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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends :
“New Capitalism” and “Stakeholder Capitalism”


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Takahide Kiuchi's View - Insight into World Economic Trends :
“New Capitalism” and “Stakeholder Capitalism”

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

#Market Analysis

#Takahide Kiuchi

Feb. 10, 2022

We still don’t have a full picture of the “new capitalism” that the Kishida Administration has touted as one of the pillars of its economic policy. Yet if we were to analogize about it based on the remarks that Prime Minister Kishida has made, this ideology would seem to have its roots in the “stakeholder capitalism” that has been gaining attention worldwide in recent years. The question is whether this “new capitalism” as a policy package aiming to reform capitalism will actually go well.

“Stakeholder capitalism” and “shareholder capitalism (the shareholder supremacy doctrine)”

“Stakeholder capitalism” is the antonym of “shareholder capitalism (the shareholder supremacy doctrine)”. According to shareholder capitalism, maximizing shareholder profits in the short term is the most important thing, and consequently this doctrine has caused problems by placing burdens on employees and local communities. But another philosophy has also gained ground, whereby a company has to consider what is beneficial not only to its shareholders, but also to a wide range of stakeholders including its employees, business partners, clients, and the local community. This is what is known as “stakeholder capitalism”.
Overseas, stakeholder capitalism is a concept that requires companies to proactively address problems such as inequality and environmental issues, but the Kishida Administration has associated it with an issue that is particularly serious in Japan: tackling wage stagnation, or more specifically, enacting wage increase policies and redistributive policies. The administration thus appears to be trying to build a policy package based on it, which it has termed “new capitalism”.
The trend overseas is to try to gradually reform companies through stakeholder-based corporate governance. By contrast, in Japan the government is taking the lead and seeking to rapidly encourage the corporate world to change.

US Business Roundtable and the Davos Conference as the impetus for this change

Stakeholder capitalism first began gaining worldwide attention at a meeting of the US-based lobbyist association The Business Roundtable (BRT) that was held in August 2019. At that meeting, the organization issued a statement that the US business community had a responsibility to serve the economic interests not only of shareholders, but also of all stakeholders, including employees and local communities. This statement was signed by the heads of over 180 major companies, including JP Morgan CEO Jamie Dimon, who was chairman of the BRT at the time.
What led the BRT to express the belief that US companies should significantly overhaul their “shareholders first” mantra was the growing demand all across the US for companies to actively take on the responsibility of eliminating inequality. Ever since the 2008 global financial crisis, the widening of the income and wealth inequalities has become a major societal problem.
Moreover, in response to this development, the World Economic Forum Annual Meeting (Davos Conference) in January 2020 was held under the theme of “Stakeholders for a Cohesive and Sustainable World”, and thus the phrase and concept of stakeholder capitalism began to sink in. At that meeting, World Economic Forum founder Klaus Schwab stated his desire to “give concrete meaning” to the concept of stakeholder capitalism.
On January 18 of this year, Prime Minister Kishida attended the World Economic Forum online, delivering an address in which he declared that Japan would lead the world on the path toward a “new capitalism”. This was likely a reflection of the events at the World Economic Forum meeting in 2020, where stakeholder capitalism first garnered the world’s attention.

Japan’s time-honored sanpo-yoshi philosophy and the teachings of Eiichi Shibusawa

With the world now starting to take note of stakeholder capitalism, which seeks to correct corporate management stances that prioritize short-term profits, Japanese companies and the Japanese government likely have a deeper sense of pride in this as the traditional approach of Japan’s corporate world, and they no doubt are very pleased to see this development. This is probably also part of the underlying reason that the Kishida Administration has asserted that Japan will lead the way toward the “new capitalism”.
Consider the example of the Omi merchants, who were based in Omi (in modern-day Shiga Prefecture) and were once active all over Japan. As their motto, these merchants adhered to the spirit of sanpo-yoshi, literally “three-way satisfaction”, which advocated benefits to the seller, to the buyer, and to the wider community. Many in Japan take pride in the fact that since ancient times, Japanese business operators have always been mindful of working for the benefit of a wide range of stakeholders, rather than merely pursue their own short-term gain, and of thereby contributing to society at large. There was also the renowned industrialist Eiichi Shibusawa, who over 100 years ago sought for a more ethical and moral kind of business management, contending that “the origin of wealth is humanity and morality”.
However, even if we supposed that this kind of stakeholder capitalism has long been rooted in Japanese soil, it is unlikely that companies overseas will suddenly be more inclined to learn from Japanese corporate management. And why is that? Because if we just look at the current state of the Japanese economy, it hardly seems like this management stance has really bolstered our companies’ competitive power, fostered a favorable economic environment, provided for a prosperous life, or promoted a diverse society, at least in the long run.

