Stakeholder Capitalism

Klaus Schwab

Stakeholder Capitalism

“Fifty years ago Klaus Schwab first proposed his theory that businesses are not only responsible to their shareholders, but also to all their stakeholders. With a global economic system generating deep divisions and inequalities, Klaus renews his call for a form of capitalism that works for everyone and where businesses don't just take from society but truly give back and have a positive impact. Stakeholder Capitalism is an urgent call to action.”

—Marc Benioff, Chair and CEO, Salesforce

“If you think this is just another pre-COVID/post-COVID book, think again. Klaus Schwab draws on his vast experience to take us on a roller-coaster ride past the highs and lows of post-war capitalism. His knack for economic storytelling gives you a real and deep insight into where we are headed and what we should be aiming for.”

—Alexander De Croo, Prime Minister of Belgium

“We can no longer think short term. Companies need to answer to more than their shareholders; they need to be accountable to higher morals. Now, in the middle of the COVID-19 crisis, Klaus Schwab shows us that we cannot go back to business as usual. He inspires us to look at the current response of global solidarity between people, companies, and governments to this health crisis and see it as the unequivocal way to a new paradigm to tackle the climate crisis and the scandal of rising inequality in the world.”

—Angélique Kidjo, Musician and UNICEF Goodwill Ambassador

“For a half-century, Klaus Schwab has been consistent in his belief that public companies can drive great returns for their shareholders AND address society's most important priorities. The world now understands that the system he envisioned—what we call Stakeholder Capitalism—can align capital to those outcomes better than any other.”

—Brian Moynihan, CEO, Bank of America

“Stakeholder Capitalism offers a timely analysis that shows how the neoliberal economic system privileges billionaires and extractive corporations over the dignity of billions of people and the protection of our planet. As COVID-19 has deepened despair and economic, gender and racial inequalities, governments must—with stakeholders—act decisively to depart from shareholder-first capitalism and instead put human rights at the heart of our economy.”

—Gabriela Bucher, Executive Director, Oxfam International

“Professor Schwab's new book offers us insightful perspectives on the world's economic history and the thinking that has led us towards the greatest challenges we face today – none larger than climate change. More importantly, it offers a blueprint for the future, inviting us to build a more inclusive, prosperous, healthier and greener world by embracing Stakeholder Capitalism at scale.”

—N. Chandrasekaran, Executive Chairman, Tata Sons

“In Stakeholder Capitalism my good friend Professor Schwab outlines an inspiring way forward in making the global economy more equitable, sustainable and future-proof. A vision that fits in perfectly with all his efforts over the years to build a better world. Once again, Professor Schwab gives us food for thought and reflection with this fascinating book.”

—Mark Rutte, Prime Minister of the Netherlands

STAKEHOLDER CAPITALISM
A GLOBAL ECONOMY THAT WORKS FOR PROGRESS, PEOPLE AND PLANET
KLAUS SCHWABwith Peter Vanham

Copyright © 2021 by World Economic Forum. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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ISBN 9781119756132 (Hardcover)

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COVER ART & DESIGN: PAUL MCCARTHY

To my parents, Eugen Wilhelm Schwab (†) and Erika Epprecht (†), who taught me firsthand the value of education, collaboration, and the stakeholder principle

About the Authors

Professor Klaus Schwab is the founder and executive chairman of the World Economic Forum. In 1971, he first published Modern Enterprise Management in Mechanical Engineering. In the book, he argues that a company must serve not only shareholders but all stakeholders to achieve long-term growth and prosperity. To promote the stakeholder concept, he founded the World Economic Forum the same year.

Since his first publication, Schwab has authored and co-authored various books and reports, including the yearly World Economic Forum Global Competitiveness Report (1979–present), The Fourth Industrial Revolution (2016), a worldwide best seller translated into 30 languages, Shaping the Future of the Fourth Industrial Revolution (2018, with Nicholas Davis), and COVID-19: The Great Reset (2020, with Thierry Malleret). Alongside his leadership of the World Economic Forum, Schwab also started the Schwab Foundation for Social Entrepreneurship with his wife, Hilde (1998), The Forum of Young Global Leaders (2006), and the Global Shapers Community (2011).

