The key to managing a company is to pay close attention to the benefits of a wide range of stakeholders. This notion has gradually gained currency in recent years.

A company’s behavior has a huge impact not just on its customers but also on its employees, business partners, local communities and the environment. A growing number of top corporate executives have come around to this viewpoint in light of widening economic inequality and global warming issues.

This trend could be described as a shift from “shareholder capitalism,” which puts the highest priority on the interests of shareholders, to a more pluralistic form of capitalism.

TUG-OF-WAR BETWEEN TWO CAMPS

But the process of this shift will not be smooth nor swift. So-called activist shareholders, who meddle in the management of the companies they invest in by using their rights as shareholders, still wield tremendous influence over many companies.

At embattled electric machinery giant Toshiba Corp., negotiations for a turnaround plan are coming to a head. Toshiba once relied on foreign funds, including some activist shareholders, to cover huge losses it had incurred. As a result, its management found itself having to kowtow to these shareholders.

The plan currently believed to have the highest chance of being approved would sell Toshiba to a consortium of Japanese companies for more than 2 trillion yen ($15.22 billion). It will likely allow the foreign funds to sell their shares in Toshiba for massive capital gains in another example of a victory for the interests of shareholders.

There is also a lot of resistance to the movement away from the “shareholder first” capitalism in the West.

In November, hedge fund Bluebell Capital Partners sent a letter to BlackRock Inc., one of the world’s leading fund management companies, urging the replacement of Chief Executive Officer Larry Fink. Fink caused a stir in the investor community five years ago by declaring, “Companies must benefit all of their stakeholders.”

Bluebell’s move against Fink’s leadership has attracted attention because the hedge fund led a campaign to oust the CEO of Danone, the French food conglomerate, in spring 2021.

The Danone chief executive was known for promoting a management style oriented to social and environmental causes and adopting the “Entreprise a Mission” model created by French law in 2019, a legal framework in which businesses pursue a set of social and environmental goals for sustainability. But the top executive was dismissed over the company’s sluggish stock prices.

DISRUPTED BALANCE

For many years, debate has raged over such fundamental corporate management questions; for example, for whom companies exist or how they should be governed.

In the United States, top executives maintained control over corporate management until the 1960s. In the 1970s, however, shareholders started exerting more influence over management due to a takeover boom and a rise of institutional investors. At that time, American economist Milton Friedman famously argued that companies were tools of shareholders, saying “The social responsibility of business is to increase its profits.” Friedman laid the theoretical foundation of the doctrine of shareholder capitalism.

In Japan, a lot of praise was once given to the so-called Japanese-style management, usually marked by cross-shareholdings and cooperative relations between labor and management. After the collapse of the asset-inflated economy in the early 1990s, however, many critics argued for a rethink of this management approach. The corporate governance reform the government has been promoting in recent years is aimed primarily at revitalizing the profitability of companies with an emphasis on “discipline” based on pressures from shareholders.

During this period, many Japanese companies increased their payouts to shareholders. In fiscal 2021, which ended in March 2022, Japanese companies paid out seven times more in dividends than they did at the end of the 1990s.

In contrast, the wages and bonuses paid to employees and corporate investment in plants and facilities have remained almost unchanged from the mid-1990s. Clearly, the balance in the distribution of corporate profits has been disturbed.

Distortions caused by shareholder capitalism should be reviewed for correction. Prime Minister Fumio Kishida’s economic policy slogan of “a new form of capitalism” briefly raised hopes for change. But his economic agenda has since been badly altered, with his pledge to double people’s incomes replaced by a vow to double “asset income.” For now, there is no denying that his economic policy has fallen short of expectations.

REFLECTING WIDER PERSPECTIVES

What is needed to enhance the viability of pluralistic capitalism to ensure its growth in the face of strong headwinds?

Things will only get even worse if the interests of top executives and a small number of stakeholders are given priority when the power of shareholders weakens. It is crucial to ensure that corporate management is designed to serve the interests of a wide range of stakeholders.

Corporate supply chains are globally networked and know no borders. Overseas workers involved in supply chains and local communities where they work are also important stakeholders.

In fact, the government last year worked out business ethics guidelines requiring Japanese companies to protect human rights in their operations of supply chains. Work is under way to establish international standards for corporate information disclosure that cover not just financial but also climate performance. A broad array of other themes, such as human capital, human rights, economic inequality and biodiversity, are also being considered for possible incorporation into the standards.

Various stakeholders will have opportunities to express their opinions and take action as they promote the disclosure of information concerning these issues. Corporate management can acquire plural perspectives through communication with the actors involved in such movements.

It is not easy, however, to set clear priorities among the interests of stakeholders. The best answer to the question may not be found quickly.

Promoting disclosure of more diverse information, however, may be a good place to start efforts to push for pluralist capitalism.

A campaign to establish the Guiding Principles on Business and Human Rights, a set of guidelines adopted by the United Nations for countries and companies to prevent and address human rights abuses committed during the course of doing business, was led by John Ruggie, an international political scientist.

In a later essay, Ruggie argued that placing top priority on shareholder value is not consistent with the roles and responsibilities companies should fulfill.

“It is time to let go of Milton Friedman,” he said.

--The Asahi Shimbun, Jan. 8