 2017) as follows: positive. Meanwhile, government ownership • has been reduced to zero, except in the case of a longer-term perspective on value creation the former national telecom operator, Deutsche and firm performance Telekom, of which the government owns a • greater commitment of stakeholders to stra- 14.6% stake; and Volkswagen, of which the state tegic decisions of Lower Saxony holds a 20% stake and con- • trolling vetoes on corporate decisions. Overall, increased stability and resilience in crises these blockholders have a vital interest in the • higher social legitimacy of corporations and respective company’s long-term prosperity. their actions This is particularly the case for family-owned businesses and businesses in which the found- • closer cooperation between stakeholders ing family continues to hold substantial shares. 10 | CFA Institute Research Foundation Capitalism for Everyone

• anticipation of stakeholder needs and An influential study by FitzRoy and Kraft (2005) reactions shows that legal changes in the German system of codetermination did not lead to lower pro- On the other hand, this stakeholder value maxi- ductivity as anticipated but instead to higher misation system has its drawbacks as well: productivity, thereby increasing shareholder • the potential for unresolvable conflicts value through higher employee satisfaction and between stakeholders productivity. This is by no means an isolated finding. Although the literature published in the • higher coordination costs 1980s and 1990s generally found codetermina- • lower focus on profit maximisation, which tion to be detrimental to productivity and prof- could reduce profit growth itability, these findings were increasingly shown to be invalid and an artefact of the methods • dependency on the relationship between used to study the impact of codetermination different stakeholders and their willingness on corporate profits. Instead, over the past two to compromise decades, the number of studies showing a posi- tive relationship between codetermination and • a lack of transparency toward capital markets. corporate profitability has grown very rapidly So, are the net effects positive or negative? (Hayden and Bodie 2020). A recent analysis by Kim, Maug, and Schneider A consensus is therefore emerging that codeter- (2018) shows that this labor representation on mination does not negatively affect shareholder boards or through workers councils acts as an value. Instead, it improves labor relations and is insurance mechanism against unemployment. thus a successful way of harmonizing the goals Companies operating in jurisdictions with of one group of stakeholders (employees) with labor representation on the board of directors the overall goals of the company. Does this cut significantly fewer employees in a crisis mean that codetermination reduces other forms than companies without labor representation. of poor governance? Of course not. One has On average, the authors find that companies only to look at the Volkswagen emissions scan- with labor representation cut fewer than 1% of dal to understand that employee codetermina- employees when an unanticipated shock hits, tion does not solve all challenges to governance, whereas companies without labor representa- but it certainly does improve labor relations at tion cut approximately 13% of their workforce no measurable cost to shareholders. Whether on average, and the labor force takes one to two the German system can be extended to other years to recover to pre-crisis levels. The price countries is not obvious, however—particularly employees have to pay for this higher protec- for the United States, with its almost exclusive tion against unemployment is lower compen- focus on shareholder value maximisation and sation in terms of wages and bonus payments. substantially different legal system (Dammann Interestingly, the researchers could find no dif- and Eidenmueller 2020). The German system ferences in firm value and shareholder returns is thus neither a panacea nor a one-size-fits- between companies with and without labor all solution. representation, indicating that this insurance In the end, the German system of corpo- against unemployment does not come at a cost rate governance depends, in our view, on the to shareholders.

