Steward Ownership, Sustainability, and Capitalism: Part 1

This post examines Germany’s proposal for ‘Steward Owned Corporations’ and their role in shaping a ‘Purpose Economy’. It explores how this model of ownership contrasts sharply with traditional and emerging legal forms, such as the Benefit Corporation. The piece also discusses Steward Ownership’s potential to promote sustainability and how it relates to capitalist frameworks, offering fresh perspectives on enduring economic challenges.

The IPCC has recently reiterated that any further delay in taking unprecedented action will rapidly diminish the possibility of securing a ‘liveable and sustainable future for all’. Apparently, we are still blatantly failing to productively process the totality of the doomsday scenario that is emerging in all the data and forecasts. However, this scenario is not a necessary consequence of human nature, but the result of the specific social practice which we call ‘capitalism’. Consequently, transforming the global economy to enable a fearless life of dignity for all while permanently respecting planetary boundaries will require nothing less than ‘structural revolutions’. The crucial question does not seem to be whether or not today’s destructive form of capitalism will end, but how.

One of the more recent approaches in this direction is the concept of the so-called ‘Purpose Economy’ (PE), which promotes an alternative social purpose of private companies. Colin Mayer, one of its most prominent pioneers, pointedly wrote: ‘[Corporate purpose should be] to produce profitable solutions to the problems of people and planet, and not to profit from producing problems for people or planet.’ That implies no less than a reversal of the traditional ends-means relationship between profit and private business.

If taken seriously, PE is a radical approach in the best sense of the word: It identifies the ‘enthronement’ of financial profit as a foundation of our destructive economy and seeks to replace it. Companies should thus primarily serve their self-chosen, entrepreneurial and problem-oriented ‘purpose’. The hope is that such profit-based ‘purpose companies’ will develop a completely different internal logic and ‘Frankenstein-character’ than conventional, profit-oriented business companies.

This concept contrasts sharply with Milton Friedman’s much-criticised but still highly influential doctrine that the one and only social responsibility of companies is to increase their profits within the framework of democratically legitimised laws. PE advocates, on the other hand, are much more sceptical about the effectiveness of legal regulation and insist that it is the internal logic and incentive structures of companies that are decisive.

By entrusting private companies with the task of operating directly for the common good, the concept of PE deliberately breaks with a fundamental axiom in the history of capitalist thought: That the common good can and even should be a mere by-product of primarily self-interested (entrepreneurial) behaviour. At the same time, PE consciously questions the traditional notions of ‘value creation’ and so-called ‘externalities’. One important underlying idea seems to be that the connection between (capitalist) efficiency and (sustainable) common good becomes increasingly coincidental the more the (regulated) pricing of such ‘externalities’ fails.

So much for theory. But what about practice? First of all, it is remarkable that almost every major company has already added a compelling (yet noncommittal) ‘purpose’ to its brand image. However, empirical studies have shown that these proclamations have remained largely inconsequential. Critics have therefore concluded that the concept of PE cannot work. It is not surprising, however, that the reorientation of a corporation requires more than (alleged) good intentions – namely structural changes to the internal organisational logic. To borrow Colin Mayer’s words once again: ‘Different purposes require different corporate structures.’

What might a more appropriate ‘corporate structure’ for a Purpose Economy look like? An inspirational search within other legal systems inevitably leads to the famous US public benefit corporation. It is legally committed to a ‘purpose of creating general public benefit’. However, this ‘public benefit’ stands alongside the private interests of the shareholders, which are generally geared to maximizing profits. The management is therefore obliged to take into account all relevant interests and balance them against each other. A so-called ‘benefit director’ as well as specific transparency obligations are meant to ensure appropriate consideration of the common good.

