Organizational Governance

We Need a Business Revolution — and We Can’t Base It on the Kindness of CEOs

Entrepreneurs and investors across the US and Europe see the need to redefine ownership and governance — so much so that a grassroots global movement is emerging to develop and support business models rooted in stakeholder governance.

Brand Provided | By Jasper van Brakel | Published 6 years ago | About a 4 minute read

Image: stux/Pixabay

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.