Stakeholder capitalism, values versus politics, and why Friedman stopped working: Seth Levine on Capital Evolution

The debate about stakeholder capitalism usually gets framed as a choice between doing well and doing good. Seth Levine's answer to a CEO who asked him exactly that question is that it is a false choice, and that the more useful distinction is a different one entirely: between having values and doing politics.

Levine is a managing director at Foundry Group and co-author of Capital Evolution, a book about how the American economy is shifting and what that means for the people running companies. He spent two years researching it.

The question that started the book

The genesis is a scene any operator will recognize.

After a board meeting in New York, with the local board members gone home, Levine was left with the management team. The conversation turned to another CEO in the Foundry portfolio who had posted publicly about a contentious social issue, and had heard from employees who felt he had gone too far and employees who felt he had not gone far enough.

Which prompted the CEO in the room to ask Levine a very specific question.

Would you accept a lower return for us living our values?

Levine gave what he calls the most unsatisfying venture answer available, and one he genuinely believes: that it is a false choice, and you do not have to make it. While acknowledging there is a great deal of nuance behind that.

The CEO's follow-up is what made it a book. His customers were large enterprises with different people and different sets of values. During Pride month they had changed their logo without anyone thinking twice about it. And now, in a climate where companies were being asked to speak on a series of national events, it occurred to him that he needed to actually think about it.

Levine's read on what that represents: media has become less trusted, government has been distrusted for much of our lifetimes, and companies have stepped into the void. Which means they are now being asked to act as social arbiters in ways they never were before.

Values are not politics

The most useful distinction in the episode came from Jamie Dimon, whom Levine interviewed alongside a range of others including Dan Schulman, Lisa Green Hall and Dick Parsons.

Levine admits he did not initially believe the distinction Dimon was drawing between values and politics, and pushed him hard on what he meant.

By the end, having interviewed others and written it up over several months, Levine describes himself as a convert. There is a real difference between a business having a set of values and expressing them in political terms.

Dimon's word for what happens when the line blurs is the one that stuck: too many CEOs were becoming weaponized by interests on one side of an issue or another. His advice, which Levine notes carries considerable weight, is not to be weaponized and not to allow yourself to be used.

The Coinbase reversal

Michael raises Brian Armstrong's decision to declare that Coinbase would not engage with politics and social issues, and the substantial criticism he took for it.

Levine's answer includes an unusually honest account of changing his own mind.

When he started the research, he was more on the side of thinking that if government is stuck and media is fragmented, CEOs should live their values and make statements about what is going on.

By the time the research was finished, having spoken to people on both sides, he had moved. He notes, with regret, that they never interviewed Armstrong, which he considers an oversight given the timing.

His assessment now: Armstrong is seen as more prescient, because we have collectively realized as a society that having CEOs weigh in on everything is genuinely fraught.

What Friedman actually said

Levine is careful with Milton Friedman, and it improves the argument rather than softening it.

The framework governing our form of capitalism came from Friedman's ideas in the late 1960s, crystallized in a 3,000-word New York Times essay in 1970, which many more people have read than the book. That became what we now call neoliberal capitalism, and Levine notes a period when essentially everyone across the political spectrum operated within it.

But his objection to how it is invoked is worth hearing. People took the compressed version of the idea, the couple-of-hundred-characters version, and turned it into an extreme that Friedman himself did not argue. Even the essay contains a fair amount of nuance, let alone the book.

Levine thinks Friedman was wrong, and considers him a frustrating figure in several respects. He also wrote the first draft of an entire chapter trying to understand him in the context of his own time, rather than in the black-and-white version.

Why it stopped working

The failure, in Levine's account, is stratification, and he has the figures.

Executive compensation has risen roughly 900% since Friedman wrote that essay. Average worker pay has risen roughly 12%.

His explanation of the mechanism is the sharpest sentence in the conversation: we came to treat everything below revenue on an income statement as something to be extracted from and minimized. Which includes workers and wages.

And his illustration of what over-optimization costs is the supply chain during COVID. So much was extracted that it became brittle. He is careful not to argue against efficiency, and notes that a great deal of supply chain optimization makes sense. What was forgotten is that there are reasons to keep some production nearer home. Some are national security, which government has since been investing in. Others are straightforwardly commercial: when there is a global disruption and you cannot move goods from the major producing countries, that is bad for your business.

