Published on: Project Syndicate, 29 October 2019
Since the advent of the modern firm, businesses have had to contend with a fundamental paradox: society needs large organizations to solve complex collective problems, but also fears centralized authority and decision-making. It is the latest incarnation of this paradox that is now driving large firms to move beyond the “shareholder first” mantra.
By last month, 183 corporate CEOs signed on to a statement affirming their commitment to move beyond the “shareholder first” mantra to account for the interests of all stakeholders, including employees, customers, suppliers, and communities – many responded with skepticism. But dismissing the statement by the US Business Roundtable as a mere public-relations stunt fails to recognize the fierce headwinds businesses are facing – and their proven capacity for adaptation.
Since the advent of the modern firm, businesses have had to contend with a fundamental paradox: society needs large organizations to solve complex collective problems, but also fears centralized authority and decision-making. As Robert D. Atkinson and Michael Lind explain in their latest book, Big is Beautiful: Debunking the Myth of Small Business, in the United States, large companies outperform small ones on almost every indicator, from wages and productivity to exports and innovation.
Yet public opinion surveys rank large companies among the least trusted institutions (above only television news and the US Congress), with small businesses among the most trusted (below only the military). This trust paradox has shaped several dramatic shifts in corporate governance over the years.
The first transition occurred in the nineteenth century, when the Industrial Revolution shifted production away from small, owner-led enterprises to modern multiunit firms, and gave rise to a professional managerial class. The great merger movement of the late 1800s, when thousands of small firms were replaced by a few dozen large trusts, accelerated this reshuffling of the corporate landscape.
The new corporate giants propelled societies forward, but also created new imbalances – and almost immediately ran into resistance. “If we will not endure a king as a political power,” US Senator John Sherman declared in 1890, “we should not endure a king over the production, transportation, and sale of any of the necessaries of life.” With those words, the Sherman Antitrust Act was born.
According to a study published in 1935 by the economist Shaw Livermore, more than half of the trusts formed in the US between 1888 and 1905 disappeared or fell behind by the 1930s. Though rapid technological progress may have been more damaging than “trust-busting” policies, business learned its lesson: if you squander your social license to operate, size is a liability.
This realization underpinned a new governance shift: the institutionalization of corporate philanthropy. While individual business leaders had been among America’s top donors since the seventeenth century, in the twentieth century, philanthropy became an essential part of doing business in the US. This helped to sustain an implicit ceasefire, with government more inclined to allow business to operate with minimal interference.
If the beginning of the twentieth century was shaped by the modern multiunit enterprise, the century’s latter half was all about the multinational. The shift began after World War I and picked up steam after the end of the Cold War, when the integration of markets and the vast expansion of corporate bureaucracies enabled companies to take advantage of global economies of scale.
The trust paradox reared its head again. Though the software giant Microsoft avoided the fate of America’s largest telecom provider, AT&T, which was broken up in the 1980s, it was forced to lift barriers on third-party software – a move that would later help companies like Google to grow.
Though the anti-trust campaigns of the 1990s did not match the scale and scope of those in the early twentieth century, businesses felt pressured to reconsider their role in society. In 1973, at the World Economic Forum’s annual meeting in Davos, WEF founder Klaus Schwab asserted that “the purpose of professional management” is to serve all stakeholders, and to harmonize their different interests.
The so-called Davos Manifesto heralded yet another shift, from “corporate philanthropy” to “corporate citizenship” – the idea that a corporation, like any citizen, had to align its self-interest with the shared interests of society. But, though participants at that year’s WEF meeting unanimously endorsed the manifesto, corporate citizenship has remained a radical idea – one that is only now, nearly a half-century later, becoming mainstream.
The catalyst is the Fourth Industrial Revolution, characterized by business expansion into the domain of data and algorithms. In a sense, smaller firms may lead this new phase of business activity. As Jack Ma, the founder of the Chinese tech giant Alibaba, told Davos attendees this year, “In the last 20 years, globalization was controlled by 60,000 companies worldwide. Imagine if we could expand that to 60 million businesses.”
But this would not be a return to the past, with individual small and medium-size enterprises driving the economy. In fact, Ma was touting a platform he has built to allow SMEs to build globalized businesses.
Therein lies the fundamental difference between modern markets and those Adam Smith envisioned back in 1776: to compete today, SMEs need to be able to store, process, and analyze massive amounts of data – capabilities that are provided by giants like Alibaba, Amazon, Facebook, and Google.
Similarly, while the rise of the “gig economy” means that more people are operating as one-person firms, these workers rely on multinational platforms to get “gigs.” It is this tension between unprecedented bigness – Apple and Amazon recently became the first privately owned trillion-dollar companies – and pre-industrial smallness that lies at the heart of the trust paradox today.
As a result, large corporations are more than stakeholders; they often govern the platforms upon which all stakeholders intersect. To avoid another public backlash, they must make these platforms serve us not only as consumers, but also as entrepreneurs, workers, and citizens. At a time of unprecedented global challenges – including climate change and high levels of inequality – this must include using the unprecedented power of platform leadership to catalyze global-scale solutions.
Earlier this year, the artificial-meat producer Beyond Meat celebrated a rapturous stock-market debut. Rather than focus on meeting rising demand for meat by scaling up factory-farming operations, as companies did in the past, it – and similar companies, such as Impossible Foods – is working to help reduce overall meat consumption, a major driver of climate change.
This is propelling the latest transition in corporate stakeholdership, focused not just on scaling more wisely, but also on becoming wiser about what to scale. Business leaders know what happens when the tide of public opinion turns against them. While critics are right to demand that they translate their recent pledges into action, there is plenty of reason to believe that they will.