The pictures and videos of children working in African mines under conditions described as modern slavery still come as surprising news in some parts of the world in the 21st century. Yet, it is an excruciatingly sad reality – urging the global community to rethink the inherent operating principles of the capitalist system and make it more accountable to generate far-reaching benefits for societies around the world. This reality strikes back at a time when discussions on the need to render capitalism more responsible and focus on stakeholder capitalism have been revived. Albeit intrinsic to the foundational principles of capitalism, the focus on stakeholders, experts argued, will help the global community rediscover the roots of the system and devise future-oriented policies to generate more values and benefits for society at large.

Reading news coverage of children forced to work under dire circumstances, even being killed, maimed and suffering life-altering physical injuries, in the cobalt mines producing raw materials for big technology conglomerates reveling in high profits is likely to propel people to react to the unequal distribution of the global wealth and unjust implementation of ethics of labor by castigating the current system of capitalism. While top managers of these technology giants, among other firms, expressed in August 2019 strong commitments to rethinking capitalism by emphasizing the liability to all stakeholders, it becomes rather difficult to weigh the concrete benefits of these discussions, making ordinary citizens skeptical about the viability of any form of capitalism. Yet, how can capitalism be revisited? How can citizens believe in the sincerity and applicability of these efforts while tragedy of modern slavery still prevails in some parts of the world?

The past year has seen significant developments that indicate a systemic shift toward responsible capitalism, challenging long-established assumptions about shareholder primacy. Stakeholder capitalism has, in fact, been grounded in capitalism. "The initial theories on capitalism never mention shareholder maximization, rather there is an emphasis on the value creation for all the parties affected by the production processes. Therefore, the concept of stakeholder is already inherent to the idea of capitalism and its early practices," Melsa Ararat, the founding director of Corporate Governance Forum of Turkey at the Istanbul-based Sabancı University, told Daily Sabah. But the question remains: How has capitalism traditionally become associated with shareholder maximization?

After the rapid evolution of the financial markets in the 1970s, seeking profits and increasing the value of shares have become the main drivers for the operations of the big corporations, Ararat explained. These changing market dynamics, she added, have also disrupted the nature of competition – one of the essential principles in the capitalist markets – and have led to the emergence of monopolies. "When there is healthy competition in the market, the corporations will enjoy the interest of all the stakeholders," she remarked in a bid to emphasize the importance of good management of competition.

"Shareholder domination had become a dogmatic principle that has been taken for granted and it has become so commonplace that nobody has ever questioned its fountainhead," said Oğuz Babüroğlu, the founder of Arama Participatory Management Consultancy and faculty member at Sabancı University.

"The idea that corporations serve shareholders above all the other parties is not sufficient to cope with the environmental complexity of vortical nature. In order to cope with the turbulence and adapt to the environmental complexity with uncertain parameters, it is necessary to return to other entities, actors and players," Babüroğlu remarked. These actors, he maintained, may not be necessarily own "shares" in the companies but they hold "stakes" as they are affected by the activities of the corporations.

The stakeholder indeed is not a vague concept. It includes employees, customers, suppliers, communities, government or relevant nongovernmental organizations. The evaluation of a corporation's activities either from the community and customer perspective or from the standpoint of shareholders and creditors reveals the foundations of corporate governance. "Acting in line with the principle of not inflicting harm, regulating corporate governance and becoming a good corporate citizen requires responsibility, and this is how corporations instrumentalize the paradigm of stakeholder capitalism," Babüroğlu explained.

The shadow of political capitalism

In August 2019, the U.S. Business Roundtable – CEOs from 181 of the biggest companies in America – signaled a new era of business purpose, one that serves not just shareholders but all stakeholders, including workers, customers, communities and the environment. In addition to American CEOs, the WEF also revived the talks on stakeholder capitalism and how to implement it. But their efforts were met with critiques who dismissed the WEF and Business Roundtable discourse as "empty." The efforts have been perceived as out of touch with reality. As trust in governments and corporations has depleted to a significant extent, it requires a lot of labor and time to sincerely implement the requirements of stakeholder capitalism.

The disruption of market competition has been an important factor in the deterioration of capitalism's initial and inherent principle to take all the actors into consideration in the production and operation processes after the rapid evolution and globalization of the financial markets in the 1970s, Ararat argued. Another trigger for why capitalism has been taken for granted as an economic regime that prioritizes the shareholder maximization has been the evolving nature of political capitalism, she said.

"The intricate relationship the corporations have formed with politicians through election campaigns and lobbyists has over time devoured the 'spirit of capitalism,'" she remarked and continued, "Corporations are legal entities and their activities are defined by law and any negative impact of their activities are subject to legal proceedings. They also have legal obligations, including tax payments. However, political capitalism has disrupted the principle of transparency for corporations."

In a similar vein as Ararat, Babüroğlu also emphasized that the adoption of stakeholder capitalism also ensures good governance both in the private sector and the public agencies.

In order to ensure better functioning of capitalism, the commitment to engaging stakeholders in corporate processes must be ensured – which will restore the idea of transparency, he underscored.

The engagement of stakeholders, Babüroğlu also argued, is a good instrument for the joint production of knowledge, therefore guaranteeing competitive and collaborative advantage for corporations. "We need to ponder on how to learn to jointly create knowledge and how to globalize that knowledge by way of ensuring cooperative actions. This, in return, will provide significant leverage for competitive advantage," he said.