Critics, however, argue that such companies constantly run the risk of neglecting the common good in favour of profit orientation. In my opinion, this is due to the fact that all these precautions are directed exclusively at the symptoms of shareholder primacy, but not at its ideological and structural foundation – the capitalist private ownership of shareholders in ‘their’ companies. The specifically capitalist ‘coding’ of this ownership manifests itself not only in the per se unrestricted claims to profits and proceeds from liquidation or sale, but above all in the possibility of (re)transforming the benefit corporation into an ordinary (joint stock) corporation at any time, thus breaking all chains to the common good with a single stroke.

This illustrates the following assertion: If shareholder primacy with its specific internal logics and incentive structures is not only to be supplemented, but to be punctually replaced as the foundation of corporate law, then alternative forms of ownership are a necessity.

Steward Ownership – the German debate

At this point, a proposal comes into play that has recently caused quite a stir in Germany and is gaining momentum throughout the EU: ‘Steward Ownership’ (‘Verantwortungseigentum’; SO). SO is an alternative form of private company ownership that differs fundamentally from all other existing forms. Under current law, SO can only be implemented via elaborate constructions under company and foundation law. However, the governing coalition has agreed to introduce a new legal form specifically for companies in SO. This agreement was the result of a remarkable legal-political campaign by the proponents of the concept, accompanied by a heated debate in the media and especially within legal scholarship. The latter centred in particular on the draft law for the introduction of a ‘VE-GmbH’ (LLC in SO; later revised and renamed ‘GmbH-gebV’), which an academic working group had presented in 2020.

SO is characterised by three structural principles. First, the owners of the corporation are so-called ‘trustees’ of the company, who do not regard their ownership as private capital. Consequently, they only hold their property for a limited period of time in order to pass it on free of charge to subsequent trustees as soon as their entrepreneurial involvement ends. Second, the entire entrepreneurial value created by the company belongs exclusively and irrevocably to the corporation. Private consumption of the corporation’s assets is prevented by a comprehensive ‘asset lock’. However, the trustees’ entrepreneurial freedom remains unaffected. Third, the raison d’être of a company in SO is its self-chosen entrepreneurial purpose; producing profits is only a means to this end.

This brings us full circle from SO to PE: the two concepts are closely related and refer to each other. While the latter propagates an alternative understanding of the societal purpose of companies, the former offers a special form of individual ownership of companies that has been ‘coded’ to fit perfectly within this alternative understanding.

In the debate on SO, however, it has often been criticised that the concept is wrongly boasting its ability to contribute to a more sustainable economy. A key argument is that the ‘purpose’ is subject to the unrestricted decisions of the ‘trustees’. Even a company in SO could therefore pursue business models that exacerbate social problems rather than solve them. This has led critics to the conclusion that SO is ‘legally indifferent to the common good (...).’

However – and this is crucial – SO creates an institutional framework that effectively prevents any undertaking from being run for the private accumulation of capital. This removes an important incentive to ‘externalise’ costs. It’s true: A company in SO can manufacture its products in a way that is particularly harmful in order to increase its profits. But the owners have no incentive to do so, because they cannot consume these profits privately and bear responsibility for their decisions. In fact, SO cannot guarantee orientation towards the common good – especially since the capitalist market and financing constraints remain unaffected. But it can at least structurally suggest such orientation and create space for a new ‘purposiveness’ of private entrepreneurship.

The transformative potential of SO can be illustrated by two neuralgic issues: Succession and democratisation. Many SMEs in Germany face succession problems. If there is no suitable and willing family member, the only option is usually to sell the business. However, many owners fear that the refinancing and taxation of the purchase price will be to the detriment of the company. In such cases, transferring the company to SO is an alternative solution, because the asset lock allows the owners to pass on the company to suitable successors free of charge. The fact that the ownership of the company loses its suitability as an investment object also opens up new possibilities for co-determination and democratisation: In theory, all employees can become steward owners; their individual purchasing power is irrelevant.

The full article can be accessed here.

Marvin Reiff is a postdoctoral researcher at the European University Viadrina Frankfurt (Oder).