CFA Institute Research Foundation | 11 Capitalism for Everyone aforementioned three Cs: clarity, communica- of workplace accidents and other hazards. tion, and compromise: The impact of a company’s actions on the • environment are then addressed in the E Clarity: A stakeholder-maximising approach of ESG analysis, which focuses on the pol- inevitably reduces transparency for share- lution and waste a corporation creates. The holders because corporate actions are rise of ESG investing thus fosters greater often the result of a series of decisions transparency in corporations that make the between stakeholders, involving compro- implementation of a stakeholder value sys- mise. Moreover, some stakeholders are not tem easier and more effective and removes accountable to shareholders. The transpar- some of the downsides of this system. ency and clarity of the decision-making pro- cess and maintaining a focus on shareholders • Communication: The interests of differ- are thus of paramount importance in gaining ent stakeholders can be naturally diver- and retaining the trust of capital markets. gent. Managers want to maximise profits, Stakeholder value maximisation can work and in many cases, though by no means all, only if all stakeholders are clear about their this goal can be achieved by cutting costs individual goals and agree, more or less, on and streamlining production. Employees, how the corporation’s goals derive from these on the other hand, want to earn as much individual goals. Furthermore, corporate as possible and thus organise in unions to management and directors need to clearly improve their bargaining power. With these show how their actions benefit shareholders. conflicts in place, communication between Conflicts of interest must be either avoided stakeholders can easily become strained and completely (e.g., by prohibiting a dual man- antagonistic and sometimes break down. date for CEOs as directors) or managed Increased communication between stake- transparently. holders, particularly those who have worked together for a long time, can build trust and The rising trend of environmental, social, increases mutual understanding. This, in and governance (ESG) investing helps turn, fosters collaboration and transparency enforce this clarity and transparency in and enables all stakeholders to enter into companies that are otherwise managed to compromises without losing face or feeling maximise shareholder value. As more and as though they have been taken advantage more adopt ESG analysis in their of. After all, without each other, they would investment process, they focus increasingly all lose. Trust is the foundation of all busi- on good governance. This in turn means ness. Without a minimal level of trust, no an increased focus on board diversity, the customer would ever buy a product or ser- avoidance of dual mandates, and improved vice from a corporation, and no supplier supervision of management through inde- would ever deliver raw materials to it. We pendent directors and best practices in have only to look at the political arena to audit and remuneration. The interests of understand how a loss of trust between dif- employees are often addressed in the S of ferent parties can create a total breakdown ESG analysis by looking at a company’s wage of the political process and prevent nec- structure (e.g., guaranteeing minimum or essary reforms from being implemented, living wages) or the frequency and severity thereby hurting everyone.

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• Compromise: Because stakeholder man- the call for increased of corporations agement tries to optimise a firm’s long-term and the demand for nationalisation of some cor- value while respecting the needs of different porations by left-wing politicians, clearly, a large stakeholders, compromise is almost always part of the public no longer feels that capitalism, a necessity. Rarely if ever are the interests and free-market capitalism in particular, are of management, employees, customers, working for them. As the example of nation- and other stakeholders perfectly aligned. alised water utilities in the United Kingdom in In a shareholder value–maximising corpo- the 1970s shows, however, handing over corpo- ration, this misalignment is not a problem. rations to politicians or other public representa- Management simply does what it thinks is tives who have no interest in running a company best for shareholders, and if employees or profitably is no solution either. customers do not like the situation, they can go somewhere else. Likewise, inves- How can the public participate in the benefits tors could simply sell their shares, also created by capitalists and corporate activities known as divestment in some contexts.2 without endangering a firm’s long-term value? Unfortunately, “going somewhere else” too The German model of stakeholder participa- often leads to short-term, not long-term, tion is probably not implementable everywhere value maximisation. The need to find a com- because of cultural differences and a lack of trust promise between the interests of different among different stakeholders. If a company has stakeholders implicitly forces a more long- paid bare minimum wages to its workers for term orientation on the corporation. As a decades and exploited its employees and suppli- result, extreme outcomes (both positive and ers wherever possible, giving them a say in the negative) are often prevented, and the cor- supervision of management is likely to result in poration becomes more stable in its devel- retribution (which could take the form of redis- opment. Furthermore, compromise enables tribution) rather than collaboration. And this all stakeholders to buy into the corporation’s kind of retribution would invariably damage the goals, which is particularly important in a company overall. world where the public has become increas- However, sovereign wealth funds (SWFs) can— ingly skeptical of the social value of corpo- at least theoretically—act as intermediaries rations and capitalism. that allow society to participate in the fruits of capitalism while preventing adversarial rela- Sovereign Wealth Funds as tionships from destroying a company. SWFs usually use budget surpluses (typically, but not Shareholders for the Public necessarily, from the export of commodities) The perceived lack of social legitimacy of corpo- to achieve intergenerational equity and other rations’ decision-making processes has led to a long-term goals for society. As such, they are backlash in public opinion. From Occupy Wall typically “owned by the people,” although in Street and its slogan asserting that 1% benefit practice, this phrase often means that they are from capitalism while the other 99% do not, to governed by the ruling politicians and subject to political goals, not just long-term societal 2Elenora Broccardo, Oliver D. Hart, and Luigi Zingales, goals, which are difficult to define. Those SWFs “Exit vs. Voice,” NBER Working Paper 27710 (August that are captured by the political process are the 2020). https://www.nber.org/papers/w27710. CFA Institute Research Foundation | 13 Capitalism for Everyone ones that give all SWFs a bad reputation. More invested at higher rates than is possible in often, however, SWFs are well governed and can the government bond market. These reserve be a force for good. They thereby foster long- investments funds aim to achieve these term stakeholder value maximisation in a coun- goals by investing internationally in long- try and benefit society. term projects and assets with high income and diversification benefits for the domestic Following the methodology of Lo Turco (2014), economy. Examples are the Government of the primary goals of SWFs are as follows: Singapore Investment Corporation and the • Economic stabilisation: Reserves from Investment Corporation. the export of commodities are invested in • National economic support: Finally, some SWFs to stabilise the government budget SWFs have the explicit goal of investing (and thus the entire economy) in times of in domestic companies to protect them adverse price swings. These SWFs typically from foreign interference and to help them invest in liquid assets that are uncorrelated develop domestic infrastructure. Examples with a country’s source of wealth. Examples are the Fonds Stratégique d’Investissement of such stabilisation funds are the Economic in France and the Fondo Strategico di and Social Stabilization Fund of Chile and Investimento in Italy. Russia’s Reserve Fund. • As a general rule, SWFs invest in liquid and illiq- Savings: These funds aim to provide sav- uid (long-term) assets but strive to avoid taking ings from the export of resources that future controlling interests in listed corporations. The generations can tap into once the resource exceptions to this rule are the SWFs intended boom has ended. Examples of these sav- to directly support national economic champi- ings funds are the Abu Dhabi Investment ons, such as the SWFs of France and Italy. The Authority and the Kuwait Future largest SWFs are economic stabilisation, sav- Generations Fund. ings, and pension reserves funds. For funds with • Pension reserves: These funds are set these goals, diversifying away from the domestic up with the explicit goal of financing economy so as to act as a stabilising force when future shortfalls in the government pen- the domestic economy declines makes sense. sion scheme. Examples are the Australian The problem with this setup, however, is that it Future Fund and Ireland’s National Pensions produces a disconnect between the ownership Reserve Fund. of the SWF by the people and its investments in other countries. • Development: These funds are meant to invest in local infrastructure to help If SWFs act as a conduit to public ownership of develop an economy and improve the gen- corporations, then several investment policies eral standard of living. Examples are the need to be considered: National Development Fund of Iran and 1. Political independence: SWFs that act the Mubadala Investment Company of on behalf of and for the people need to be Abu Dhabi. strictly independent from political influ- • Reserve investments: In some cases, excess ence. Some might say that such indepen- reserves need to be better managed and dence is not possible, but we already have

