By Chris Jurgens, Director, Reimagining Capitalism
At Omidyar Network, we believe business can be a powerful force for good. This is a belief rooted in Pierre Omidyar’s founding of eBay and in Omidyar Network’s decade of experience investing in impact-oriented entrepreneurs. Businesses play an essential role in creating profitable solutions that benefit customers, address societal problems, sustain quality jobs, and support healthy communities.
We’ve seen particularly powerful examples of this during the COVID crisis, as corporations mobilized their research and development capabilities to invent new vaccines and leveraged global supply chains to distribute them at unprecedented speed and scale. Thousands of companies small and large responded to the needs of their employees, their customers, and their communities with compassion and care.
But while many individual businesses are making a positive impact, at the macro level, our corporations and capital markets are not delivering the societal outcomes we need. The current paradigm of shareholder-driven capitalism is serving as an engine of inequality and a major impediment to addressing our most pressing societal challenges—persistent structural racism, a fraying social contract, and an accelerating climate crisis. Many of these problems have only been exacerbated by the pandemic.
Essential workers have been on the frontlines of sustaining our economy through the depths of this crisis, at significant risk to themselves and their families, despite an economic system that too often does not fairly value or respect their contributions to it. In this country, the average grocery store cashier makes about $11 an hour, and a home health care aide makes $25-27,000 a year—levels where it’s hard to make ends meet.
Meanwhile, the stock market has soared during COVID, and the richest shareholders have added $4 trillion to their wealth in just the last year. Most essential workers have not meaningfully benefited from this windfall. The top 10% of the income distribution own of 84% of stock, while half of Americans own none and Black households own only 1.9%. While we are starting to see encouraging signs of a reviving economy, most Americans have fallen further behind in the last two years and overall inequality has worsened.
We are seeing these outcomes—more concentrated wealth and power, declining economic mobility—because our economic system has been designed to produce them. W. Edwards Deming, a pioneer of systems thinking, stated that “every system is perfectly designed to get the results it gets.” The version of capitalism that currently governs our markets is designed not to produce societal wellbeing, but to maximize returns to shareholders.
Over the last several decades, a set of beliefs, norms, rules, and laws have served to codify and entrench the idea that a business’s primary objective should be maximizing financial returns for equity holders in markets with minimal government intervention, and that this orientation will both deliver optimal outcomes for business and markets as well as for society writ large.
This model has failed. It is based on the wrong ideas, driving the wrong decisions, and delivering exactly what you would expect—wealth for shareholders, but problems for society. To fix this, we need to rewire the rules and incentives that are driving the system.
The Path Forward, from Individual Solutions to Systems Change
At Omidyar Network, we spent a decade supporting the growth of impact investing and working to harness the power of business to drive positive social and environmental outcomes. We’re proud of that work. But we’ve realized that the efforts of even the most well-intentioned companies and investors to contribute to positive impact won’t ultimately succeed at the scale we need unless we fix the underlying rules and incentives that wire the markets in which they operate—rules that too often reward decisions which generate financial returns for shareholders but are harmful for society.
The current system constrains what individual businesses or investors can achieve on their own—because the system is designed to reward returns to shareholders and punish actions which deviate from that result. We’ve seen time and again that this system is resilient, and it will strike back.
Just ask former CEOs Paul Polman of Unilever and Emmanuel Faber of Danone, among the most visionary champions for corporate purpose and stakeholder-centric decision making. Both pushed their companies to prioritize stakeholder and societal outcomes as part of long-term value creation strategies, and both were punished by activist investors who saw this as violating the orthodoxy of short-term profit maximization.
Individual businesses are fundamentally constrained by the pressures of competition and the demands from our capital markets. They can move on win-win scenarios, where investments or policies that improve ESG outcomes can also be clearly shown to benefit the bottom line. But let’s be honest. Not everything can be a win-win. Often, there’s a direct tension between what insatiable profit-maximizing market forces demand in the short-term and what delivers value for long-term investors and other stakeholders. In this context, we can’t rely on the voluntary actions of corporate leaders alone—we need structural solutions which change the incentives.
We also recognize the need to address both sides of the impact coin. We believe investors can contribute to tremendous positive impact by investing in solutions that solve societal and environmental problems—but this risks being outweighed by the negative impacts generated by those financial sector actors that drive extractive speculation, prioritize short-term distributions to equity holders over long term value creation, and powerfully reinforce the current paradigm of profit maximization without regard for societal costs. Unless we address the rules that both enable positive impact, and curb negative impacts, our markets won’t deliver the outcomes we need.
