The multi-stakeholder company

Today’s businesses are governed by a one-party system: the “return on investment” party. No wonder we feel prisoners of an ideology of infinite growth, even as the urgency of global warming is increasingly felt.

Why do big companies need to grow at a consistent rate, but not local restaurants? This simple question might hold the key to resolve today’s economic, social and ecological challenges.

Local restaurants have a simple ownership structure. They are usually owned by one person or one family. Local restaurants usually grow to a point where they reach an established and loyal customer base in their community, and then stop. Why is that? Well, because return on investment is not the only reason a person owns a restaurant. The restaurant usually provides the owner with a job, and the owner doesn’t necessarily want to sacrifice a quality work environment for more profit. Growing would also require much more work from the owner, which might throw off his work-life balance. Similarly, the owner usually lives in the same local community as his restaurant, and thus he wants his local community to thrive. He won’t take decisions that hurt his local community in the name of profit, or open a new restaurant elsewhere and neglect his local community and client base. Return on investment must sometimes be sacrificed for more important matters. Local restaurant owners thus pursue multiple interests, and the decisions they make take into account all of these sometimes conflicting interests.

The growth requirement arises when the ownership structure diversifies and complexifies, such as when a company enters the stock market. At that point, multiple people with multiple, often conflicting interests, share the ownership of the company. Without a way to keep track and respect all of these divergent views, conflicts often arise, and it can be tempting to resolve them by assuming everyone wants the same thing: return on investment.

Based on this assumption, since all owners now only want a return on their investment, why not maximize it? This is where growth becomes required. Return on investment is composed of two parts: profit and capital gain (growth of the company), and both must be maximized to maximize return on investment. This is why big companies must grow and not local restaurants.

The assumption that all owners want a return on their investment led to the stock companies we know today, and it was a great compromise at the start of capitalism when growth was still beneficial to society as a whole. Today, this is not the case, growth hurts society, so we need to let go of this assumption. And we can, since with today’s new technologies of communication, keeping track of the multiple divergent interests of different actors is rendered trivial.

It is thus time to design a new model of governance that is responsive to the interests of multiple actors: a multiparty, multi-stakeholder company.

The model

The model described in this article was obtained by assuming that no change in governance can occur if it is not in the interest of those who currently hold power: the shareholders wanting a short-term return on their investment. Thus, the implementation of this model, in any company, must guarantee a short-term increase in the value of their shares.

The multi-stakeholder company is a stock company that associates each share with a stakeholder. Thus, a share may be of the “return on investment” type, of the client type, of the worker type, of the local community type, of the government type, of the environmental protection type, etc.

These types are not predetermined, it is not declared in the constitution that 50% of the shares must be of the “return on investment” type and 50% of the worker type; rather, the shareholders may, at the beginning of each financial year, decide to change the type of their shares.

The Board of Directors remains informed in real-time of the composition of the shareholding:

The legal obligation of the Board of Directors is no longer to maximize the value of investors, but rather:

1 — To ensure the long-term survival of the company by remaining solvent and tending towards or staying beyond the breakeven point.

2 — To invest any net profit generated in the interest of each stakeholder, proportionally to its weight in the composition of the shareholding. Thus, according to the composition of the shareholding illustrated above:

• 41% of the net profit must be paid in dividends to the 41% of shareholders of the “return on investment” type, or invested in the growth of the company.
• 29% must be invested in improving the quality of the product or customer service or should be given back to customers through a generalized price reduction.
• 15% must be invested in the improvement of workers’ conditions or in a collective wage rise
• 10% must be invested in reducing the ecological footprint of the organization or donated to environmental protection organizations.
• 5% must be invested according to the government’s strategic objectives.

3 — To reserve all dividend and capital gains to the shareholders of type “return on investment”.

This latter legal obligation is essential to ensure this new model is in the interest of the company’s current investors. However, it involves some technical complications.

Paying the dividends only to the “return on investment” type of shareholders is easy, but the capital gain is determined by the market value of the shares, and since all shares are similar (they may be of a different type, but can at any time be converted to another type: none is therefore fundamentally different from others), they all have the same market value. However, only “return on investment” type shareholders have invested in the growth of the company, and therefore, only these investors should be entitled to this appreciation.