14 | CFA Institute Research Foundation Capitalism for Everyone

inherently political institutions that are, at maintain the United Kingdom’s nuclear least in the ideal case, independent from arsenal). This transparency helps legitimise immediate political influence: central banks. the SWF among the public and increases Although central bank officials are usually the public’s trust in the fund and in the appointed by politicians and legally subject claim that its activities do no harm. to government oversight, political influence on monetary policy is typically minimised 3. Domestic benefits: A key drawback of sav- (at least in Western countries). Similarly, ings and stabilisation funds is their need to although SWFs are established by govern- invest in foreign assets. This attribute has ments or legislatures and subject to govern- the potential to reduce public legitimacy ment oversight, the investment decisions and buy-in because the money in the fund of an SWF and how the proceeds of the does not directly benefit the people who investments are used need to be beyond own the assets, though it does benefit the the influence of politicians. This is already a people through diversification benefits and given in the case of many SWFs, such as the higher, more stable returns. The fund there- Government Pension Fund of Norway and fore needs to have a clear policy in place to the Alaska Permanent Fund. use the income and gains from its invest- ments to benefit its owners. 2. Transparency: As we have stated, transpar- ency is the foundation on which to build One approach is to send the owners a check trust. If we want the public to buy into the with their share of the investment profits, benefits of capitalism and corporate activi- as is done by the Alaska Permanent Fund, ties, SWFs must have transparent investment which sends a check to every person who processes and holdings as well as clear guide- resides in Alaska for at least six months of lines of eligible investments and investments the year. Of course, the problem with this to be avoided. Transparency regarding their system of “helicopter money” or universal decision-making processes would also help. basic income is that it distributes the money indiscriminately.4 Large public infrastruc- The Government Pension Fund of Norway ture projects will never be built by Alaskans is a good example of a transparent SWF. The coming together to them with their fund employs a Council on Ethics that anal- checks from the Alaska Permanent Fund. yses every holding of the fund for violations Thus, an alternative to sending every person of socially undesirable business practices, a check is to use the proceeds of the SWF to such as exploitation of workers or produc- finance public infrastructure projects. This tion of nuclear arms. As a result, the fund is the idea behind the SWFs of France and has blacklisted3 companies such as Walmart Italy, and it has the advantage of providing (for breaching human and labor rights), Rio resources for major public works projects Tinto (for the severe environmental dam- that the people need but that might other- age it causes), and Serco (because it helps wise not be produced by the usual political process as a result of political gridlock.

