The Soft Corporatism of Stakeholder Capitalism

The more time you spend in the world of ideas, the more you realize there is little new under the sun. The words might be different and the faces change, but the basic messages remain the same. Intellectual revolutions are like all genuine revolutions—extremely rare. Good and bad ideas alike tend to be recycled under different labels.

This particularly applies to one set of ideas which has been making its presence felt in business and politics over the past five years. The World Economic Forum’s Executive Chairman, Klaus Schwab, calls it “stakeholder capitalism.”

Stakeholder theory has been around in the world of business ethics and management since 1984. It maintains that a company has a responsibility to create value for all those who conceivably have a stake in the business—employees, customers, local communities, suppliers, etc.—besides those who own or are invested in the company.

Stakeholder capitalism is a broader and older concept. Schwab has been writing about it since 1971. He describes it as “a form of capitalism in which companies do not only optimize short-term profits for shareholders, but seek long term value creation, by taking into account the needs of all their stakeholders, and society at large.”

By value-creation, Schwab has in mind prosperity but also what he calls “People,” “Planet,” and “Peace.” That gives you a sense of how all-encompassing his model aspires to be. Schwab identifies the stakeholders responsible for these four Ps as “companies,” “governments,” “civil society” (NGOs, unions, universities, etc.), and “the international community.” By the last of these, Schwab is not thinking of the world’s 7.8 billion people. He means international and supranational organizations like the United Nations and the European Union.

Schwab’s vision isn’t, however, without its own pedigree. He gives the game away while reminiscing about postwar Europe:

This approach was common in the post-war decades in the West, when it became clear that one person or entity could only do well if the whole community and economy functioned. There was a strong linkage between companies and their community. In Germany, for example, where I was born, it led to the representation of employees on the board, a tradition that continues today.

What Schwab is alluding to here is often called “corporatism.” It’s an approach to organizing society whose roots go back at least to the Middle Ages. As a modern set of ideas, it has been embraced by people on the left and right. But whatever its precise form, corporatism comes with some significant drawbacks that stakeholder capitalism has the potential to project onto a very large stage.

We’ve Been Here Before

Corporatism’s emergence as a political program during the 19th century was shaped by thinkers ranging from the French sociologist Emile Durkheim to the German Jesuit theologian Heinrich Pesch. It attracted support from socialists, nationalists, Christians, progressives, and fascists. There were many schools of corporatist thought and they didn’t agree about everything, but the following propositions often featured prominently:

  • Private enterprise and markets are useful. However, they generate excessive wealth-disparities, weaken communities, and diminish security. In short, they undermine solidarity—a word frequently used in German corporatist circles from the 19th-century onwards.
  • Private property and free exchange must subsequently be imbedded in a legal and political framework that prioritizes the building of consensus around the achievement of specific social and economic goals.
  • Every industry and profession should have organizations that embrace everyone who works in it. These corporate bodies have the prime responsibility for deciding wages and conditions, and they provide workers with a voice in management decisions.
  • The principal place for resolving disputes within industries should be within these corporate groups assisted by special tribunals, which issue binding resolutions.
  • The activities of all corporate bodies should be coordinated by the state which bestows legal recognition upon these organizations.

To be sure, different corporatists emphasized some such ideas more than others. Many focused upon establishing worker co-determination structures whereby employees (invariably union officials) were allocated seats on company boards. Large German businesses used corporatist ideas to rationalize the cartelization of the economy. Some corporatists were more concerned with creating corporate bodies to embrace entire industries, which would then be coordinated by the government to achieve particular national goals.

That often included objectives of an authoritarian nature. In a 1935 article published in the journal Economica, the German free market economist Wilhelm Röpke demonstrated how Mussolini was using corporatism to harden the Fascist regime’s grip on the economy and society. What might be called “hard corporatist” policies were also pursued in countries like Franco’s Spain, Vichy France, Dollfuss’s Austria, and, following World War II, Perón’s Argentina (albeit rather chaotically in his case).

After 1945, corporatism took on softer forms. Christian Democrat-led governments sought to foster consensus among employers and workers within industries. They consequently established structures like work councils (whose leadership was dominated by union officials) that management was legally bound to consult. In other cases, they supported worker co-determination arrangements.

Some countries use corporatist institutions today to integrate employers and workers into the shaping of government policy. Under legislation passed in 1954 and amended in 1992, the Chamber for Workers and Employees purports to represent all employees in Austria. Membership is compulsory. Among the Chamber’s responsibilities are evaluating draft legislation from the standpoint of employees’ interests, proposing amendments, and participating in the implementation of laws. Likewise, any Austrian business whose work involves manufacturing, construction, mining, commerce, banking, craft production, insurance, transport, telecommunications, or tourism must be a member of the Federal Economic Chamber. Like its employee counterpart, it reviews legislation and consults with government officials.