The need to promote a true “investment in human resources”

As part of this “new capitalism”, the Kishida Administration has committed itself to promoting wage increases. Following the government’s decision to adopt a tax policy incentivizing companies to raise wages, the annual spring labor talks (shunto) going on now have seen demands for companies to raise their wages substantially. What I want to draw attention to here is how these wage hikes are being framed in the discussion as an “investment in human resources”. The gist of it is surely this: that wage increases are not simply a burden on companies but are rather a sort of upfront investment that will lead to revenue growth in the future.
Yet this phrasing would seem likely to invite misunderstanding. Wages are essentially the fruits of one’s labor in productive activities, determined by the extent of a worker’s contributions. While one can imagine that higher wages would boost worker morale (=work ethic), and lead in turn to higher productivity and revenue, that outcome is far from certain. It is only natural for companies to be unable to invest capital in something when they cannot be certain of the effect. The government’s calling on companies to raise wages as an “investment in human resources” would be forcing companies to take such actions.
On the other hand, things like the worker capacity development, skill acquisition, relearning, and reskilling that the Kishida Administration is also touting could perhaps be considered a true “investment in human resources”. These endeavors will contribute to increasing worker productivity, and to upgrading our industrial structures by alleviating mismatches in the labor market. They will also bring significant advantages for companies.
Sustained wage hikes will require things such as improved worker productivity and higher expectations for corporate growth, and thus if we are to aim for higher wages, perhaps instead of directly encouraging wage hikes, the government should shift its focus to policies that incentivize these true “investments in human resources”.

Government-led corporate reform also carries risks

If we assume that the “new capitalism” being proposed by the Kishida Administration is based on stakeholder capitalism, then it would be something that is already widely accepted around the world, so it could not necessarily be considered all that “new”.
That said, attempts being made overseas to revise management policies based on the stakeholder capitalism approach are rather being pursued under a mode of governance led by shareholders and other stakeholders, achieved through dialogues with companies. What’s more, the driving forces behind these attempts are financial and market mechanisms.
For instance, in the case of climate change risks, investors would estimate the societal cost of a company’s CO2 emissions, and the company would have an incentive to reduce those emissions, because doing so would lead its share price to increase and its corporate value to rise, or alternatively, it would mean lower financing costs. Given the foregoing, the company would seek to review its activities and reform its management so as to reduce this societal cost. That is the process by which companies are made to change their production activities and discover ideal new resource allocations, in order to keep the societal costs brought about by climate change risks to a minimum.
The “new capitalism” being advocated by the Kishida Administration appears to envision the government contributing significantly to this process. However, this would surely involve considerable risks.
I don’t’ believe the government knows the optimal solution when it comes to allocating resources for solving all kinds of social problems. In the case of long-term challenges such as climate change, a truly optimal solution needs to also be effective for future generations, and this is an extremely complex matter.
If the government were to needlessly tighten regulations on companies, resource allocation would deviate in a big way from the optimal solution, and it would cause a drop corporate activity and profitability to drop, and perhaps even harm the interest of shareholders, employees, and a wide range of other stakeholders.
If the government really seeks in earnest to reform capitalism, I believe it would do well to adopt a particular stance toward solving the problems at issue, by first respecting the process of stakeholder-based governance, and then, once the power of finance has been maximally leveraged, making limited contributions of its own as needed.

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