To solve this problem, the Board of Directors needs to issue new shares when the book value of the company reaches a new historic high and needs to distribute these new shares only to the “return on investment” shareholders. The number of new shares to be issued must be such that the book value of the individual shares remains the same. Thus, a company whose book value increases from $ 1,000 to $ 2,000 and having 100 shares outstanding must issue 100 new shares so that the book value of each share remains at $ 10. Thus, the stakeholders not entitled to the appreciation do not earn or lose anything, while those entitled to it gain the added value through the newly issued shares.

If the book value of the company falls, we let the share’s market price adjust to the decline without removing shares from circulation. In fact, no stakeholder is responsible for the decline (no one invests directly to destroy the company), and so it is fair that all stakeholders absorb the loss. If, after this loss of value, the company returns to its initial value, we still let the share’s market price adjust without issuing new shares. Indeed, as all stakeholders have absorbed the previous loss, all are entitled to regain it. This is why it was mentioned earlier that we issue new shares for “return on investment” shareholders only when the book value of the company reaches a new historic high.

The advantages of such a model are numerous. First, for current investors, this model will increase the speculative value of their stock. Indeed, this model sacrifices none of the benefits investors are currently entitled to, and it multiplies the demand for their shares. People wanting to invest in the company will include those who believe in the growth of the company, but also workers who want to improve their conditions, customers who want to benefit from a better service, governments or civil society organizations who want to have some control over the decisions taken, etc.

These multiple sources of demand will stabilize the value of the shares and make investments less risky. When shares are only owned by “return on investment” investors, the mere doubt that the company will see its growth potential decrease hastens the selling of shares by investors, which makes their value decrease if there is no variety in demand sources. However, workers still want good working conditions even if the company is not growing and customers still want good services, so demand in shares from these stakeholders will not fall when poor results are announced.

To summarize, we can see the multi-stakeholder enterprise as a system that unites under one model several corporate structures present today. When the company is 100% owned by “return on investment” shareholders, it is a for-profit company. When it is owned at 0% by “return on investment” investors, it is a non-profit organization. When it is owned 100% by customers, it is a customer cooperative. When it is owned 100% by workers, it is a worker cooperative. However, this model makes it possible to move smoothly from one model to another depending on the interests and needs of the stakeholders, which necessarily change over time. Thus, if workers feel exploited by investors and customers, they can unite and buy shares in order to gain power over their company and improve their conditions. When a new issue emerges, such as the threat of climate change, it is possible to redirect our companies to deal with it by allowing environmental interests to buy shares.

The phase of maturity

Our companies and organizations are living beings, that is why we sometimes refer to them as “organisms”. And as we look at nature for inspiration, we realize that all living beings first undergo a phase of growth, followed by a phase of maturity, where growth stops.

Growth is not bad per se. All organisms must grow as they enter life in order to survive and thrive. The success of capitalism and stock companies comes from the fact they have enabled the growth and survival of numerous useful organizations. However, capitalism is incomplete. If we ever want our companies to reach maturity, there needs to be an internal mechanism defined in their constitution to determine when and how to stop growing, much like organisms stop growing eventually because it is written in their DNA.

The multi-stakeholder constitution enables such a mechanism implicitly. There are always stages in a company’s life where the potential for short-term growth decreases. These stages indicate good moments where the company could transition to maturity. If we go back to our local restaurant example, growth might become difficult if the catering market becomes saturated in its local community. In these moments, the value of the shares in the eyes of the “return on investment” shareholders decreases. Without multiple sources of demand for the shares, that would be bad news for the shareholders, who’d want to push for more growth. However, in a multi-stakeholder setting, it might happen that the value of the shares in the eyes of another stakeholder becomes higher than its value in the eyes of the “return on investment” shareholders. At that point, the most rational move for “return on investment” shareholders would be to sell their shares to that other group and start seeking growth elsewhere: in a startup company, for example. By that process, all “return on investment” shareholders would quit the company and leave it under the control of other stakeholders. The company will stop having a growth incentive: it will have reached its maturity point.

As long as our organizational structures remain inflexible, political games will prevent us from making real progress on the new issues that threaten our civilizations, preferring to maintain the status quo. That is why, in my opinion, the only way to deal with the threat of climate change is to fundamentally change the makeup of our organizations.