Professor Schwab holds doctorates and master's degrees in economics (University of Fribourg) and in engineering (Swiss Federal Institute of Technology) and obtained a master's degree in public administration (MPA) from the Kennedy School of Government at Harvard University. In 1972, he became a professor at the University of Geneva, where he is now honorary professor. Throughout his career, Schwab has received 17 honorary doctorates. Schwab was knighted in France (Knight of the Légion d'Honneur, 1997), in England (by Queen Elisabeth II, Knight Commander of the Order of St Michael and St George, 2006), and Germany (Knight Commanders Cross, 2012). He also received the Grand Cordon of the Rising Sun of Japan (2013), among many other national distinctions. He lives in Geneva with his wife, Hilde.

Peter Vanham is the head of Chairman's Communications and the International Media Council at the World Economic Forum. He previously led the Forum's US media relations from New York, and worked as a journalist in Philadelphia, London, Zurich, and Berlin. Vanham is the author of Before I Was CEO (2016), recounting the life and career lessons from CEOs before they made it to the top, and has contributed stories on emerging markets and business leadership to The Financial Times, Business Insider, Harvard Business Review, and many other media. He holds master's degrees in business and economics journalism (Columbia University) and commercial engineering (KU Leuven). He lives in Geneva with his wife, Valeria.

Preface

In early February 2020 I sat down in Geneva to discuss this book with a colleague, when the phone rang in my office. It turned out to be what you could call an AC/BC moment, when attention shifted from the time before COVID-19 to the reality that set in after COVID-19.

Before that call, me and my colleagues had been preoccupied with the long-term challenges of the world economy, including climate change and inequality. I had reflected in depth on the global economic system built in the 75 years since the end of the Second World War, and the 50 years since the creation of the World Economic Forum. I examined the various elements of our globalized world today, including the benefits, trade-offs, and dangers. Then I considered what changes to the system were needed in the next 50 or 75 years, to make sure it would be more equitable, sustainable, and resilient for future generations.

But in one call, that long-term agenda was upended. My focus moved to the immediate crisis that was about to be faced by all of us, in every country on the planet.

On the other end of the line was the head of our Beijing representative office in China. Usually, these kinds of calls cover routine matters, providing a chance to catch up on established initiatives and programs. But this one was different. The director had called to update me on the epidemic that had hit China hard earlier that winter: COVID-19. Initially confined to the city of Wuhan, this novel coronavirus, which often causes a severe respiratory disease, was rapidly becoming a primary public health concern across the country. Our colleague explained that much of Beijing’s population had travelled beyond the city to attend Lunar New Year celebrations and, as they returned, they carried the novel coronavirus with them, causing an outbreak and subsequent lockdown in the capital.

My colleague kept his cool, providing objective facts on what the lockdown meant for our employees and operations. But from his voice, I could tell that he was very worried. His family, and everyone in his life, was affected, facing the dangers of infection and the lockdown in place. The measures taken by authorities were drastic. Employees would be forced to work from home indefinitely, only being allowed to leave their apartments under very strict conditions. If anyone showed symptoms, they’d be tested and quarantined immediately. But even with these draconian measures, it wasn’t certain that the health threat would be kept in check. The epidemic was spreading so rapidly that, even as people were locked inside, they were terrified of contracting the virus. Meanwhile, news from the hospitals was that the disease was very aggressive, hard to treat, and overwhelming the health system.

Back in Switzerland, we had known about SARS-CoV-2, the virus that causes COVID-19, since our Annual Meeting in late January 2020. It had been a topic of conversation in public health discussions, among participants from or with major operations in Asia. But until that phone conversation, I had hoped the outbreak would be limited in its duration and geographic spread, similar to how the coronaviruses SARS and MERS had been contained. I hoped it would not personally affect so many of my own colleagues, friends, and family.

During the phone call, my understanding of the global public health threat changed. In the days and weeks following, I halted the work on this book, and the World Economic Forum went into crisis mode. We set up a special task force, asked all employees to work from home, and focused all our efforts on aiding the international emergency response. It was not a moment too soon. A week later, the virus forced a lockdown in much of Europe, and a few weeks after that, much of the world was facing a similar situation, including the United States. In the following months, several million people died or were hospitalized, hundreds of millions of people lost their jobs or income, and countless businesses and governments went physically or virtually bankrupt.

