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Stakeholder Capitalism's Next Frontier: Pro- or Anti-Monopoly?

Stakeholder Capitalism's Next Frontier: Pro- or Anti-Monopoly?

Today, I'm highlighting the just released paper — “Stakeholder Capitalism’s Next Frontier: Pro- or Anti-Monopoly?” — that I co-authored with the Balanced Economy Project’s Michelle Meagher. You can read the Executive Summary and full report here.

Rana Foroohar, a journalist that I highly respect (and author of the incredible book Makers and Takers), featured our report in her Financial Times column yesterday: "The failures of stakeholder capitalism."  As Rana says, "People who care about creating a fairer and more sustainable market system tend to think about things like 'ESG' investing (environmental, social and governance issues) and 'stakeholder capitalism.' But what they need to start thinking about is power."

Today's newsletter will intro the report, with some pictures and charts not found in there (bonus!).

Topline: The Stakeholder Capitalism (and ESG) movements have ignored historically high levels of concentrated corporate and financial power. It is within these market conditions that those 'reimagining capitalism' make their case for better firm behavior.

But there is a fundamental tension between firms that want to do good, and firms that seek power. We can't create a more equitable and sustainable economy without addressing the fundamental imbalances of power across the economy which harm workers, consumers, independent businesses, the environment, and ultimately, democracy.

In this paper we cover:

• The two camps of both ESG investing and stakeholder capitalism
• The harms from monopolized markets, including: higher consumer prices, lower wages for workers, less business dynamism and low startup rates, lower growth, less innovation, risks to national security, higher inequality, etc.  
• Why conservative critiques of ESG and stakeholder capitalism echo Milton Friedman while sowing the very outcome they wish to avoid
• How the watering down of antirust enforcement and maximizing shareholder value have a shared intellectual and political history
• Political actions we can take to enact structural reforms to foster economic democracy
• + more!

Download the report.

From Alphabet and Apple to Bank of America and United Health Group, firms championed by stakeholder capitalism and ESG investors are also among the worst antitrust offenders.

Take Alphabet — in November 2021, the U.S. Chamber of Commerce, financed in part by Google, announced in the Wall Street Journal a well-publicized “war” on the Federal Trade Commission, the key enforcer of fair dealing in markets. “It feels to the business community that the FTC has gone to war against us, and we have to go to war back,” said U.S. Chamber of Commerce CEO and President Suzanne Clark.

The attack includes lobbying political leaders, filing records requests and lawsuits, and launching expensive PR and advertising campaigns. But this is not an isolated occurrence; Google gives millions of dollars to politicians to shape regulatory actions globally, as do most large firms.

Perhaps the defensiveness is because Google is currently being sued by dozens of state attorneys general for violating its dominant position in search, and it has previously paid record antitrust fines for violating children’s privacy laws.

However, at the same time, in its code of conduct, Google pledges itself to “the highest possible standards of ethical business conduct.” And Alphabet, Google's parent company, is #1 on Just Capital’s list of "most just companies."

This is the first of many disconnects between stakeholder capitalism rhetoric and reality.

Bank of America — whose CEO Brian Moynihan is regularly featured on stakeholder capitalism panels at Davos — is being sued under antitrust law for bid rigging the credit default swap market. The company (along with Wells Fargo and JPMorgan Chase) also recently settled an ATM charge price-fixing case in October of 2021. Wells Fargo, number 25 on Just Capital's most 'just' companies, continues to discriminate against Black borrowers.

Amazon, which signed the Business Roundtable stakeholder capitalism statement in 2019, now receives more revenue from seller fees than any other portion of its business – including AWS. Amazon has consistently raised seller fees on its third party businesses, while also competing with them. Endless articles detail its abuses against independent businesses: self-preferencing Amazon Basics products, copycatting, stealing IP during its corporate venture capital due diligence process, failure to address counterfeit products or fake online reviews. It has also engendered news article after news article on its union-busting tactics, including heat-mapping which warehouses were most likely to organize.

And what about stakeholder capitalism's favorite poster-boy, Marc Benioff? While prone to using heart emojis and the cultish phrase 'thank you Ohana' (Hawaiian for 'family'), this Mr. nice guy veneer obscures his play-book business strategy: growing Salesforce through mega-acquisitions and entrenching dominance by building insurmountable moats to thwart competitors.

Just for kicks, let me know if you can see what's wrong with these two recent tweets side-by-side?

This isn't confusing or ironic at all...

Salesforce is far and away the leader in global customer relationship management (CRM) software, capturing nearly 20% of all global CRM spending in 2020 — more than Oracle, SAP, Microsoft, and Adobe combined. The company has acquired more than 60 companies over the last two decades. And Benioff’s recent multi-year mega-acquisition spree swallowed up Slack for $27.7 billion in 2020, Tableau for $15.3 billion in 2019, and MuleSoft for $6.5 billion in 2018.

Spending big on acquisitions has paid off handsomely. In Salesforce’s November 2021 earnings report, Benioff gushes, “We delivered another phenomenal quarter, fueling strong revenue growth, margin and cash flow.”

In 2016, when Microsoft bought LinkedIn, Benioff (who had also made a bid for LinkedIn) complained to regulators that the acquisition was anticompetitive, urging both the EU Commission and the FTC to scrutinize the deal. Yet he employs the exact same consolidation strategy – most large businesses today do.

Now, to be fair to Salesforce, this is actually pretty cool and something I want to see more of – a stronger focus on unfair take-it-or-leave-it contract terms like non disclosure agreements (NDAs) which afflict workers, suppliers, and consumers. And Benioff has publicly said that he welcomes increased taxes and other regulatory reform, despite deploying 14 tax subsidiaries to pay zero federal taxes in 2018, 2020, and 2021. But anyways,

Why this disconnect between stakeholder capitalists and the anti-monopolists?

