“Business’s role should be to improve the standard of living. It should be working for the greater good of the society — and be equally committed to the environment.”
— Mariam Susan Cherian, Kochi, India
The private sector is often considered tobe the heart of wealth creation and innovation — the late 1990s and early 2000s success story of Silicon Valley being a prime example. In this model, shareholder value is seen as the ultimate measure of a company’s success. Indeed, the idea that businesses are the most productive actors in the economy has served as a convenient justification for high incomes and great wealth.
Today, however, many businesses also claim to be purpose-oriented; they are not just wed to shareholder value but are dedicated to creating stakeholder value. This concept, which has been floating around business schools and corporate boardrooms for decades, argues that the public sector, local communities, philanthropy, labor, and others should all be part of, and benefit from, business decisions. It has opened a door to a world in which considerations beyond the interests of investors and corporate leaders are possible and in fact necessary.
And yet stakeholder value has largely followed the same fate as corporate social responsibility (CSR) and environmental, social, and governance (ESG) frameworks: Its transformative power has been watered down and hollowed out by overuse and underaction. It’s been value-washed. If we are to walk the talk of true stakeholder value, we must reverse two key trends: the financial sector’s propensity to invest in itself, and businesses’ prioritization of stock buybacks. As those trends are reversed, companies and governments must embrace a new way of creating and distributing value, and that will transform society.
Why Stakeholder Capitalism Has Stalled
When companies talk about providing stakeholder value, they usually frame it as a means to an end — stakeholder engagement as a productive and moral way of increasing shareholder value in the long run. But those efforts don’t go far enough, for two reasons.
First, the financial sector continues to invest largely in finance, insurance, and real estate (FIRE) — in other words, in itself instead of in things like infrastructure or innovation. For example, the glut of loans in the system — which only increased during the Covid-19 pandemic — has brought the amount of private debt, and especially household debt, to record levels. And because household consumption has outpaced the rise in disposable income, finance has bridged this gap with credit — furthering the financial sector’s expansion. Rents and interest payments have increased, promoting the concentration of income and wealth in the financial sector and in the hands of the most wealthy. But to build a truly multistakeholder approach, the financial sector must be transformed in a way that creates value for everyone.
Second, companies outside financial services, such as those in manufacturing, are spending more on share buybacks and dividend payouts than on human capital, machinery, and R&D. While buybacks boost the stock price in the short term, the repurchasing of a company’s own stock reduces its means for reinvestment into its capabilities and hampers productivity over the long term. Even the 1% tax on share buybacks that was recently signed into law in the United States is unlikely to put an end to the buyback mania.
The combination of these two factors puts most people in society at a disadvantage. The insufficient redirection of finance toward the real economy and labor continues to widen the divide between those that hold capital and those that do not. For example, because CEO pay is often heavily dependent on share price performance, share buybacks are one factor behind the rise in the ratio of CEO pay to workers’ income. It is the lack of reinvestment — not robots and AI, as it is often claimed — that threatens jobs most. The prioritization of shareholder value and executive pay, accomplished through share buybacks, is an active choice not to distribute the value created to wage earners.
These trends make it hard to argue that social purpose is really at the core of the private sector. Although there has been much talk about the social goals and responsibilities of businesses, the value they create has not been distributed to all. This is because the core elements of shareholder-oriented business plans and investment strategies remain untouched.
Rethinking How Value Is Created
To truly rethink the role that business should play in society, companies and governments need to radically reconsider how value is created in our capitalist economies: who creates it, who extracts it, and what happens when extraction is rewarded over creation. A true commitment to stakeholder value requires more than words, gestures, or speeches of goodwill. It requires purpose to be put at the center of how value is defined in firms and in governments.
In my book The Value of Everything: Making and Taking in the Global Economy, I argue that we need to stop confusing value with price and instead recognize the collective efforts that go into value creation. The sharing of rewards must occur among all value creators: public institutions, private institutions, and civil society. Otherwise, we end up socializing risks and privatizing rewards.