His analogy for what an aggregate number conceals: Jeff Bezos walks into a bar and the average person is a billionaire, which tells you nothing about anyone in the bar. Neoliberalism has been remarkably successful at growing the economy as a whole, at the cost of extraordinary stratification in wealth and opportunity.

The Business Roundtable statement

The institutional moment Levine points to is 2019, when Dimon chaired the Business Roundtable, a group of around 200 chief executives of the largest US companies.

They issued a statement on the purpose of a corporation, directly answering Friedman's famous claim that the only purpose of a company is to make money for shareholders.

Their position was that other stakeholders matter too. Employees, obviously. But also suppliers, the environment and community.

And then, as Levine notes with some frustration, we never got to have the debate. The statement came in late 2019, produced a brief flash of argument about whether it was lip service or overreach, and then the pandemic arrived and nobody discussed it again.

The politics underneath

Levine is careful that the book is not particularly political, and he does connect the economics to the moment.

His argument is that treating labor as a resource to be extracted from, in much the way the environment has been treated, has produced the fractious politics we now have.

The evidence he offers is a genuinely interesting data point: a double-digit percentage of voters who backed a democratic socialist mayoral candidate in New York also voted for Trump. Which sounds counterintuitive until you look at what those voters say about why.

His reading: the prescriptions are entirely different, and the diagnosis of the problem is similar.

His own position, offered to an audience he assumes is broadly capitalist: he is, as he puts it, a capitalist by job title.

The 5 things I took away from this conversation

1. Values and politics are different things. This is the distinction I will be using. A company can have and act on values without allowing itself to be conscripted into someone else's fight. Jamie Dimon's word, weaponized, is the right one for what happens when the line disappears.

2. Would you accept a lower return for us living our values is a false choice. Seth's answer to that CEO is worth having ready, because the question gets asked in a form designed to make you pick. The interesting work is in refusing the framing and then handling the nuance behind it.

3. Everything below revenue became something to extract from. That single sentence explains a great deal, including the 900% against 12% compensation divergence and the supply chain that turned out to be too brittle to survive a shock.

4. Read the actual argument, not the compressed version. Seth thinks Friedman was wrong and still wrote a chapter trying to understand him in his own context. The version that governs how people behave is the couple-hundred-character version, which is not what was argued.

5. Optimization has a floor you cannot see until you cross it. The supply chain case is the cautionary one for any operator. Every individual efficiency decision was defensible. The aggregate removed the slack that made the system survivable.

FAQ

What is stakeholder capitalism? The position that a corporation's purpose extends beyond returning money to shareholders, to include employees, suppliers, community and the environment. The 2019 Business Roundtable statement, issued under Jamie Dimon's chairmanship, is the most prominent institutional expression of it.

What did Milton Friedman actually argue? That the only purpose of a company is to make money for its shareholders, set out in a 1970 New York Times essay and an earlier book. Levine notes the essay contains considerably more nuance than the compressed version most people know, while still concluding Friedman was wrong.

Why has shareholder primacy been criticized? Because of the stratification it produced. Levine cites executive compensation rising roughly 900% since 1970 against roughly 12% for average worker pay, and argues the underlying mechanism was treating everything below revenue on an income statement as something to be minimized.

Should CEOs speak out on social and political issues? Levine changed his mind during the research, moving from thinking they should toward Jamie Dimon's distinction between values and politics. The concern is that CEOs become weaponized by interests on one side of an issue, which is a different thing from a company acting on its own values.

What did over-optimizing supply chains cost? Resilience. Levine's point is that extensive supply chain optimization is sensible and that it was taken far enough to become brittle, and that there are ordinary commercial reasons, alongside national security ones, to keep some production closer to home.

Also mentioned

• Capital Evolution, co-authored by Levine, and his earlier book on the future of entrepreneurship
• Foundry Group, where Levine is a managing director
• The Business Roundtable statement on the purpose of a corporation
• Jamie Dimon, Dan Schulman, Lisa Green Hall and Dick Parsons, among the interviewees
• Milton Friedman's 1970 essay, and the neoliberal framework built on it
• Brian Armstrong's decision to keep Coinbase out of political debate

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Seth Levine on Between Two COO's

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