INTRODUCTION

FOR THE PAST FOUR decades, capitalism has been slowly committing suicide. It’s going on in plain view, although few recognize what’s happening because, to most observers of the stock market, nothing looks amiss.

The stock market has become the yardstick of the nation’s financial and economic health: we assume that stock prices measure the well-being of corporate and business success, and we continue to apply this metric even as the market reaches record-setting territory. Growth in the value of stocks has become an obsession. It is part of our culture. Shareholders have come to demand it. Year in and year out, quarter after quarter, profits must go up. As a result, a CEO must push earnings and stock prices skyward by whatever means possible. Do that consistently, and the CEO is richly rewarded, celebrated in the press, and applauded by the financial community. Any CEO who allows earnings and profits to languish, even temporarily, is in danger of losing his or her job. That has become our zeitgeist—deliver earnings, push up the stock price, or perish. It has the appearance of a natural, reasonable process, but it isn’t. It is an unforgiving ritual, a cruel way to do business—a way through which unintended actions have disastrous long-term consequences for companies and our society in general. This is the world in which shareholders have come to demand and get maximum, short-term returns. A world where shareholders have dominion over all other stakeholders in a company. Nearly four decades of this version of capitalism have damaged the long-term viability of businesses and helped create a vast, unequal America in socioeconomic terms. Simply put, shareholder primacy has become a kind of cancer that needs to be eradicated before it destroys our way of life.

To say this within the world of business today is tantamount to pointing out, centuries ago, that the earth was actually round. Shareholder primacy has become so fundamental to the way we’ve thought about business for nearly half a century that most of those in business are hardly more aware of it than they are of the air they breathe. Meanwhile, this philosophy has been destroying the conditions that create markets and healthy communities for the companies that make their shareholders wealthy. If that way of life collapses, profit isn’t sustainable. It will disappear along with the company creating it. What makes our corporations appear to be strong and successful is actually undermining our entire society by eroding the ability of the general population to spend, to thrive, to hope for a better future. For the large majority of our people, the American dream has simply disappeared.

This book describes how and why shareholder primacy has become one of the major drivers of income inequality and the dearth of economic opportunity for many in America. Our economy has become a cage for the majority of Americans who have little or no chance to improve the quality of their lives, many of whom are living in a quicksand of debt. The unrest and anger that determined the outcome of the 2016 presidential election are in part the result of the destructive consequences of shareholder primacy, which has been turbocharged by the negative effects of globalization and technology.

It’s no wonder that our universities are turning out generations of young Americans who believe capitalism is evil. Thomas Piketty’s book Capital in the Twenty-First Century only reinforced this view in its central thesis that our economic system increasingly concentrates wealth within the pockets of a smaller and smaller percentage of the population—those who demand and get a disproportionately large share of the profit, rather than those who do the work that creates it. Yet, free enterprise at its best has been the lifeblood of a growing economy—the drive to innovate and work hard in order to earn a better life is what built the United States into a place where, half a century ago, nearly anyone could succeed and enjoy increasing rewards through his or her own efforts.

That hope has been all but extinguished, though not because the system of free-enterprise capitalism is inherently self-destructive. Opportunity has disappeared because free-market capitalism has been hijacked. At one time, our most successful companies felt an allegiance to a variety of stakeholders—employees, customers, the corporation itself, communities, and the nation. By operating with an imperative to strengthen all of these constituencies, our system thrived in the late 1940s through the 1970s, when America organized itself into the greatest engine of prosperity in the history of the world. In the late ’70s, all that began to change. We narrowed our vision and started to focus solely on rewarding shareholders. As a result, we are now seeing in our economy and our society a loss of opportunity for all but the wealthy segment of our nation. What we desperately need now is not to abandon free-market capitalism, but to correct its vision—to restore its broader sense of responsibility to multiple stakeholders, to our society as a whole.

I’m not the first to suggest this. Many advocates for “stakeholder primacy,” as it were, have been pointing toward shareholder primacy as a villain. Among others, Lynn Stout at Cornell Law School and Judith Samuelson of the Aspen Institute have been decrying this philosophy for years and pushing for a new sense of responsibility in the executive suite. Organizations such as JUST Capital have sprung up to push for a wiser form of corporate governance. Even Jack Welch, the former CEO of General Electric, has famously called shareholder primacy “the dumbest idea in the world.” Yet, so far, little has changed. Most business leaders protect their jobs by going along with a system that rewards them with equity, so by squeezing every last penny of profit from a firm before its next quarterly report, the executive’s own compensation increases in proportion to the rise in the stock price. If they don’t act for short-term gain, and instead take responsible steps to build a company with long-term viability, they fear they will be replaced. And they have legitimate reasons to fear the wrath of the financial community and a radical group of shareholder activists.

Yet they and the system that enables them fail to recognize the tremendous upside in moving away from the short-term mentality that has ruled the commercial community for nearly as long as current leaders have been in business. What’s missing is a recognition in our business community of the happiest irony in this story: only by abandoning short-term shareholder primacy will a company find its path to greater profits down the road, while supporting society, helping to re-create a viable middle class, and rekindling hope in the American dream. We hope this book can serve as a manifesto for executives, directors, shareholders, and others who take steps to push back against the pressures of shareholder primacy and begin to reshape free enterprise with a vision that looks to long-term profitability rather than short-term gain. My own hope is that this book helps point the way toward that sustainable path to a future that only an enlightened capitalism will make possible. Many companies are already on the way toward it. To all the rest, we say, “Capitalism, heal thyself”—while there’s still a chance. The reality is that the current shareholder-primacy model is a disaster, and it is also not sustainable. Society will soon demand change through the ballot box or in the streets. By reimagining free-market capitalism, business can help heal our economy and our society—and ensure lasting profits into the future. It is time for capitalists to arise; we need to do it now.