We need the ‘Davos Manifesto’ for a better kind of capitalism.

What kind of capitalism do we want? That may be the defining question of our era.

“Shareholder capitalism,” a major model embraced by Western corporations, holds that a corporation’s primary goal should be to maximize its profits. “State capitalism,” which entrusts the government with setting the direction of the economy, has risen to prominence in many emerging markets, not least China.

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, recommends that we adopt the third model: “stakeholder capitalism.” He first proposed the model a half-century ago. It positions private corporations as trustees of society, and seems to be the best response to today’s social and environmental challenges.

Shareholder capitalism, currently the dominant model, first gained ground in the United States in the 1970s, and expanded its influence globally in the following decades. Its rise was not without merit. During its heyday, hundreds of millions of people around the world prospered, as profit-seeking companies unlocked new markets and created new jobs.

But that wasn’t the whole story. Advocates of shareholder capitalism, including Milton Friedman and the Chicago School, had neglected the fact that a publicly listed corporation is not just a profit-seeking entity but also a social organism. Together with financial-industry pressures to boost short-term results, the single-minded focus on profits caused shareholder capitalism to become increasingly disconnected from the real economy. Many realize this form of capitalism is no longer sustainable.

The Davos Manifesto: “We should seize this moment to ensure that stakeholder capitalism remains the new dominant model.”“Stakeholder capitalism” is gaining momentum, in part thanks to the “Greta Thunberg effect.” Many influential economists and business leaders believe that it offers the best opportunity to tackle today’s environmental and social challenges. The US Business Roundtable, America’s most influential business lobby group, announced this year that it would formally embrace stakeholder capitalism.

Klaus Schwab claims that business leaders should seize this moment to ensure that stakeholder capitalism remains a new dominant model. To that end, the World Economic Forum is releasing a new “Davos Manifesto,” which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field – particularly in the “platform economy.”

But to uphold the principles of stakeholder capitalism, companies will need new metrics. For starters, a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics. Fortunately, an initiative to develop a new standard along these lines is already under way, with support from the “Big Four” accounting firms and led by the chairman of the International Business Council, Bank of America CEO Brian Moynihan.

The second metric that needs to be adjusted is executive remuneration. Since the 1970s, executive pay has skyrocketed, mostly to “align” management decision-making with shareholder interests. In the new stakeholder paradigm, salaries should instead align with the new measure of long-term shared value creation.

Finally, large companies should understand that they themselves are major stakeholders in our common future. Clearly, all companies should still seek to harness their core competencies and maintain an entrepreneurial mindset. But they should also work with other stakeholders to improve the state of the world in which they are operating. In fact, this latter proviso should be their ultimate purpose.

Today, the so-called impact investing is rising to prominence as more investors look for ways to link environmental and societal benefits to financial returns. The Chartered Financial Analyst (CFA) Society of the UK now offers a Certificate in ESG Investing, which sets out the fundamentals for Environmental, Social, and Governance (ESG) investing and equips financial professionals with the skills and knowledge to integrate ESG issues into their roles.

Image: Davos, Switzerland / Nici Keil

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