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New challenges in the era of Stakeholder capitalism

New challenges in the era of Stakeholder capitalism

The shift from a shareholder to a stakeholder-centric model of capitalism seems inevitable. But how will the 21st century version differ from previous iterations, how does the business world transition from the theoretical to the practical, and is it even possible to prioritise all stakeholder groups?

What is stakeholder capitalism?

There is a rising tide of evidence that the current model of capitalism, forged in the single-minded MSV (maximising shareholder value) days of the 1980s, is no longer fit for purpose.

A chain of recessions and financial crises, culminating in the economic wrecking ball of the coronavirus pandemic, has halted the relentless march of short-term profit at any cost. A harsh light has been shone on its side effects – growing inequality, stagnant median incomes, distrust in the motives of big business, and the ever-quickening charge towards ecological devastation. The Edelman Trust Barometer, released in January 2021, revealed that of the 34,000 people surveyed, 56% felt capitalism in its current form is doing more harm than good in the world.

Alongside this is a growing belief that business has a responsibility beyond its own bottom line. The Edelman research found that people hold companies accountable for their employees’ financial wellbeing – 83% of respondents feel it is the duty of employers to pay decent wages, while 79% hold that workers whose jobs are threatened by automation should be retrained at the company’s expense.

Businesses are also expected to cut their carbon emissions and plastic usage, pay their fair share of taxes, support community initiatives, stamp out modern slavery, and channel profits into philanthropy. But, at the same time, they are not trusted to do so.

The laser focus on maximising shareholder value among corporate leaders in free market economies has clearly not worked for all parties. It is both unsustainable and ethically unacceptable. A more inclusive model is required, through which both business and the rest of society can thrive.

Enter stakeholder capitalism.

At its heart lies the principle that business activity should create shared social and economic value for all stakeholders – including investors, but also encompassing consumers, employees, suppliers, regulators, local communities, and society as a whole.

Stakeholder capitalism holds that the purpose of a corporation is sustained value creation for all. It is a long-term view, based in the principle that, by serving the interests of all stakeholders, a business will be more sustainable, and enjoy ongoing success.

Profits can, and should, still be maximised, but not at the expense of any stakeholder group.

As well as a more ethical approach, it is also good business practice.

The history of stakeholder capitalism

The theory is not new. Published in 1932, The Modern Corporation and Private Property by Adolf A Berle and Gardiner C Means espoused the idea that public firms should have stakeholder managers to balance the needs of different groups, while remaining in line with public policy. The “epoch-shattering” tome shaped government and corporate thinking for the next four decades.

Consequently, a form of stakeholder capitalism, in which businesses understood that profits were best protected by a long-term view of the good of all, was the norm until 1970, when US economist Milton Friedman published his influential argument that the only social responsibility of a business was to increase it profits. He wasn’t uncontested, however: fellow economists Joseph Stiglitz and Sandford Grossman refuted the ideas in a series of papers in the late 1970s, which challenged shareholder primacy and showed that shareholder capitalism did not maximise societal welfare.

Friedman’s line won out, however, and stakeholder capitalism was pushed to the side-lines for decades. Indeed, it was seen as subversive by some, with critics likening it to a communist regime, with a socialist-style interventionist policy built in, in order to favour certain stakeholder groups over others. This, they argued, raised the interests of the less deserving above those who had earned it – or at least invested – more. Some more extreme viewpoints have even compared stakeholder capitalist principles with fascism, claiming that it ensures, by force of social stigma and government regulation, “the world of business is to march to the corporate social responsibility drummer”.

These are, however, minority perspectives. The latest drive towards stakeholder capitalism is powerful and undeniably mainstream. It can be dated from the release, in 2019, of the Business Roundtable’s Statement on the Purpose of a Corporation. In a 180-degree about-face from its previous position – that corporations exist principally to serve their shareholders – the association of chief executive officers of America’s leading companies announced that they had a fundamental commitment to all of their stakeholders.

Stakeholder capitalism today

The leaders of the world’s free markets are getting on board, recognising the need for more responsible business practices. In 2019 the World Economic Forum (WEF), released its Davos Manifesto, stating that “companies should pay their fair share of taxes, have zero tolerance for corruption, uphold human rights through their supply chains, and promote a competitive and level playing field”.

The following year, the WEF took a practical step towards realising a stakeholder-centric reality, presenting its Measuring Stakeholder Capitalism framework, intended to support businesses in their pursuit of sustainable value creation.