In a corporatist world, success depends less on innovation and much more on your institutional clout. That exacts a high economic cost.

Soft corporatism has even achieved constitutional expression in some nations. Article 41 of Italy’s 1947 Constitution states that “Private-sector economic initiative is freely exercised.” One sentence later it adds, “The law shall provide for appropriate programs and controls so that public and private-sector economic activity may be oriented and coordinated for social purposes.” Other corporatist provisions appear in Article 46: “For the economic and social betterment of workers and in harmony with the needs of production, the Republic recognizes the rights of workers to collaborate in the management of enterprises, in the ways and within the limits established by law.”

Corporatism also rears its head at the EU level. The EU has its own in-house corporatist institution—the Economic and Social Committee. Its charge is to represent the views of “civil society, employers and employees” to EU officialdom. Corporatist claims have even been integrated into the Charter of the Fundamental Rights of the European Union. Article 27 refers to the right of workers “or their representatives” (union officials) to be consulted about an enterprise’s operations.

Encouraging Incompetency, Enabling Cronyism

Some economic historians argue that soft corporatism helped Western Europe recover from World War II. Through neo-corporatist arrangements, they maintain, governments secured the buy-in of businesses and unions into policies that helped many European nations overcome their grave postwar challenges. Over time, however, the same corporatist arrangements have had seriously negative effects.

First, corporatism has provided established businesses with political and legal mechanisms to advance their interests over and against, for example, consumers, taxpayers, and new entrepreneurs. By definition, taxpayers, customers, and start-up businesses are less-organized and more diffuse. They are subsequently less able to promote their concerns than companies who have hard-wired themselves into policy-influencing corporatist institutions.

In this world, success depends less on innovation and much more on your institutional clout. That exacts a high economic cost. The Nobel economist Edmund S. Phelps has detailed at length the clear linkages between the prevalence of corporatist mindsets and structures, and the weakening entrepreneurship and overall economic performance in many European countries.

Second, corporatism undermines accountability. It entrenches incompetent boards and executives by allowing them to excuse poor performance by telling shareholders that the company’s legal obligations to contribute to realizing various national objectives means that investors must settle for less profit.

Third, corporatism enables widespread cronyism. There is no shortage of empirical studies showing how the client-patron relations between businesses and politicians facilitated by corporatist structures has enabled particular companies to dominate entire economic sectors in countries. Nor can we discount how easily corporatist cronyism morphs into outright corruption.

Consider, for instance, the scandal that engulfed the Volkswagen Corporation in 2008. Facing increased global competition and the subsequent need to reduce labor costs, VW executives created a slush fund to buy off employee representatives (i.e., union officials) on the VW works council to secure their consent for changes in labor conditions. Among the inducements were paid-for shopping sprees for union officials’ spouses, paid visits to prostitutes, and outright bribes.

Global Corporatism: Toxic for Freedom

The parallels between corporatist ideas and aspects of Schwabian capitalism are clear. What’s different about the latter is its global ambitions. Given the problems with corporatism, that should give anyone pause.

For one thing, embracing stakeholder capitalism on a global scale would only magnify the already-yawning gap between those who fit the profile of Davos Man and everyone else. To expect the rest of the world simply to accept whatever stakeholder-corporatist insiders have decided to be the new global consensus on any given topic seems disconcertedly utopian. It also increases the possibility of more populist backlashes on an international level.

Perhaps most disturbingly, corporatism—whether of the old-fashioned national or contemporary Schwabian variety—doesn’t place great emphasis on freedom. For the most part, the focus is upon establishing and then enforcing a consensus on particular topics.

But what happens if you are the owner of a large business who’s not interested in signing up to stakeholder capitalism’s four Ps because you think three of the Ps are so broad as to mean nothing (or to mean whatever a career EU politician says they mean)? What happens if you are an employee who wants to negotiate your salary with your boss directly instead of having it determined for you by supranational chambers of labor and employers staffed by officials who know nothing about your specific circumstances? Corporatism struggles to answer such questions. In fact, it positively discourages people from asking them in the first place.

Corporatism doesn’t deal well with dissent, whether the question is economic policy or defining the content of Progress. This is the looming problem with stakeholder capitalism. In the name of harmony and solidarity, it’s likely to undermine liberty. And that’s a sure way to generate what corporatism says it’s against: deep and lasting discord.