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IDEAS

How to save capitalism

A big change in business law would make it easier to hold companies accountable for their effects on the wider world.

The Danone headquarters in Paris, seen in 2005. The food and beverage company gets almost half of its annual revenue from subsidiaries that are B Corps, which pledge to consider entities other than their shareholders in corporate decisions.
The Danone headquarters in Paris, seen in 2005. The food and beverage company gets almost half of its annual revenue from subsidiaries that are B Corps, which pledge to consider entities other than their shareholders in corporate decisions.PASCAL PAVANI/AFP via Getty Images

Fifty years ago, capitalism — and the US economy — took a dark turn. That’s when conservative economist Milton Friedman published an article that described what quickly became an organizing economic principle: shareholder capitalism, which holds that a business’s sole responsibility is to maximize profits. A bland assertion now, this thesis was revolutionary then.

In the first few decades after World War II, corporate leaders had a broader aim — helping their communities and workers, as well as shareholders. In the 1950s, for example, Sears employees owned a quarter of the company, allowing salesmen to retire with an average of $1 million in savings. Companies acted as engaged citizens, working with organized labor, providing generous corporate pension programs, and underwriting many important community projects.

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But Friedman denounced corporate “social responsibility” as a “fundamentally subversive doctrine” and posited that businesses’ sole aim should be delivering profit to shareholders. Those taking responsibility “for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers … [are] preaching pure and unadulterated socialism.”

This view was so influential that it became enshrined as a legally binding part of corporations' governance. Executives can be sued if they don’t prioritize shareholder returns.

We see now that this framework has overemphasized short-term gains, exacerbated wealth inequality, and contributed to environmental devastation, among other ills. A bipartisan consensus is emerging that serving shareholders alone was a blinkered, wasteful mistake.

A smarter, fairer, more sustainable approach is to hold companies accountable to all stakeholders, such as employees, consumers, and communities. Over the past 10 years, the “B Corp” movement, led by the nonprofit B Lab, has created alternative structures allowing companies to seek independent verification that they’re operating in the interests of stakeholders other than just their shareholders. B Lab certifies companies as B Corps by assessing over 200 characteristics that reflect their commitment to, for example, having a diverse board of directors and management team or lowering their carbon emissions. This assessment system can help all companies: Beyond the 3,500 global B Corps, over 100,000 other businesses and investors use it to manage their stakeholder relations.

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But a voluntary certification can only go so far. So B Lab also introduced the Benefit Corporation, a new corporate form that shifts a company’s fiduciary duty so that it must consider its impact on all stakeholders instead of binding executives to prioritize shareholders. The change places this principle at the legal core of the company, protecting management and directors from lawsuits by shareholders who expect their interests to come first. Three dozen states; Washington, D.C.; and Puerto Rico, as well as Italy, Colombia, Ecuador, and British Columbia, have passed legislation establishing the Benefit Corporation as a corporate form in their jurisdictions. Massachusetts Senator Elizabeth Warren’s Accountable Capitalism Act would do so nationally.

One example of a B Corp is Fireclay Tile, a California-based manufacturer of tiles like the ones used in a series of dramatic murals covering nearly 25,000 square feet of a newly renovated terminal at LaGuardia Airport. Just last week, Fireclay announced it was creating a new pool of stock options for its employees, making it possible for them collectively to amass a 35 percent ownership stake in the company. Many B Corps, including well-known brands such as King Arthur Flour and Eileen Fisher, are also largely employee owned.

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Other B Corps are working to be more responsible to society and the environment. For example, Preserve, a consumer products company, has launched new lines of toothbrushes and razors that are made from plastics collected from coastlines and waterways. It donates 25 percent of the revenue from those items to nonprofits working to stop the flow of plastic pollution to the sea. Another acclaimed B Corp, footwear company Allbirds, open-sourced its carbon-neutral material for shoe soles for any company to use.

Global health and dairy giant Danone has 27 subsidiaries that are certified as B Corps, accounting for 45 percent of the company’s $30 billion in annual revenue; the global entity has committed to becoming a B Corp by 2025. In the United States, the company’s well-known Dannon yogurts, Silk soymilk, and Horizon organic milk all sport the B Corp logo, certifying they were produced in a sustainable way by a company that prioritizes all stakeholders.

The stakeholder-centric approach has its critics. The Council of Institutional Investors, for example, says “accountability to everyone means accountability to no one.” But by systematically measuring and reporting stakeholder impacts, the B Corp model facilitates open, direct engagement about who should bear businesses’ true costs. Requiring corporations to disclose and address their externalities — their effects on the environment and our society — creates greater transparency and accountability.

Gregory Mankiw, who chaired President George W. Bush’s Council of Economic Advisers, argues that it would be “dizzyingly” complex for CEOs to satisfy responsibilities to employees and the environment. But executives already balance complex trade-offs. They can and should do so in this area.

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After 50 years, shareholder capitalism has left the American and global economies in a dire place. Corporations are wealthier and more powerful than some nations. Capitalism has wreaked havoc on the environment, our health, working conditions, and even human rights. This long-accepted system rewards companies for off-loading costs onto society. It is time to say enough is enough.

Christopher Marquis is a business professor at Cornell University and author of “Better Business: How the B Corp Movement Is Remaking Capitalism."