Stakeholders include at least five parties: employees, shareholders, customers, community and the Government. Wealth is created when all five work effectively together. Indeed wa, or harmony, among the five is the chief value that Singapore proclaims and achieves. The stakeholder vision is not of one "holder" dominating others, nor of parties forced into a sullen, corporatist compromise, but of shared problem-solving.
By now we are nearly all agreed on what went wrong in the Seventies. One of the stakeholders, the unionised employees, gained their wages not by co-operating effectively in the production process but by shaking down other stakeholders, the community, the shareholders, even the Government.
It is to Margaret Thatcher's credit that she stood up to the unions. It is to her discredit that she saw the "war between stakeholders" as an extension of politics-as-usual and took sides against working people. She crushed her enemies in the school room and tool room. Alas, crushed people are not more productive than predatory people. Britain's decline continued.
Just as unionised employees were once too predatory, there are now ominous signs that another stake-holder group has overpowered fellow stakeholders. I refer to shareholders. Shareholders are absolutely essential to the wealth-creating process. It would be as foolish to assail them as it was to assail working people. Rather, we need them to behave differently in their own interests and in ours. Powerful financial institutions have been transferring the rewards of industry away from customers, employees and government towards themselves and those they represent. This helps to explain why share prices keep breaking new records, while the rest of us fear to go out and spend, fear redundancy, fear to rely on the NHS to keep us alive.
There are at least three ways in which shareholders are getting money earmarked for other stake-holders. The first source is downsizing. If we examine decisions to downsize, we see that these are typically rewarded by a jump in the share price. This enriches immediately both shareholders and "shareholders' representatives" in top management, who hold shares, or options or both. Now, if the jump in the share price was the result of considered judgements that the corporation was overmanned, we could not reasonably object. Unfortunately, the price jumps for another reason, because a sizeable chunk of the wage bill is now available for distribution to shareholders.
There is a distinct lack of evidence that downsizing helps the corporation in the long term. Most of the available evidence from the United States points in the opposite direction. Surveys conducted by Wyatt & Co for the American Management Association show that 56.5 per cent of 547 downsizers failed in their objective of improving operating profits; a majority had to rehire within the year, stress-related illness jumped, and complaints from customers increased.
By the time the emaciated chickens have come home to roost, shareholders have long since moved their money to another hen-house. Even the managing director and his share options are likely to have moved on, leaving the Anaemic Organisation behind him.
The problem is that shareholders, like the unions before them, profit not simply through the contributions they make to the work of other stakeholders, but in part at the expense of other stakeholders and industry generally. But this is failing for the same reason as predatory unions fail, because all stakeholders are needed to create wealth.
A second symptom of our troubled relationships among stake-holders is competing against consumers. The City puts, say, clearing banks under strong pressure to raise their returns and so they start to compete less with each other than with their own customers. It is far easier to claw back a few millions from innumerate customers than to beat another set of professional accountants in improved service. Indeed, given the current spate of lay-offs, good service is a vanishing art. American banks, for example, have started to charge customers extra for using cashiers.
A third way of moving money from other stakeholders is via takeovers, mergers and acquisitions. These grew astronomically during the Eighties and they mostly rob Peter to pay Paul. In the recent battle between Forte and Granada, for example, each had to promise the shareholders larger payouts. Inevitably, much of this money will come from employees, already low paid, who will now earn even less, and from customers, who will pay more.
Takeover targets (ICI, Pilkington) are often those who have put aside "patient money" to improve employee education, buy new equipment, improve quality and develop new products. All these pay off in the long term. But corporate raiders offer this money to shareholders now, and too often they bet on the outcome of the fight, thereby abetting the takeover process. We search for the "quick buck", oblivious to the fact that real wealth is created by "slow bucks" and by stakeholders who trust one another and learn together.
The Victor Company of Japan invested an estimated $3bn (pounds 2bn) over eight years to develop the video-recorder into a consumer item. Britain lacks capital that is cheap enough, patient enough and plentiful enough to develop world-class technologies. A nation that believes that pounds 1m worth of potato chips, casino chips and microchips are of equal value is crunching not just numbers but its own brains. An economy is not a horse race in which we "pick winners" but a living system informed by products such as microchips, which improve hundreds of other products while teaching every person they touch.
The logic of profit has driven out the logic of learning. As the fate of the Hanson Trust has shown us, those who deal in companies cannot grow companies. They have neither the patience nor the skills. If investments are designed to pay off over seven years, this leaves the investor helpless to meet a bid for his assets next month. How many prime-site corporate HQs would not earn more as hotels? But this does not mean that we should sell the central nervous system of our economy.
The truth is that for really successful industries, shareholders come last. This is a quote from the 1943 Credo of Johnson & Johnson, the US pharmaceutical house. The irony is that this company has earned more for its shareholders over the last half-century than any other. By "last", J&J does not mean "least important". It means last in time. Not until employees, encouraged by managers, have served customers and customers have given money can the shareholders get their whack. Where shareholders invest in other stakeholders they must wait for them to succeed, benefiting themselves in the process.
That way we all get richer, shareholders, too. But we get poorer if shareholders jump the queue and divert money destined for others. As Michael Porter, the US-based analyst of what makes economies and companies competitive, recently pointed out, the UK financial community over-harvests, giving too little investment and demanding too much, too soon.
For we have fatally misread the success of the Asian tigers. We attribute this to their low government expenditures, less welfare, compliant workforces and absence of regulations. Yet this happens not because government does less, but because corporations do more for their people and are repaid by ever-improving work. Moral debt looms large in these cultures. The company supplies a free bus service, so workers devise some cost-cutting scheme to repay the favour, whereupon the company builds day-care centres and workers are spurred afresh. Reciprocal benefits escalate on each side. As a result, there is less for government to do.
I remember visiting Intel, the microchip and computer processor manufacturer in Penang, Malaysia, where the Pentium processor is made. The managing director, a Chinese Malaysian, explained how he had started an in-house shop. Why? "To save time," he explained, "but also to generate profits, which we used to start the Credit Union. Now we have taken the capital in the Credit Union and invested it in low- and medium-tech corporations in this area."
I still did not see the point. "It is so that any employee who has worked loyally for us but cannot learn the trigonometry needed for Pentium production can be out-placed in a company that our union partly owns. We find jobs for everyone."
We were standing in the middle of a flower garden, which was also the day nursery. The children were learning English: "Good morning, visitor!" they chorused. Managers' children are educated at cost, technicians' at half-cost, workers' children are educated free. In the background was the Adult Activity Centre, which welcomes the families and guests of employees. Intel won the 1993 prize for the Most Caring Corporation in Malaysia. All nominations are from the community only.
However, there are coercive aspects as well. The managing director was told that one of his chief suppliers was seen during the week at the Turf Club. "I looked up his donations to local schools. They had fallen well behind the ratios we had agreed. I asked him in for a chat. He is still our supplier and he is doing his share in building the education infrastructure that this area needs. We no longer see him at the races."
The Malaysian economy grew at a rate of about 8 per cent per annum between 1993 and 1996. Neighbouring Singapore has overtaken the United States in GDP per capita. At about $30,301 per annum it is $10,000 higher than in the UK, its recent colonial master. On its present trajectory, Singapore will overtake Switzerland as the century turns to become the wealthiest economy in the world.
Here is an "enterprise culture" that is also a "stakeholder economy". Yet the next UK election will almost certainly feature the advocates of each system pelting each other with mud. That is the measure of our present failure.
The writer is senior research associate at the Judge Institute of Management Studies at the University of Cambridge, and is the author of 'The Seven Cultures of Capitalism', published by Piatkus.Reuse content