This dysfunction is visible in many sectors. The U.S. pharmaceutical industry is a good example. While the investments in drug innovation come from publicly funded research labs, philanthropies, and of course businesses, the largest pharmaceutical companies are the ones that benefit the most financially. The taxpayer-funded National Institutes of Health invests more than $40 billion a year in drug innovation, but the high prices of drugs do not reflect that — indeed prices can be as high as the market will bear. Nor do intellectual property rights reflect that: They are too wide (including publicly funded research), too strong (hard to license), and too upstream (preventing further innovation). And the most prominent measure of an economy’s health and size — GDP — does not recognize the value of essential public services like free health care, only its costs. The system is designed so that private profit is essentially prioritized over public value.
To change, we need inclusive funding and governance structures that spur mission-driven investments that are not centered around shareholder value but around a true common good. I call this a mission economy — one that brings private purpose and public missions together. This is not about top-down steering but about setting a clear direction of travel and crowding in those who are willing to innovate toward common goals. This requires not loose talk about partnership but a fundamental redesign of the contracts involved to be truly symbiotic. It allows for citizens, workers, and community organizations to partake in the financial and political operations and outcomes of capitalism. National and transnational economies need a new social contract between the state, capital, and labor to promote equality of opportunity, social justice, and a fair distribution of resources.
An excellent example of what this can look like is NASA’s Apollo program, a purpose-driven partnership between a capable public sector and a willing private sector that got a crew of astronauts to the moon and back. The difficult mission was completed through a massive amount of collaboration and the collective intelligence of 400,000 people — and through a carefully designed contract between the U.S. government, for-profit businesses, and research institutions. Procurement went from being cost-plus to a fixed price with incentives for quality improvement. And a “no excess profits” clause was included, making sure space would not become a casino that overcharged contractors and rewarded inefficient management. This last piece was crucial because it meant that all contributors should earn rewards, not just a few in “excess” of the value actually created.
The Apollo mission also illustrates what governments as pioneering risk-takers can look like. The project was not just an innovation in aerospace but also in materials, electronics, nutrition, and software — and additional economic value was created from that innovation rather than from an ex ante obsession with efficiency. Camera phones, foil blankets, baby formula, and software were just some of the hundreds of spillover innovations that we still benefit from today. Without Apollo-based technologies we wouldn’t be able to swim in chlorine-free pools or receive treatment in cases of cardiac arrest.
In the context of the current challenges we face, such as the climate and the cost-of-living crises, there is little political appetite for publicly funded programs on the scale of Apollo. Indeed, most space launches have moved to the private sector. The point, however, is not about bringing back public spaceflight programs but about building a public sector that is equally capable of tackling today’s grand challenges.
The Next Stage of Creating Value
While Apollo serves as a great example of the impact public missions can generate with private business, contemporary challenges are of course more complex — they require not just technological change but also social, regulatory, and behavioral shifts. There is no straightforward way to approach most problems we are facing today. We cannot solve our way out of the climate crisis or inequality through new technologies alone. These problems are socioeconomic in nature, raising questions about social justice, economic security, and political stability. Global cooperation and a clearly defined industrial strategy are necessary to tackle these problems in a coordinated way. At the same time, to successfully cooperate across regions and industries, decentralized governance structures within the projects themselves can incentivize bottom-up innovation. This is quite different from NASA’s centralized mandate in the case of the space race.
Asking three questions can help businesses and governments create and distribute public value equally to help tackle the grand challenges of our time. Some of these are directed more toward businesses than governments, and vice versa, because both have important roles to play.
What should we create?
Governments and businesses don’t need to start from scratch. A good starting place is the 17 Sustainable Development Goals (SDGs) from 2015 — concrete goals that have been signed onto by more than 100 countries. Neither the public sector nor the private sector alone can solve the 169 targets related to those goals, such as reducing the rate of youth unemployment or doubling the global rate of improvement in energy efficiency. Governments in particular can use the goals to set missions that require many different organizations to invest in and innovate around.
Sweden provides an insightful example of how the SDGs can serve as a starting point for mission-driven partnerships between the public and private sectors. In line with SDG 11, “make cities and human settlements inclusive, safe, resilient and sustainable,” Sweden made a large investment in green technology and infrastructure. A project initiated by the government-commissioned Council of Sustainable Cities aims to increase knowledge in sustainable urban development and to promote dialogue and collaboration with artists, residents, businesses, and nonprofit organizations at national, regional, and local levels. By engaging in conversations about key proposals, for example, the council gave residents a direct stake in their community’s development. These conversations uncovered new areas of cooperation between the Council, the residents, and the for-profit companies involved in each project.