Collaborative design of future

In an article on the World Economic Forum (WEF), Klaus Schwab, the forum's founder and executive chairman who is one of the figures that spearheaded the revival of discussions on stakeholder capitalism and will be discussing the issue at this year's annual meetings, argued that advocates of shareholder capitalism, including Milton Friedman, had neglected the fact that a publicly listed corporations are not just profit-seeking entities but also social organisms.

"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," Schwab wrote and maintained that management must also serve employees and society, as a "trustee of the material universe for future generations."

The commitment to stakeholder capitalism should not remain as a vague concept of political economy and its tangibility relies on the future-oriented policies to ensure the viability and sustainability of corporations and societies, Babüroğlu stressed. "Stakeholder capitalism is all about asking how to devise a future together with all the other entities while doing business," he added. In this regard, he noted, it is never about pursuing short-term interests, yet is a guiding principle for future strategies. "While doing business, it is inevitable to assess all the future uncertainties that may ensue from supplier relations, employee engagement, community or customer relations. Since prospective uncertainties compel businesses to focus on well-devised long-term strategies, they are bound to bring the relevant parties to the table," he explained.

"If the companies care about their long-term strategies and sustainability of their profits, they have to form relations and establish dialogue mechanism with all the stakeholders," Ararat confirmed in a bid to emphasize the importance of stakeholder relations for future policies.

What could be done?

In a climate where the system is too tainted by political capitalism or where politics are either broken or rigged, the expectations for improvement or regulation as well as the odds of failure could be too high. Therefore, it is unlikely that there is turning back from the current parameters as it is difficult to transform the conventional behaviors of political capitalism.

"What could be done first is a strong restoration of market competition. In addition to traditionally defined stakeholders, companies should also categorize their rivals as stakeholders. Free competition is one of the ways to prevent the monopolization of the market," Ararat explained. She went on explaining that most of the technological giants have become monopolies in their respective areas of activity, devouring their smaller rivals in time – a phenomenon that has disrupted the market competition. "Competition should remain one of the guiding principles to ensure checks and balances in the market," she added.

While working to ensure effective competition, the policymakers should also redesign tax regimes and provide an accommodating environment for the emergence of alternative models for doing business, according to Ararat.

On another note, she suggested that a new set of standards on the nonfinancial operational disclosure of multinational companies could be introduced by supranational governance institutions. "We have access to the financial disclosures of companies as they are posted on a quarterly and annual basis. However, we are not able to measure the other impacts of the nonfinancial operations," she said. It is rather difficult to measure water pollution in the area of activity of a corporation, or how many workers they hire or lay off, and how much carbon they emit per year. "We need nonfinancial reporting standards to measure such impacts as part of integrated reporting. Sustainable accounting standards must be adopted and mainstreamed as a reporting requirement across nations," she explained.

Since citizens, employees and communities are also significant actors directly affecting a firm's operations, Ararat claimed, it is essential to institute a democratic approach to their participation and establish a platform where they can express themselves. "The protection of democracy and providing platforms where employees and customers can express their input are of great importance," she opined.

With regard to the activities of the multinational corporations in emerging markets where there is less attention paid to the stakeholders, like African countries, developing Asian nations and other similar geographies, an influential instrument to address the stakeholder concerns or to engage them is to carry out participatory rural appraisals (PRA), Babüroğlu also suggested. "Since a firm has to weigh future uncertainties while making an investment in an area, it needs to measure the social, economic and political impact of its project and resort to a PRA as an effective tool to assess all the stakeholders," he concluded.

Whether through national or international platforms, it is imperative and urgent for the ruling elite and businesspeople running big corporations to develop and implement concrete methods to deliver the promises of stakeholder capitalism.

Davos leaders are busy redefining capitalism this year

After discussing globalization 4.0 last year, the 50th World Economic Forum Annual Meeting will delve into the reforms the capitalist system needs in line with how to include stakeholders.

Explaining what the WEF means by stakeholder capitalism, Sebastian Buckup, global programming coordinator head at the forum, stressed that stakeholder capitalism is necessary for a cohesive and sustainable world.

In an exclusive statement to Daily Sabah, Buckup stressed that this year that the Davos manifesto focuses in particular on the role of business on two major issues as the theme says Davos has to tackle social cohesion and sustainability.

"Of course, the notion of stakeholder capitalism is not peculiar to this meeting; it was a part of all the meetings in the last 50 years because companies and other stakeholders in societies having multiple parties to look after. In the case of business, it is not just shareholders. This is the core principle, the core idea of the WEF," he explained.

The WEF maintains that the purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders but all its stakeholders. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.

Sustainability will be another hot topic in the meetings. The WEF has always been a platform for sustainability, and this year's agenda stresses that many of these global challenges are not restricted by borders.

"Climate change is not restricted by borders. Companies have to be aware of the one planet we have, and they have a responsibility not as just shareholders but for all of their stakeholders. This is what we are putting down as the 2020 version of the Davos manifesto," Buckup noted. The sustainability issue has two elements in the Davos manifesto. The first expressed the idea that companies, no matter where they operate, clearly, should look after all the stakeholders.

"The WEF, with the notion of stakeholders, puts forward the core idea that corporations cannot go it alone. Ultimately, it is the shared responsibility of governments, civil society and businesses to move and lead some of these topics," he argued.

Referring to a great number of challenges in the implementation of stakeholder capitalism, Buckup stressed that it is imperative to think about how we actually measure success going forward. How we measure performance going forward will be a separate part of the program. Also, some of our high-level conversations among leaders will focus on economic, social and governance (ESG) measures. "The question is how we can measure along the lines of environmental performance, societal performance and good governance performance," he remarked.