Stakeholder capitalism is at the forefront of the minds of many CEOs in 2021. The increasingly rapid spread of information, coupled with the effects of COVID-19, have encouraged business leaders to be more aware of the social implications of their businesses and the interests of all stakeholders.
What Is Stakeholder Capitalism
So, what is stakeholder capitalism? Stakeholder capitalism is a management approach where a company works toward a primary goal or mission that benefits all stakeholders. These stakeholders include customers, employees, suppliers, communities, shareholders and more and are central to business planning. Stakeholder capitalism differs from PR initiatives aimed at cultivating public and investor goodwill.
Companies practicing stakeholder capitalism can have higher returns. A recent analysis found that companies offering equitable worker pay and sustainable environmental impact generate 6.4 percent higher return on equity compared to peers. Consumers also support stakeholder capitalism with their spending. A Forbes survey found that 85% of consumers are willing to pay more for a product from a stakeholder conscious company.
Stakeholder capitalism offers an additional source of impact that business leaders can adopt immediately. How? Governments and nonprofits work to advance the interests of all stakeholders. In August 2019, 181 CEOs signed a new Statement of Purpose of a Corporation that committed their companies to promoting “an economy that serves all Americans.” Jamie Dimon, Chairman/CEO of JPMorgan Chase and Chairman of the Business Roundtable gave his support for the cause.
Detractors identify several cons to this management approach. One con of stakeholder capitalism is that the interests and goals of the various stakeholders often conflict. External factors (political, social, environmental) influence decision-making for a company and are outside the control of leadership. Decisions thus represent compromises between the parties that are not made in a vacuum.
Another con is that stakeholder capitalism may create inefficient organizations. Some business scholars argue that stakeholder capitalism was the primary management style of companies beginning in the 1950s and engendered “garbage can” organizations. “Garbage can” organizations exhibit bureaucratic and process-oriented structures that kill accomplishment or agency.
Stakeholder Capitalism Examples
Looking for stakeholder capitalism examples? Examples include paying fair wages and offering learning and development opportunities to employees. Companies can reduce CEO pay to more equitable levels. Enterprises should engage in sustainable business practices. An example from the food and beverage world: Starbucks monitoring its entire supply chain – from the coffee bean farms to the stores – to ensure wage equality and human rights practices.
Patagonia exemplifies stakeholder capitalism in the retail sector by protecting migrant workers, choosing suppliers with reduced environmental footprints, and offering recycled and sustainable products. An older example of stakeholder capitalism is found in LEGO’s relationship with play and learning. The company famous for its creation of interlocking colored bricks in the 1950s and subsequent iterations of games and puzzles runs a research center that explores play and learning. The LEGO Foundation’s Centre for Creativity, Play, and Learning received 25% of the company’s profits to fund research and also sponsor educational programs for children.
The Difference Between Shareholder And Stakeholder Capitalism
One of the key differences between shareholder and stakeholder capitalism is that stakeholder capitalism adopts a long-term view for returns. The traditional shareholder capitalism envisioned by Milton Friedman, on the other hand, considered returns to investors the chief goal of an enterprise. Some scholars like Maryland finance professor Michael Faulkender argue that shareholder capitalism already takes a long-term view because equity prices reflect future earnings.
Yet, there is a difference in the timeline of the commitment of shareholders and stakeholders to a company. While a shareholder can sell and buy stock and interests in companies at will, stakeholders are bound to a company longer term and with a higher level of commitment. If a company is underperforming, vendors and employees will suffer, but shareholders can simply divest.
How A Management Consultant May Encounter Stakeholder Capitalism
Management consultants may encounter stakeholder capitalism in their client companies. McKinsey recommends 5 steps to bring stakeholder capitalism to a corporation:
- Get the support of the board for implementation of stakeholder capitalism. Consider rewriting the mission statement of the company to make stakeholders central.
- Establish metrics for tracking environmental goals and report on progress regularly.
- Work with all company suppliers to communicate new goals, engender support, and check for compliance.
- Serve the customers’ long term needs.
- Treat employees with respect and invest in their futures.
Moving forward from 2021, corporations not following a stakeholder capitalism model may want to adjust their business practices. Consulting firms are well set up to guide organizations through this planning and transition!
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Stakeholder capitalism offers a new way forward for businesses to incorporate forward-thinking purpose and sustainability into the mission of the organization. Will we see a movement away from shareholder capitalism toward stakeholder capitalism? Only time will tell, but the future’s looking brighter and brighter!
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