By Ian Robertson

For Canada to be more than a nation that talks about global leadership but can’t compete, we need to acknowledge a hard truth: even good intentions have unintended consequences. Stakeholder capitalism — the idea that, under the watchful eye of government, corporations should serve not just shareholders but “all stakeholders” — was supposed to create inclusive growth. Instead, it has made Canada a jurisdiction of indecision, capital flight and underperformance at a time when the world’s economic heavyweights are retreating to shareholder and state-centric models.

Intended as a “third way” of doing business, stakeholder capitalism’s build-out in Canada gained momentum after the 2008 financial crisis as policy-makers sought a moral counterweight to the problems of supposedly “unrestrained” markets. A tipping point came in 2019 when the Business Roundtable — 200 of the world’s most powerful CEOs — redefined corporate purpose to serve “all stakeholders.” The same year, Canada’s business act was amended to give boards permission to prioritize “stakeholders” and “the long-term interests of society” over shareholders.

Stakeholder capitalism responded to perceived shortcomings in the shareholder model: reckless cost cutting, environmental neglect and unsavoury labour practices. But it relied on two flawed assumptions. First, that business can effectively balance competing interests without compromising efficiency and, second, that “stakeholders” can be clearly defined and will act in good faith. Reality has proven otherwise.

Imagine you’re a CEO. Shareholders expect earnings growth, the board wants its strategies executed, employees demand higher wages, customers want lower prices, regulators expect compliance and activists demand carbon neutrality by Friday. The more stakeholders a company tries to satisfy, the more it does a mediocre job for each, eventually alienating everyone.

Some of Canada’s best companies have hit big challenges in their embrace of the stakeholder model. Tim Hortons alienated franchise owners with costly sustainability pledges. Teck Resources Ltd. abandoned coal despite its profitability. Banks have reduced fossil fuel financing only to see clients borrow in jurisdictions with less stringent environmental regulations.

As corporate leaders have traded cufflinks for cause bracelets, Canada’s growth and competitiveness have stalled. GDP, foreign investment and R&D have all deteriorated, especially when compared to more shareholder-focused economies like the United States and Singapore.  Even Canada’s pension funds — bastions of risk-averse capital — are sending more money to nations that prioritize shareholder returns.

If stakeholder capitalism were the superior model, Canada would be outpacing the U.S. in economic growth. It isn’t. Consider the oilsands. Canadian producers like Suncor Energy Inc. grapple with regulatory hurdles, endless consultations and environmental assessments that U.S. producers are free of. And the instruction from the American shareholder-in-chief is now to “drill baby drill.” Meanwhile, state-driven actors like Russia’s Gazprom PJSC and China’s Sinopec exploit geopolitical alliances to secure markets with zero regard for social and environmental impact.

The post-Cold War assumption that globalization would harmonize economic systems has been proved wrong. A world of competing models has emerged, with the U.S. doubling-down on the shareholder model and Russia and China seeking international allies in pursuit of state model dominance. As an open economy reliant on international trade, Canada’s insistence on stakeholder capitalism looks increasingly untenable, especially when a $62-billion deficit renders the mass bureaucracy the model requires a luxury we can no longer afford.  Our economic future depends on recognizing that a well-intentioned detour toward ideological purity has not been rewarded by the markets. Instead of clean, inclusive growth, stakeholder capitalism has brought a deterioration in Canadians’ standard of living. That’s a steep price to pay for marginal reductions in income inequality and carbon emissions.

Canadians can and should pursue social progress, environmental sustainability and inclusive growth, but these are best achieved through the wealth creation that comes from putting shareholders first. Milton Friedman was right: a company’s first social responsibility is to increase profits, though to do so over the long term it must act responsibly. A strong economy funds social progress, not the other way around. Well-run companies governed by strong boards (not regulators) integrate long-term considerations because their reputations depend on it.

But ideals must be balanced with the practicalities of maintaining a competitive business environment. Businesses should be free to choose when and how to integrate stakeholder priorities in ways that align with their core competencies and long-term profitability. It is consumers then, not government, that drive social change and ethical behaviour with their purchases.

Transitioning to a shareholder-first model is not a rejection of ethics but an acknowledgment of economic reality. For Canada to fulfill its great promise we don’t need more stakeholders, we need richer shareholders. Instead of asking our companies to save the planet, let’s ask them to do what they’ve always done — make money by satisfying the economic needs of citizens. The rest will follow.

Ian Robertson is a partner with The Jefferson Hawthorne Group.