As crises pile up around us — from climate change to income inequality — it’s
clearer than ever that the way most businesses operate is a large part of the
problem. Former US President Barack Obama recently
suggested
that labor unions work with “innovative companies who recognize that shareholder
value and quarterly earnings are not the only thing that is important,” and even
the corporate world is starting to
recognize
this way of thinking. But calls to “consider” the interests of all stakeholders
or donate more
money
will not fix what’s broken.
These solutions ask us to rely on the kindness of CEOs. It doesn’t take a cynic
to see why that might not work out. We need to fundamentally change the
incentive structures for business leaders and investors. That means challenging
the primacy of shareholder profits, yes; but also rethinking who controls and
benefits from businesses. It means we need to stop treating labor and land as
commodities to feed wealth accumulation for the lucky few. It means adopting new
ownership models that position profit not as an end but as an engine for
creating social, cultural and ecological goods.
The initial response to this analysis often is, “Who wants to invest in a
business set up like that? Who wants to put in the sweat equity to build one?”
The answer might surprise you: a lot of people. In conversations with
entrepreneurs and investors across the US and Europe, I’ve found that
people respond passionately to the idea of redefining ownership and governance —
so much so that a grassroots global movement is emerging to develop and support
business models rooted in stakeholder governance.
Several factors are fueling this movement. We’ve all heard about millennials’
preference for companies with a
purpose
beyond profit taking. But beyond a few stories about founders opting out of
public markets, few have noticed the brewing rebellion among entrepreneurs
against the status quo. Social entrepreneurs who launched businesses in the ’70s
are approaching retirement age and looking for a succession plan that doesn’t
destroy everything they’ve built. These pioneers and succeeding waves of
founders and CEOs are grappling with how to provide liquidity for themselves and
their investors, while protecting their company’s mission and enabling continued
growth. Their ideas about a fair economy are now part of the mainstream
conversation,
but structural threats to their independence remain (no one wants to suffer the
fate of Toys R
Us).
Many are looking to mission-first business
models
as the answer. These models share three foundational principles:
-
Profits serve purpose. They are reinvested in the business, shared with
stakeholders, or donated.
-
Stakeholders who are actively engaged in or connected to the business
control it. Control can’t be purchased or inherited.
-
Economic and voting rights are separate. The business can bring in
outside investors, but it can’t sell voting or controlling shares.
The point is to empower companies to value long-term strategy over short-term
profits. A mission-first model protects a company from hostile takeovers;
eliminates the potential for individuals to profit at the expense of the
business; and prioritizes profitability in service to the wellbeing of the
company and its mission, investors, employees, customers and suppliers,
collectively.
These models aren’t just theoretical. There are companies operating this way in
the wild, and they show the benefits: Mission-first companies tend to invest a
higher percentage of revenues in R&D, driving innovation. They usually pay
higher wages. They are free to elevate social and environmental impact over
growth. And their overall commitment to putting money back into the business
makes them more resilient to economic and political cycles.
This is not a hidden way to turn a business into a nonprofit — everyone needs to
make money. The business needs to be profitable in order to serve its mission,
and it needs to deliver a return in order to attract investors. It is true,
though, that mission-first companies need patient capital deployed with the goal
of optimizing financial return and impact in combination, rather than maximizing
money out.
We’ve all heard the Friedman-ite claim that making money for shareholders
is a mission. But that’s not true in any real sense of the word; and besides,
centralizing decision-making power with shareholders leads to less than optimal
decisions from a systems standpoint — as we have
seen.
If we want business to create social and environmental as well as economic
value, we need to toss a number of paradigms out the window. What got us here
won’t get us there; we need to judge business structures based on the outcomes
they produce, and shift to new ones that produce the outcomes we want. When that
happens, we’ll have the foundation of a new economy.
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Jasper J. van Brakel joined RSF Social Finance as its president and CEO in March 2018. He is convinced that innovative approaches are needed to address the significant social, cultural, and economic challenges of our time, and guides RSF as it builds on its success in transforming the way individuals and organizations work with money.
Published Jan 24, 2020 1pm EST / 10am PST / 6pm GMT / 7pm CET