Ledgers transparency can help to fulfill the Davos manifesto
Capitalism was at almost every headline last month thanks to the annual World Economic Forum Summit conference was concluded for the 50th time in the usually sleepy Davos. The event commemorated the power of the true world leaders who have gathered in the small mountain village, those overlooking balance sheets of hundreds of billion dollars.
Every year, they are accompanied by a crowd of current politicians, scientists and leading activists. Those, in business words, are the Stakeholders.
Unsurprisingly, this year’s forum manifesto corresponds to the trends and announcements repeated by similar business and management circles overseas regarding the rising importance of Stakeholder Capitalism, and whether it should replace Shareholder Capitalism.
The latter rose to popularity thanks to the Nobel prize-winning economist Milton Friedman in the 1970s, stating that the sole responsibility of a company is to maximize the revenue of its shareholders. Conversely, Stakeholder capitalism dictates corporations are responsible for balancing the opposing needs of the different communities influenced by the business activity, usually creating a larger value to the society as a whole. In the theoretical game, this objective is called Maximizing Social Welfare.
As I tried to stay focused while driving the sharp curves leading to Davos, excited about visiting, for the first time, such an iconic event, I pondered the manifesto which was published only days before the event.
Do those CEOs really mean it? Or are they just saying the right thing until the storm passes by?
Speaking of storms, it is typhoon season in Davos. Humanity seems to be a few scandals shy of a third world war, there is a teenager dressed in a worn-out sweatshirt roaming the summit among all the suits and the world’s forests are on fire. Above all, Professor Klaus Schwab, the founder of the World Economic Forum himself called to adopt Stakeholder capitalism 50 years ago upon the inception of the WEF, has anything changed?
These days Davos is color-coded. A pack of businessmen and women in black suits rush from one event to another. On the rooftops, in white, are Swiss soldiers camouflaged with the environment, in charge of protecting us from terrorists running from the mountains, but they are also worried about the colored people.
Those are long lines of protesters, who walked in the cold equipped with drums and agenda who believe there is only one answer to my doubts: Of course the corporations just say what they need to say, and intend to do nothing. Well, I tend to agree with them, yet I can’t help but wonder if they carry alone the responsibility for destroying our future on this planet. Do we, as individuals, suffer from the same short-sightedness when confronted with such catastrophic events to happen in the distant future?
Thinking about game theory, we understand that the two approaches to capitalism are, in fact, not that far apart. Moreover, the tools we are developing today in the fintech industry, drawing inspiration from the defamed blockchain world, might just be what we need to save this planet.
How? You might ask. In theory, everyone holds a utility function, which dictates how they value different situations. Imagine the government grants again the right to use a regional river for a ridiculously low price to a private company. Assume the public makes a little use of the company’s product and doesn’t get to enjoy the river. On a scale of one to ten, this river is valued by the people at a value of 1, as they do not get to use it. In contrast, it holds high value, say, 9 for the company, as they have full and private access to the river.
It would be easy to imagine a better scenario in which the public can use the river half of the week, valuing the situation at 5, while for the company the new situation is valued, say, at 6. Since the total combined values of the last situation is greater than the original one, we say it has bettered social welfare or, put another way, it’s a better balance between the different stakeholder influenced by the company’s business.
Interestingly, the theory shows that if we repeat this game an infinite amount of time, assuming the public has the power to learn about the company’s behavior and to actively punish them for misbehaving, naturally the different entities would be incentivized to drift toward better social welfare. Although we all live in a finite game, corporations hold a longer outlook. Hence, all we need in order to reach this equilibrium is the ability to easily learn about the wrongdoing of public corporations and easily respond to that wrongdoing.
It isn’t surprising that climate change and the use of common resources were on the top list of worries in this year’s WEF. The harsh competition in the corporate world and the personal need of the managers to demonstrate tangible results obscures their zoom lens. How easy is it to pollute a river while crushing the competition, and caring about the environment only upon securing the target market share, and going home with a jumbo bonus. While it is powerful to speak, debate and surface those problems. To really solve them, we need better tools that would make our economy more efficient and agile. This is the only way to see a reality that hews closer to stakeholder capitalism.
Nowadays, social media surfaces local mishaps and spirals them into viral stories within days, letting the entire world know. Well, it isn’t enough. Millions of likes and shares are just not enough to create a real change. A snappy look into Google Trends confirms how quickly humanity’s attention spans forward even from immediate catastrophes. Can we do better?
It seems unlikely that Bitcoin will emerge as the world’s sole currency, despite being promoted with unwavering conviction by bitcoin maximalists, but the crypto coin has created a financial bubble that has contributed heavily to the development of fintech solutions. The constant flow of great minds, money and open-source code contributors led to the creation of a mature infrastructure that can be used by any team trying to disrupt the financial industries.
Blockchain, the underlying technology empowering crypto-currencies, is a software suite that builds trust distributing, persistent, append-only and transparent ledgers. Transparency was what ignited the minds of many around the globe, envisioning better governance, compliance and supply chain software, in which strategic stakeholders could have monitoring or validating positions. While Bitcoin and Ethereum boasted total transparency for every transaction happening on the ledger, today, we have a wide set of privacy solutions utilizing cutting edge cryptography, tailored for specific use cases coming from different industries. Through these solutions, specific parts of the system can be obfuscated and revealed upon trusted requests, say, court orders. Most of those solutions can be found in increasingly maturing open-source code cases, lowering the barriers to entry for emerging solutions and increasing the competition.
Transparency is important but it isn’t enough. If we couple that with smart digital wallets, analyzing the data in real-time, we’ll achieve a true change. Digital wallets are gaining wider traction these days, eventually moving from enabling payments to being an essential part of almost every digital interaction. Since the wallets will be connected to the aforementioned transparent governance and supply chains, they could automatically make environmentally-aware or consumer-smart choices for us. Ideally, In the near future, procurement managers’ digital wallets could automatically switch between different suppliers upon finding out critical changes in their supply chain. In case your toilet paper brand signs a deal with a not-so-eco-friendly transportation company, your wallet will automatically order the next batch somewhere else.
There are still some serious milestones we have to pass prior to unlocking the benefits of such a future. Yet, the march of this revolution is now ongoing. The infrastructure and protocols being developed today will significantly synchronize non-trusting systems and optimize the social-economic system that we live in. And yes, we do owe a great thank you to Satoshi Nakamoto, for accelerating what was initially baby steps. Who knows, maybe the return to Shareholder Capitalism on Davos 60th meeting will be a good signal after all.