As I write this preface in the fall of 2020, the global state of emergency caused by the first wave of COVID-19 has mostly receded, but a new wave of infections is putting the world once more on high alert. Countries around the world cautiously resumed social and economic life, but the economic recovery is very uneven. China was among the first major countries to end its lockdowns and reopen businesses, and is even expected to see economic growth over the full year 2020. In Geneva, New York, San Francisco, and Tokyo, our other permanent bases, by contrast, parts of public life have resumed also, but in a much more fragile way. And all around the world, many lives and livelihoods were lost; billions were spent to keep people, businesses, and governments afloat; existing social divisions deepened and new ones emerged.

By now, we have some distance from the initial crisis, and many of us—including myself—have come to realize the pandemic and its effects are deeply linked to problems we had already identified with the existing global economic system. This perspective brought me back to the discussion I had been having in February 2020 on the date of that fateful phone call from Beijing. Many of the analyses we had previously been working on were more true than ever. You will be able to read about them in this book. I will present in what follows my observations on rising inequality, slowing growth, sputtering productivity, unsustainable levels of debt, accelerating climate change, deepening societal problems, and the lack of global cooperation on some of the world’s most pressing challenges. And as I hope you will agree, these observations are as valid after COVID-19 as they were before.

However, one thing has changed in the interim period between “BC” and “AC”: there is, I notice, a greater understanding among the population, business leaders, and government that creating a better world would require working together. The idea that we need to rebuild differently post-COVID is widely shared. The sudden and all-encompassing impact of COVID-19 made us understand, much more than the gradual effects of climate change or increasing inequality, that an economic system driven by selfish and short-term interests is not sustainable. It is unbalanced, fragile, and increases the chance of societal, environmental, and public health disasters. As COVID-19 demonstrates, when disasters strike, they put an unbearable strain on public systems.

In this book, I will argue that we can’t continue with an economic system driven by selfish values, such as short-term profit maximization, the avoidance of tax and regulation, or the externalizing of environmental harm. Instead, we need a society, economy, and international community that is designed to care for all people and the entire planet. Concretely, from a system of “shareholder capitalism,” which prevailed in the West in the past 50 years, and a system of “state capitalism,” that gained prominence in Asia, and is centered on the primacy of the state, we should move to a system of “stakeholder capitalism.” That is the core message of this book. In what follows, I show how such a system can be built, and why it is so necessary to do so now.

Part I (Chapters 1 through 4) provides an overview of global economic history since 1945, both in the West and Asia. It explores the major achievements and shortcomings of the economic system we live in, including increased economic growth, and also inequality, environmental degradation, and debts for future generations. It also looks at how societal trends, such as increased political polarization, are related to the state of the economy and our governance systems. Part II (Chapters 5 through 7) digs deeper in the possible causes and consequences of our economies’ problems and progress. It looks at the role played by technological innovation, globalization, and trade, and the use of natural resources. Finally, Part III (Chapter 8 through 11) looks at possible changes to our global economic system. It provides a definition of stakeholder capitalism, and shows what it can mean in practice for businesses, governments, international organizations, and civil society.

Throughout the book, I have tried to be fair and even-handed, whether in presenting the global problems we are facing, their possible causes and consequences, and the solutions I see to create a better world going forward. But I should immediately add that the views I present here are my own, and inevitably colored by my personal life experiences. I talk about some of those formative experiences as a child, student, and young professional in the first chapter of this book. I hope they help you as a reader to understand my world view, which is based on the belief that the best outcomes in a society and economy result from cooperation, whether between the public and the private sector, or peoples and nations from around the world.

I hope this book inspires you, whoever you are, to help build such a system. By working together to build an economic system built on inclusivity, sustainability, and equality, we can change COVID-19’s legacy. While it inevitably includes death and ruined lives and livelihoods, it can perhaps help us orient ourselves toward a more resilient world. In that way, I hope the post-pandemic world could be to our generation what the post–World War II era was to my parents’ generations: a moment of unity, where the recent past is a stark reminder of a world that nobody wants, and the present and future are an opportunity to create a world where everyone can thrive.

In the decades after the war, we did so by building a social compact at home—including a social market economy in Europe, and a “Great Society” in the US. We also created a multilateral system aimed at preserving peace, fostering collaboration, and creating financial home—including institutions such as the World Bank, International Monetary Fund, and the UN.