3The authors understand that blacklisting, or excluding “undesirable” businesses, fails as a strategy for improving 4See Michael S. Falk, “Income for Everyone?”, in Get to corporate governance because it concentrates ownership Work… on OUR Future, 77–94 (CreateSpace Independent among shareholders who accept the “undesirable.” Publishing Platform 2019). CFA Institute Research Foundation | 15 Capitalism for Everyone

Finally, in an ideal world, SWFs could become connote generational narcissism, poor gover- a major shareholder in domestic publicly nance, opposition to sustainability, or too little listed corporations and act there as the voice money? We do not know in the abstract, but we of the people. This scenario would open up think every country with the economic ability to domestic corporations to a more stakeholder establish an SWF should do so and have it act in value–oriented model that ensures manage- the public interest. How this could be done in ment actions are evaluated with the greater practice is the focus of the next section. good in mind. At the same time, because SWFs are professionally managed, they can influence STAKEHOLDER “WHAT IFS” management without triggering the feelings of resentment that so often dominate the rela- In this section, we explore ideas to bolster tionship between corporate management and Milton Friedman’s “open and free competi- employee representatives or government enti- tion” and “rules of a fair game.” And we cannot ties—because the SWFs would simply be acting think of any better primer for those ideas than according to their societal mandate. As a result, the following quote from Lewis Carroll’s Alice’s emotions are kept at bay and compromises are Adventures in Wonderland (1865): easier to forge. The crucial point in this case, however, is that an SWF needs to be politically Alice laughed. “There’s no use try- independent to prevent political goals from ing,” she said. “One can’t believe superseding the overall goal of long-term firm impossible things.” value maximisation. “I daresay you haven’t had much Government-run entities are typically poorly practice,” said the Queen. “When I was your age, I always did it for run. By investing in domestic listed corporations half-an-hour a day. Why, some- and being active shareholders engaged with times I’ve believed as many as corporate management on behalf of the public, six impossible things before however, SWFs can become the missing link breakfast.” that helps build trust in capitalism and ensures the increased legitimacy of corporations in the Six impossible ideas we do not have. However, public eye. The German model of constructive we offer four improbable, yet possible, ideas to collaboration between different stakeholders ponder. might be a bridge too far, culturally or politi- cally, in more shareholder-oriented countries 1. What If Stakeholder such as the United States. Nevertheless, as pub- lic entities that invest with a long-term horizon Governance Were Designed? and represent public (as opposed to political) Governance, expressed simply, refers to those interests, SWFs could be the major driving force who have the right to decide and how they of a rejuvenation and acceleration of capitalism will exercise that right. We can design gover- in a world where so many people have become nance that offers benefits from “the wisdom disillusioned with it. of crowds”: What about countries that do not have or will • Wisdom begins with a diversity of opin- not set up an SWF? Would such an absence ions, and our three potential “internal”