Momentum hasn’t slowed: in the aftershocks of the global Covid-19 crisis, the imperative for businesses to work for the common good is starkly apparent. Job protection, vaccine development, PPE manufacture, supply chain resilience, and adherence to public health policy have all been vital corporate contributions to society’s survival.

BlackRock CEO Larry Fink’s 2021 open letter to CEOs highlighted the inequalities created by the pandemic, as some flourished while others were devastated. Covid also catalysed other social trends – political unrest, popular protest, social inequities. The letter reminded business leaders of the climate crises seen in the last 12 months – wildfires, flooding, droughts and storms – resulting in an acceleration in sustainable investing. And it underlined the responsibility of those CEOs and their companies to acknowledge their position as fundamentally enmeshed in, not separate from, the global trends that impact their stakeholders.

The only way to sustain their businesses is to shoulder that responsibility and act for the long-term benefit of all.

The principles of Stakeholder Capitalism today

Almost a century on from its first iteration, while the world looks very different, stakeholder capitalism can be distilled down into a commitment to these key principles:

  • Delivering value to customers: offering fit-for-purpose, high quality products and services. Acknowledging consumer rights, offering appropriate customer service.
  • Investing in employees through fair remuneration and equal pay for equal work. Providing appropriate training and career development; creating a culture of diversity and inclusion in which everyone is heard and has equal opportunities.
  • Dealing fairly and ethically with suppliers. Fostering resilience in the supply chain, and taking responsibility for supplier actions. Actively eschewing all forms of modern slavery.
  • Supporting communities by taking an active role in community ventures. Contributing to an improved local environment; job creation in the local economy.
  • Protecting the environment through sustainable practices including cutting carbon emissions, reducing waste, reducing energy consumption and sourcing sustainable materials.
  • Generating long-term value for shareholders. Providing transparency and effective engagement with them through comprehensive corporate reporting.
  • Adhering to regulator and policy maker guidance and rulings. Paying appropriate taxes, not pursuing loopholes to avoid corporate social responsibility.

Moving to a stakeholder capitalism model

In 2021, the need to understand the priorities and expectations of all stakeholder groups should be apparent to every organisation. It will be more challenging for some than others to move away from the shareholder-centric model, but doing so is a significant step on the road to business rebuilding the contract with society.

Part of the challenge lies in the practical application of these ideals. Even after such a long history, in its current form stakeholder capitalism remains something of a lofty and abstract ideal.

It is more of a bare framework, or even a utopian vision, than a practical guide to how to engage all stakeholders in creating long-term value.

Currently, a gap exists between understanding the theory and subscribing to the diagnosis, and the implementation of a new approach to create a tangible reality.

The first step is to understand how stakeholders perceive the business, and whether it is delivering to each along the principles of shared value creation. Gleaning the sentiment of what is being said and felt about an organisation was slow, inaccurate – and expensive – prior to the advent of Stakeholder Intelligence.

Now it is possible to garner real-time feedback of what consumers, employees, the media and government think about everything from products and services to executive behaviours, environmental impact and brand positions.

A powerful stakeholder intelligence solution can process millions of pieces of content, from sources including social channels, government disclosures and all forms of media, to create a complete picture of an organisation’s stakeholder ‘health’, and related risks, opportunities and liabilities. It can help shape boardroom decisions, corporate governance, environmental strategies and public relations in the pursuit of rebuilding the social contract.

New challenges: Stakeholder capitalism in the global business

Stakeholder intelligence allows evidence-based, stakeholder-centric decision making, but it doesn’t offer a complete solution to implementing stakeholder capitalism.

Once the immediate business of understanding stakeholders is in hand.

It’s vital that the responsibility for acting on the information does not sit within individual silos within an organisation, fragmenting responses rather than building a co-ordinated effort.

There needs to be a mechanism by which stakeholder perspectives are represented and understood throughout the organisation. And for stakeholder capitalism to succeed, it needs to be led from the top.

Another challenge for real world businesses establishing a stakeholder capitalism model is the need to abandon the ideal. The pragmatic, and necessary, approach is to accept that, even when all stakeholder needs are considered, and decisions are taken based on that knowledge, there will still be winners and losers among the many stakeholder groups.

Some stakeholder needs will necessarily be prioritised over others for the long-term good of the company.

To ignore the drive towards a stakeholder-centric business model will be to lose competitive advantage in the long run – as well as leaving those organisations on the wrong side of history.

There are many facets to the stakeholder capitalism evolution, and in this series of blogs, we will address potential solutions, and explore in greater depth the challenges facing the capitalist world as it shifts to a stakeholder-centric model.