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Measuring stakeholder capitalism

Measuring stakeholder capitalism

Having adopted a stakeholder capitalism model as the path to long-term business success, companies are faced with the challenge of how to measure their progress, both against stakeholder priorities and attributable outcomes. Frameworks are being built, but a global, cross-industry solution has yet to be established.

Understanding stakeholder capitalism

Stakeholder capitalism is rapidly becoming the chosen model for companies seeking a more sustainable way to do business. While far from original – its foundations lie firmly rooted in the early 20th century – the central pillar of creating long-term value for all stakeholders is generating renewed interest. In the 21st century, with the growing necessity for environmental, social and governance (ESG) issues to drive business decisions, it is a means of building resilience for an uncertain future.

Stakeholder capitalism works by changing the focus from a single stakeholder group – the investor-centric view that has predominated over recent decades – to the broader considerations of everyone with a stake in the success of the company. At its core, this comprises customers, employees, suppliers, the local community, but also embraces the wider needs of the environment, the media, NGOs and regulators. The theory holds that all of these stakeholders need to have their priorities met for the organisation to flourish.

While some stakeholders may have a greater influence and their actions a more immediate impact, shared value needs to be generated for all. To ensure this is being done requires more than blindly implementing the principles of stakeholder capitalism. It means being able to accurately measure its outcomes, and for businesses to align this measurement with their mainstream reporting.

Only when companies can measure and demonstrate their recognition of and response to the varying needs of all stakeholders will they reap the rewards of stakeholder capitalism.

While the idea of instituting running a business for the common good is relatively straightforward – if controversial among die-hard proponents of shareholder primacy – measurement performance is less so. While the investment community will still benefit from reports of financial performance, how well the expectations of other stakeholders are being met is more challenging to quantify.

There is, to date, no single set of stakeholder capitalism metrics. Neither is there a standard global system for consistent reporting of sustainable value creation. The widely differing issues that matter to different stakeholder groups adds layers of complexity to the measurement challenge.

The measurement challenge

Nonetheless, stakeholder capitalism needs to be measured to be managed, and noble attempts are being made to classify and categorise these issues, fitting them into a reporting framework that works across industries and national borders.

In 2020, the World Economic Forum (WEF) released a set of common metrics for sustainable value creation. The result of six months consultation, the stakeholder capitalism metrics and disclosures outlined in its report are a valuable advance in the ability of organisations to incorporate ESG performance and targets such as the Sustainable Development Goals (SDGs) into their corporate reporting.

Backed by the Big Four consulting firms and Bank of America, the WEF’s initiative incorporated the views of international organisations, NGOs, investors, corporate and other interested parties to establish the framework of a comprehensive global reporting system that recognises and accounts for the many different elements of stakeholder capitalism.

More recently, McKinsey has taken up the mantle of defining and measuring stakeholder capitalism, with the announcement in April of its report From practice to principle: Making stakeholder capitalism work. In it the company outlines five steps along the route to successful implementation. Number three on the list is, unsurprisingly, “define and measure ways to serve stakeholders”.

Having identified five dimensions of stakeholder impact, the McKinsey research suggests ways to measure them. Financial and operational impact is not only tracked via share price and dividends, but also reflected in employee wage rises or the endowment of scholarships.

Environmental impact can be traced through ESG reporting. Health impacts are classed as organisational and personal; the former measured through goals set and achieved, the latter through health-assessment questionnaires. Capability building is an impact that applies not only to employees but also suppliers. Achievement in sharing expertise with suppliers might be measured through reduction of carbon or energy use in the supply chain, for example. Satisfaction, the fifth and final impact, can be monitored through employee engagement and customer satisfaction metrics.

Less formal than the WEF framework, these practical steps could enable businesses to broadly measure and demonstrate their commitment to stakeholder capitalism.

Shifting boundaries in stakeholder capitalism

Such efforts to fix stakeholder capitalism in a quantifiable framework are both well meaning and welcome. They bring with them their own challenges, however.

Top-down measurement of the kind dictated by pre-codifying a subject requires all the elements to fit neatly into predetermined categories. But the speed of change in the evolution of stakeholder expectations and priorities defies such a rigid model.

A bottom-up approach is likely to be more effective in responding to the shifting goalposts presented by ESG concerns and their incorporation into stakeholder capitalism strategies.

Different markers of success – beyond the purely financial – are required for different stakeholder requirements, yet they must still be comparable across the board. Emerging topics need to be accounted for and the system quickly adapted to include them. Shifting priorities among stakeholders based on outside influences and events must be anticipated.

A structure such as the WEF’s, as one of the first concerted efforts to provide guidance on how to implement shareholder capitalism measurement, is vital in creating a practicable solution rather than a wistful ambition. But while it provides a useful yardstick, ultimately measurement will need to be more agile in order to keep pace with new issues and prioritise as they surface.

To achieve this, an actionable measurement solution will need to incorporate alternative data sources, beyond any mandatory and voluntary disclosures a company makes on long-term value creation. By tracking stakeholder perspectives across a wide spectrum of channels, and sifting content from an exhaustive number of sources, organisations can be confident that they are abreast of the changing expectations of all their stakeholders, and measure them accordingly.