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stakeholders (clients are external), the EOS 2. What If Competitive (employees, owners, and society), can have Dominance Had Limits? very distinct views. The S potential will become clearer in the fourth what if. If a business grows to be 10% of its sector or • more (out of the 11 broad economic sectors that The aggregation of stakeholder votes mat- exist today in terms of ), ters, as does how those votes count; an then the competitive landscape has changed. To aggregation would give each EOS group its help bolster open and free competition, upon own vote. First, each group’s vote would be achieving that 10% level of success, and until determined by a simple majority within the and unless the business falls below a 7% level group. Second, for a vote to pass, two out within its sector, the business would be prohib- of the three groups would have to pass it. If ited from the following: only two of the EOS groups exist, they must agree for a vote to pass. The groups’ votes a. Making acquisitions that exceed 0.5% of the are transparent, but those of the individual acquirer’s market capitalization, as mea- participants are anonymous. sured by rolling five-year periods • To best leverage different views, each one b. Making stock buybacks. “The investment needs to be represented independently. theorist Peter L. Bernstein proposed, half All the different views should be gathered tongue-in-cheek, that companies should anonymously and listed. Then an anony- have to pay out all their net income in divi- mous poll is taken and the poll results dends (or use it to repurchase stock). If they recorded. After all the views are discussed needed money to expand, they would have and debated, a second anonymous poll is to get investors to buy new shares.”5 taken to determine the final decision. All Much to Milton Friedman’s chagrin, corporate votes by voting groups are to be recorded, executives sometimes spend money that belongs including any changed votes, for future to shareholders on their own pet projects—the review and learning. reason why he was 100% pro-shareholder as a • Decentralization, which is helped by the defense to public companies spending corporate voting groups, is important to help avoid dollars to peddle influence. All corporate lob- a decrease in the diversity of the groups’ bying, political, and charitable dollars should opinions and to discourage from creep- be required to be clearly displayed on the home ing in. page of a corporation’s website. “Clearly” means • that no clicks or scrolling would be needed to Trust is necessary, and this process helps view the spending. The information displayed facilitate trust between stakeholders. should be (1) the trailing 12- and 48-month dol- Governance decisions should embrace “wis- lars spent, (2) the equivalent dollar percentage dom”; however, determining which decisions as related to both the corporation’s net income would use the stakeholder approach should and total taxes paid for those periods, and (3) the be done separately. Just as a board has certain 5 decision rights while management has others, Jason Zweig, “The Hidden Risk When You Own Stocks for the Long Run,” Wall Street Journal (15 March 2019). the EOS approach might mimic board decision https://www.wsj.com/articles/the-hidden-risk-when-you- rights, perhaps with a few extensions. own-stocks-for-the-long-run-11552662001. CFA Institute Research Foundation | 17 Capitalism for Everyone most recent 12-month year-over-year percent- • And dividends would gain in popularity, age change in spending. These disclosures are versus buybacks. meant to aid transparency (and maybe serve as a disinfectant, too) for the public and the corpora- Might a more sustainable business be the result? tion’s employees, who might not even know what We can imagine improved sustainability ratings their employer has been doing with cash flows. and a positive boost in public market exposure. A by-product of all this—keeping in mind the 3. What If More Employees maxim that generating positive cash flows and covering costs is everything—is that manage- Had “Ownership”? ment would have less capital allocation flexibil- Imagine that all employees who reach a full-time ity. But before you think that is not a positive tenure of five years, for example, receive par- by-product, keep in mind that corporate acqui- ticipation shares. The number of shares granted sitions have a very poor track record, stock would be based on employees’ wage compensa- buybacks are financial engineering as well as tion as a percentage of the aggregate wage com- support for stock option giveaways, and rein- pensation of the middle 60% of all who qualify. vestments overall have been dropping. These shares would come with both voting and dividend rights. The dividends would be paid in 4. What If Society Had Partial the form of a bonus. The shares would be nei- ther saleable, transferable, nor owned beyond Ownership of Companies . The total participation shares (in addition to its income count would be capped at a theoretical 30% of the total outstanding shares. tax share)? Although capitalism has done more for people Now, imagine the following: than any other economic system before it, • Wage reductions could be less likely, with unfettered capitalism has limits. Imagine a foot- votes against them. Wage increases would ball game with no referees: It would likely be a not become more likely because of the harm free-for-all. The move from a shareholder focus they would do to potential dividends. to a stakeholder one is a big step in the right • direction—dare we say the addition of vested Wage inequality could be reduced through referees will help? We do not propose doing higher incomes. away with capitalism. • Productivity could improve with the success Given that society, both local and global, can be incentive. a stakeholder—remember the externalities—we • Expense management could improve because should seemingly welcome such voices to the of the desire for dividends. table as vested, independent opinions. Once a company reaches top-line inflation-adjusted • Working conditions and safety could improve, (2020 base) revenues of $500 million, it would if need be, in response to the new “voice.” grant a 5% restricted stock position to the juris- • Strategic planning could improve because of dictional SWF. If no SWF exists, then why not the broader inclusiveness. use this idea to establish one?