While both movements have gained traction in recent years, the two communities and conversations rarely intersect. Both, however, ask fundamental questions about the nature and obligations of firms in society. Stakeholder capitalism generally focuses on what happens inside corporations, while anti-monopoly focuses on what happens between corporations, in markets and economies. These terrains overlap in important ways and, when seen this way, the potential allyship of sincere advocates for change within both movements becomes clearer.

It is important to distinguish between the two broad camps of stakeholder capitalists and ESG investors (yes this is an oversimplification):

1. Sincere challengers to neoliberalism, advocating for more democratic systems by sharing and decentralizing power through systemic reforms for workers, consumers, and independent businesses ; and
2. Actors using stakeholder capitalism rhetoric as a tactic to forestall regulatory intervention and to shield to retain the private regulatory power that dominant firms now exercise in many areas of the economy.

It's worth noting that the same is true in the anti-monopoly movement (again, very broadly speaking) the camps are:
1. Sincere challengers to concentrated corporate & financial power and its abuses. They are known as structuralists or "Neo-Brandeisians" named after the progressive New Deal era U.S. Supreme Court Justice, Louis Brandeis; and
2. Lawyers, economists, regulators, even current FTC commissioners using antitrust to retain the status quo. These people use the “consumer welfare standard” and claims that mergers make the economy more “efficient” as legal and economic cover for monopolization.

Our hope with this paper is to bring together sincere actors in both communities who are wanting to create structural change to rebalance power across the economy.

Here's how we are loosely defining these terrains, though, as my friend Alison Taylor has noted – ESG (and stakeholder capitalism and anti-monopoly) is far too amorphous a 'thing' to have any one definition.

ESG investors, by the way, don't fare any better on the issue of ignoring monopoly power. ESG indexes are dominated by a handful of dominant tech companies, which tend to employ fewer workers, pay lower effective tax rates, and act as market gatekeepers as Vincent Deluard, Director of Global Macro at research firm StoneX Macro, and I have written about previously. Here's some screen shots of the top 10 holdings of some of the largest ESG ETFs today, which collectively manage billions of dollars:

$4.08 billion USD as of March 31, 2022
$1.44 billion USD as of March 31, 2022
This is the Vanguard FTSE Social Index Fund Admiral Shares (VFTAX) which has $15.89bn USD as of Mar 31 2022.

Information technology is the largest sector allocation for most ESG funds and Google was the most commonly held stock across most funds, according to this 2021 MSCI report.

If you're wondering why investors should care about monopolies at all, here are a few charts (I won't got into all the negative ramifications of concentrated markets here, but they are in the report):

The left chart shows the trend of declining investment over time. The chart on the right is from Thomas Philippon, a researcher at NYU, who shows that the top 10 most concentrated sectors (the light grey line) invest much less than the 10 least most concentrated industries.

Companies in concentrated industries invest less back into their companies. This is a signal that despite rising profits for many firms, profit isn't coming from new, innovative products or better services, or acquiring new customers. It's coming from rent-seeking (charging customers more for the same product, squeezing suppliers, etc.).

This also contributes to lower growth (GDP):

And concentration hurts consumers (who are paying higher prices) and workers, who are getting less of the economic pie:

A new Brookings report has some eye-popping charts about how workers were left behind during the pandemic, even as corporate profits soared. Many Business Roundtable Signatories don't even pay their employees a living wage. The one baller execption is Costco (showed at the right of the below chart), who never even signed the BRT statement, and has just been treating workers well all along.

There is a lot more to say on all this, but one thing should be fairly clear to everyone at this point: Voluntary changes from companies, including performative statements, are not sufficient. Neither are endless disclosures.

This excellent essay — by a former Bank of Canada official and a former IMF senior staff member — agrees. It's talking about the failure of monetary policy to create the conditions of a thriving economy, but it also applies here. The authors state that, "What is needed are structural reforms that rebalance power between capital and labour, reverse the concentration of market power, redefine the role and operation of corporations, restructure debt where needed, make production systems and consumption preferences more nature friendly, redesign the social contract to benefit the majority, make our governance mechanisms more accessible and transparent, and incentivise politicians to work for the common good. The urgency of beginning this transformation must be emphasised."

As competition policy regulators have mostly stood idly by over the past few decades, the competitive playing field has moved from selling in open markets to gatekeeping over markets. If we don't like what this has done to the economy, it's up to all of us to change it. And thankfully, the tide is turning, and we have an opportunity to change this through regulators who really care – Lina Khan at the Federal Trade Commission and Jonathan Kanter at the Department of Justice. Europe is also leading much of the work on these issues.

There are many ways to rebalance power across the economy. We highlight antitrust / competition policy as a promising area, but sector-specific regulation is needed, and stakeholder capitalism advocates can also focus on power asymmetries in markets (like unfair contract terms, increasingly toll booths, algorithmic discrimination, etc.) which disadvantage stakeholders. Our recommendations are in the report, and there are many others – perhaps which I'll detail in a future newsletter.

Despite the political malaise and waning hope about the democratic process, itself, the only way to make serious structural change is through public and democratic channels, which must be safeguarded and upheld.

It is time to reassert the foundational tenets of a democratic economy: that corporations are fundamentally embedded within society, that the corporation is a public creation and should be publicly accountable, and that markets are public creations and structured by politically determined rules. Rules that we — the public — need to set. This is the hard work of democracy, but as Rana Foroohar says, "it only takes one or two strong leaders to change things." And I would add, it only takes you and me.