To date, this initiative has given the council a broader spectrum of competencies to tackle the capital-intensive and bold missions the private sector would not be able to shoulder alone. The same mission-oriented approach could be used for other SDGs and regions: a strong direction set by governments to solve a problem, which purposeful organizations and residents then tackle together.
How should we evaluate social impact?
Governments need to evaluate the organizations they fund and partner with based on whether their actions will result in concrete successes for the highest number of people — across different firms, sectors, and countries. In other words, policy needs to be designed not to pick sectors or technologies as “winners” but to pick the willing by providing support that is conditional on companies moving in the right direction.
This requires dynamic tools of evaluation that capture the wider implications of investment and strategy, moving beyond static cost-benefit analyses. Public value mapping, a qualitative policy-evaluation framework, is a useful approach to assess whether a project or investment is contributing to previously defined societal goals or not. Setting immediate milestones allows for reflexive evaluations of ongoing projects. Continuously tracking the progress of a mission also enables agencies to stop funding failing projects early on. Like any other investor, the state will not always succeed; failure is inevitable. Through a diversified portfolio, however, the returns of successful investments can compensate for the unavoidable losses.
To accomplish this, governments should worry less about handouts and more about using instruments like procurement and prize schemes to incentivize the bottom-up solutions they need from companies. And intellectual property rights should stop being used to extract rents through more exclusionary models of patenting: To promote innovation, they can be narrower and weaker and thus easy to license.
In companies, this process should be about taking concrete steps to help solve problems with government partners and citizens in ways that are mutualistic, not parasitic. To ensure that value is not extracted easily and shamelessly, for example, organizations need a new way to govern innovation systems and the innovation spillovers that result from public investment.
How should we share?
Answering this question is necessary for an equitable partnership between the public and the private sector. As Warren Buffet says, “[S]ociety is responsible for a very significant percentage of what I’ve earned.” William H. Gates Sr. echoes that sentiment: “Success is a product of having been born in this country, a place where education and research are subsidized, where there is an orderly market, where the private sector reaps enormous benefits from public investment.” But what has been more difficult for people in the business community to acknowledge is how these collective efforts require the sharing of rewards, not only risks.
One solution involves governments keeping more of the returns from the upside of projects to cover the downside losses that risk-taking requires. Indeed, when the U.S. government provided approximately $500 million in guaranteed loans to Tesla and Solyndra, it ended up bailing out the failed Solyndra while not getting a penny from the successful Tesla. Rather than stipulating that the government would get 3 million shares if the loan was not paid back, the agreement should have been the opposite: The government would get shares if the company was successful and paid back the loan. The government would have earned more than enough to cover the Solyndra loss as well as the next round of investment.
This kind of “entrepreneurial state” thinking is precisely why Israel became a “startup nation,” with public venture-capital entities like Yozma viewing their role not as lenders of last resort but as active investors of first resort. This, of course, requires in-house capabilities that are missing in most governments. But they can be created by investing in the training of the civil service instead; the trend of massive outsourcing has hollowed out government capacity.
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Too often, companies benefit from public investments in the form of subsidies, guarantees, loans, bailouts, or procurement agreements that have no strings attached. These are missed opportunities for governments and businesses to successfully work together in creating and distributing collective value, shaping innovation, and achieving economic outcomes that align with their missions.
We need a new social contract that recognizes that the revolutionaries and innovators of our time are not only situated in Silicon Valley or New York boardrooms. There is not one form of capitalism. Whether capitalism does “good” or “bad” things in society depends on the concrete configurations of business models, institutions, and structures of government that constitute the system. Instead of only talking the talk of shareholder value, businesses should walk the talk by building a truly cooperative model of multistakeholder capitalism, sharing the rewards of collective value creation.
Mariana Mazzucato is a professor in the Economics of Innovation and Public Value at University College London, where she is the founding director of the UCL Institute for Innovation and Public Purpose (IIPP). She is the author of Mission Economy: A Moonshot Guide to Changing Capitalism.