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The SWF would receive voting rights (as one of The simplest and most straightforward way to the three EOS groups) and be run by an indepen- make capitalism more inclusive—to in fact bring dent, professional . In exchange for SWF about capitalism for everyone—is to take into shares, companies would receive an exemption account the interests of all stakeholders. And we that lowers the taxability of their dividend pay- think the best way to do this is to give these stake- ments; dividends would become more tax friendly holders a seat at the tables of capitalism, right in than capital gains. Participation-share cash divi- the boardroom. Giving employees representation dends (special bonuses) would, as a result, be eli- on the board of directors might sound radical, gible for the same advantaged tax status. but it has worked in Germany for decades—and it can work in other countries as well. Giving the SWF goals would be, by their nature, oriented in general public (not only public shareholders) a favour of longer-term and externality-oriented stake in each listed company above a certain size types of risk. might sound like a wild idea, until you realise not only that SWFs already do this in many countries IS CAPITALISM FOR EVERYONE but also that these entities can be successfully A RADICAL IDEA? shielded from political interference. We hope that in this note, we have shown that Imagine if we had said at the outset of this piece our ideas are not radical, unrealistic, or destruc- that we advocate for government entities to take tive but instead are unconventional, realistic, substantial stakes in private companies for the and constructive. Obviously, people will dis- benefit of the public. Imagine if we had said agree with us on both the details and the prin- that we advocate for employee representation ciples underlying some of our ideas. That is a on boards where possible. Would you have read good thing. Our intent here is not to provide further? ready-made solutions but to contribute to an We are both avowed capitalists, yet we recog- ongoing discussion and to get people thinking nise that capitalism, practiced as pure share- about the possibilities open to us. holder capitalism, is flawed. But this does not Capitalism, in our view, has a bright future if we mean that we should fight capitalism or abolish can make it more inclusive. But if we fail to do it in favour of some other, possibly untested, that, we will all pay a price. economic system. Capitalism has been the most successful economic system in history. It has created more wealth and lifted more people out REFERENCES of poverty than any other economic system. Azar, José. 2016. “Portfolio Diversification, We do not need to abandon capitalism: We Market Power, and the .” need to reform it to make it more inclusive. Working paper, University of Navarra. Because if we do not, societal trust in capitalism Berle, Adolf A., Jr. 1931. “Corporate Powers will continue to decline, the attacks from the as Powers in Trust.” Harvard Law Review populist left and the populist right will increase, 44 (7): 1049–74. and eventually, its opponents might break it— which could cause significant harm for billions Berle, Adolf A., Jr. 1932. “For Whom Corporate of people worldwide. Managers Are Trustees: A Note.” Harvard Law Review 45 (8):1365–72. CFA Institute Research Foundation | 19 Capitalism for Everyone

Bottenberg, Konstantin, Anja Tuschke, Kim, E. Han, Ernst Maug, and Christoph and Miriam Flickinger. 2017. “Corporate Schneider. 2018. “Labor Representation in Governance between Shareholder and Governance as an Insurance Mechanism.” Stakeholder Orientation: Lessons from Review of Finance 22 (4): 1251–89. Germany.” Journal of Management Inquiry Laplume, André O., Karan Sonpar, and 26 (2): 165–80. Reginald A. Litz. 2008. “Stakeholder Theory: Dammann, Jens, and Horst Eidenmueller. Reviewing a Theory That Moves Us.”Journal 2020. “Codetermination: A Poor Fit of Management 34 (6): 1152–89. for U.S. Corporations.” European Lo Turco, Celeste C. 2014. “Sovereign Wealth Corporate Governance Institute Law Funds: An Opportunity for Sustainable Working Paper 509 (April). Development If Properly Managed?” Doctoral Dodd, E. Merrick, Jr. 1932. “For Whom Are thesis, Libera Università Internazionali degli Corporate Managers Trustees?” Harvard Law Studi Sociali LUISS Guido Carli. Review 45 (7):1145–63. Magill, M., and M. Quinzii. 2009. Finite Horizon Farrell, J. 1985. “Owner-Consumers and , International Library of Critical Efficiency.”Economics Letters 19 (4): 303–6. Writings in Economics, Vol. 1. Incomplete Markets. Cheltenham: Edward Elgar Publishing FitzRoy, Felix, and Kornelius Kraft. Company. 2005. “Co‐Determination, Efficiency and Productivity.” British Journal of Industrial McVea, John F., and R. Edward Freeman. Relations 43 (2): 233–47. 2005. “A Names-and-Faces Approach to Stakeholder Management: How Focusing on Hayden, Grant M., and Matthew T. Bodie. 2020. Stakeholders as Individuals Can Bring Ethics “Codetermination in Theory and Practice.” and Entrepreneurial Strategy Together.” Journal Florida Law Review 73 (2): 2021. of Management Inquiry 14 (1): 57–69. Jensen, Michael C. 2002. “Value Maximization, Zogning, Félix. 2017. “Agency Theory: Stakeholder Theory, and the Corporate A Critical Review.” European Journal of Objective Function.” Business Ethics Quarterly Business and Management 9 (2): 1–8. 12 (2): 235–56.

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