Now, I hope we will use the post-COVID recovery to enact stakeholder capitalism at home, and a more sustainable global economic system all around the world.

Thank you for reading,Klaus SchwabGeneva, December 2020

PART I

THE WORLD I GREW UP IN

1

75 Years of Global Growth and Development

In the 75 years since the end of World War II, there has been a surge of global economic development. But despite this, the world is living a tale of two realities.

On the one hand, we have rarely been as well off as we are today. We live in a time of relative peace and absolute wealth. Compared with previous generations, many of us live long and mostly healthy lives. Our children get to go to school, even often college, and computers, smartphones, and other tech devices connect us to the world. Even a generation or two ago, our parents and grandparents could only dream of the lifestyle many of us have today and the luxuries that come with abundant energy, advances in technology, and global trade.

On the other hand, our world and civil society are plagued by maddening inequality and dangerous unsustainability. The COVID-19 public health crisis is just one event that demonstrates that not everyone gets the same chances in life. Those with more money, better connections, or more impressive ZIP codes were affected by COVID at far lower rates; they were more likely to be able to work from home, leave densely populated areas, and get better medical care if they did get infected. This is a continuation of a pattern that has become all too familiar in many societies. The poor are consistently affected by global crises, while the wealthy can easily weather the storm.

To understand how we got here—and how we can get out of this situation—we must go back in time, to the origins of our global economic system. We must play back the picture of post-war economic development and look at its milestones. The logical starting point for this is “Year Zero” for the modern world economy: 1945. And there is perhaps no better place from where to tell this story than Germany, for which that year was truly a new beginning.

Foundations of the Post-War Global Economic Order

Children like me, who started primary school in Germany in 1945, were too young to understand why the country they lived in had been at war before or why the next years would change so markedly. But we understood all too well that future conflict was to be avoided at all costs. As in the years following the First World War, “Nie Wieder Krieg,” or “Never Again War,” became a rallying cry all over Germany. People had had enough of conflict. They wanted to rebuild their lives in peace and work together toward a better quality of life.

This would not come easily, in Germany or elsewhere. As World War II came to an end, the country lay in ruins. Barely a fifth of the historic buildings in Germany's main cities still stood. Millions of homes had been wiped out. Swabia, the region in southern Germany where I grew up, was no exception. In its most industrialized city, Friedrichshafen, almost every factory was razed to the ground. This included those of Maybach and Zeppelin, two legendary manufacturers of cars and aircraft whose production capacity had been used by the Nazi government for military purposes during the war.

It is one of my earliest memories, how on the roof of my parents’ house, just 18 kilometers away from Friedrichshafen, we watched the fires that led to Friedrichshafen's destruction. We prayed that the raid would not also hit our hometown, and luckily it didn't, but 700 people died in the last raid of Friedrichshafen alone. I remember how my parents cried when they heard the news, knowing many people personally in this neighboring city. By the war's end, only a quarter of the 28,000 original inhabitants of Friedrichshafen remained.1 The rest had fled, disappeared, or died.

Ravensburg, where I lived, was one of the rare towns spared by Allied bombardment, a fate likely due to its lack of military-industrial capacity. But the consequences of war were all around us. By the end of the war, as the French Allied army moved in, Ravensburg had become a vast shelter for internal refugees, forced laborers, prisoners of war, and wounded soldiers.2 The chaos in the city was complete. The only silver lining at midnight on May 8, 1945, was that the war had truly ended. In Germany, we came to mark this moment as the “Stunde Null,” or “Zero Hour.” Historians such as Ian Buruma later referred to the year that followed as “Year Zero.”3 Germany's economy was a wasteland, and it could only hope to be allowed to begin again, with a clean slate.

The other Axis powers, Italy and Japan, faced similar challenges. The Axis nations’ productive capacity had been decimated. Turin, Milan, Genoa, and other Italian cities had suffered extensive bombings, and Hiroshima and Nagasaki saw unparalleled devastation by atomic bombs. other European countries were also shell-shocked and went through an initial period of chaos. Further east, China and much of Southeast Asia were mired in internal conflicts. Economies in Africa, the Middle East, and South Asia were still shackled by colonial rule. The Soviet Union had suffered enormous losses during World War II. Only the economies of the Americas, led by the United States, had come through the war largely unscathed.