When capitalism is thought of, it is only thought of in one way.
The way in which shareholders are placed at the highest priority. Although this form of capitalism has taken shape especially over the last half-century, it has come at a great cost.
There has been a major shift in the relationship between organizations and employees over the last three decades. Short-term profits are valued more than long-term gain. More often than not, that strong desire for short-term profits come at the cost of employees.
To boost the bottom line, corporations have begun to “feel free” in going through massive layoff cycles as a preferable “go-to” solution to reduce cost.
In turn, this actually harms society causing serious long-term effects including the following:
- Removes job security by increasing fear. Retaining employees become even more difficult.
- Trust between organizations and employees are destroyed.
- Remaining workforce is stretched too thin, causing stress and other health issues raising societal health care costs.
- Wealth gap and economic disparities widen.
Modern Day Capitalism is Unsustainable Long Term
Many advanced nations are suffering from financial growth and inequality; hence societies are financially and environmentally unsustainable. Modern day capitalism struggles to meet public interest expectations.
The expectation that a corporation should be serving and benefiting its community which has raised more interest to find other forms of capitalism to meet that public demand.
Public Interest Capitalism
Public Interest Capitalism has called upon a more balanced, developed form of capitalism.
George Hara, Founder and Chairman of DEFTA Partners, has long called to shift away from the traditional form of capitalism calling for an economy emphasizing on Return To Company (RTC) as opposed to Return on Equity (ROE).
He and other fellow researchers at Harvard with the support from the Tokyo Foundation have come to summarize public interest capitalism to hold three key pillars:
- Sustainability: Human welfare should be promoted now and be prioritized for the future.
- Equity: Rewards are positively correlated with contributions. Employees should have access to profits and successes of the company, especially those who provide strong contributions.
- Innovation: Producing better goods and services more efficiently. Higher quality goods and services are those that contribute more to human welfare. Companies are able to innovate more when they are profitable. They are profitable because of the incentive to provide strong contributions by employees where they have access to an organization’s profits.
Many modern-day forms of capitalism fail to apply these criteria causing wide economic disparities.
Shareholders vs. Stakeholders
The United States, European Union and Japan face long-term economic troubles sparking a strong interest in an increasingly attractive, alternative form of capitalism.
Modern day capitalism places the focus on shareholders, or investors who hold some form of ownership in an organization.
Public interest capitalism, on the other hand, is focused on stakeholders, or ones who have a strong interest that could be affected by the organization.
This form of capitalism allows equality of profit shares among employees, communities and stockholders in order to promote company growth. This will help the middle class to flourish and become more financially stable.
Furthermore, this will promote economic independence in underdeveloped countries through the expansion of businesses and relationships with the advanced world economies.
Focusing on stakeholders is known as Public Interest Management which can potentially help maximize shareholder returns over long term periods, therefore the equity criterion should allow firms to share profits with employees and other stakeholders that contribute to the success of the company.