That’s why as part of our commitment to Reimagining Capitalism, Omidyar Network is committing $10 million to a new focus area: Corporations, Capital Markets, and the Common Good. The vision for this work is to reshape the rules that govern markets to incentivize corporations and their investors to contribute to the common good, curb the pressures that drive businesses to contribute to negative outcomes on people and the planet, and empower stakeholders to hold companies accountable for their impacts on society.
To realize this vision, we’re shifting our work with business and investors to two upstream issues which we think are critical to systems change—shifting policy and shifting power.
Reorienting the Rules
We think three shifts are key to rewiring the rules that drive corporate and investor decision making.
First, the rules—particularly those defining fiduciary duty—should reinforce that corporations are accountable to workers, customers, suppliers, and communities—not solely shareholders. Second, the rules should drive businesses to systematically account for their impacts on people and planet, so that companies can better manage their impacts, and stakeholders can hold those companies accountable. Third, the rules need to curb pressures from capital markets that reinforce short-termism, drive excessive financialization, and enable outright extraction to benefit speculators at the expense of stakeholders and society.
This is why we are partnering with a range of advocacy organizations—including Americans for Financial Reform, B Lab, and The Value Reporting Foundation—seeking to shift corporate governance rules, create a harmonized system of mandatory ESG disclosure in the US and globally, and build a fairer financial system.
In addition to shifting policy, it’s also critical to shift power—particularly by strengthening stakeholders’ voice in corporate and investor decision making. We think this means strengthening structural bargaining power for workers, increasing worker voice in corporate governance, and in seizing opportunities to make more workers owners themselves.
This also means shifting the investment management industry to focus more clearly on serving the needs of the vast majority of investors (by number, if not by assets under management) who are working people saving for their retirement and their children’s education. These days, most such individuals are highly diversified investors saving for the long-term through passive investment strategies through which they own the entire market. What matters most for such investors’ long-term wellbeing and financial security is neither chasing alpha nor minimizing tracking error in an index—it’s the health of our societal systems. It’s employers that provide quality jobs, an economy that delivers broad-based prosperity, stable democratic governance, and a planet that isn’t beset by climate catastrophe.
Those interests of the average investor are fully in line with the long-term orientation of building a more sustainable, inclusive capitalism. There is a tremendous opportunity to leverage the voice of those individual investors via more active stewardship by the fiduciaries that vote their shares and represent their interests in engaging companies and fund managers. Truly representing these investors’ interests would mean making long-term investments in growth, focusing more on worker wellbeing, and addressing systemic risks like the climate crisis.
Mobilizing the power of these long-term shareholders is essential to countering the pressure from those financial sector actors bent on “downsize-and-distribute” tactics like squeezing workers, prioritizing public company share buybacks over long-term investments, or stripping the assets from privately-held companies to fund dividend recapitalizations that juice short-term returns.
This is why we’re partnering with organizations like the Interfaith Center for Corporate Responsibility (ICCR) and The Shareholder Commons that are working with institutional investors to drive a more systemic, forceful investment stewardship agenda.
Finally, if we are going to shift corporate and investor decision making, we also believe we need to look at the whole picture. Privately-owned firms represent a large and growing proportion of our economy, but they lack the accountability mechanisms—like disclosure regimes and shareholder engagement—we have for public markets. That’s why we’re focused on increasing transparency and strengthening accountability mechanisms in private markets—particularly in the context of the private equity industry. We’re exploring how to work with private equity firms and their limited partners on strengthening the industry’s attention to stakeholder and societal issues, as well as advancing policy ideas that can help improve transparency for investors and mitigate risks to stakeholders.
That’s why we’re exploring opportunities to enable private equity firms and their LPs to better measure and benchmark the ESG performance of their portfolio companies. Simultaneously, we’re supporting advocacy to ensure workers’ interests are protected by working with partners like the United for Respect Education Fund.
Building a new capitalism
Over the last several decades, we’ve built an economic system to optimize market efficiency and maximize shareholder returns and hoped it would also yield the societal outcomes we want. That hasn’t worked, full stop. We need to stop designing our society to serve the wellbeing of markets and restructure our markets so that they serve the wellbeing of society.
We see this work to shift the rules that drive corporations and capital markets as an important complement to Omidyar Network’s commitments to shifting ideas and ideology by creating a new economic paradigm, strengthening worker power, and checking concentrated market power.
Changing this system will take time, energy, and engagement from everyone that has a stake in it—particularly those whose voices have been excluded.
We aspire to play a role supporting those change-makers that are seeking to shifting policy and shifting power as two key pieces of a new economic architecture. And we are eager to partner with all of those who share our vision of building an economy that works for everyone.