What is Stakeholder Capitalism?

Published on:

November 24, 2022

What is Stakeholder Capitalism?

Stakeholder capitalism is about companies serving a wider group of interests beyond the narrow focus on their shareholders. The list of stakeholders includes the shareholders but also customers, staff, partners, suppliers, the planet, the community and wider society. A stakeholder business considers the environmental, social and governance (ESG) issues and corporate social responsibility (CSR) in addition to making a profit for shareholders.

  • Stakeholder capitalism has a broader scope than shareholder capitalism alone
  • Implementing stakeholder capitalism can be difficult as it has to be balanced with the priorities of shareholder capitalism
  • Consistent metrics for companies to measure their efforts are needed for stakeholder capitalism to be applied successfully
  • Momentum in the growth of stakeholder capitalism is being driven in part by increasing ESG and CSR requirements
  • Economic models are adapting to support stakeholder capitalism objectives with advances in sustainable and circular economic activities 

The idea of stakeholder capitalism features in The Modern Corporation and Private Property from 1932 and came to life in the 1970s, driven largely by Klaus Schwab, who founded the World Economic Forum. In 2019, the influential Business Roundtable of top US company executives urged a move by companies away from shareholder primacy. 

At the start of 2015, releasing a report with former UK chancellor Ed Balls, former US treasury secretary Larry Summers wrote, “The ability of free-market democracies to deliver widely shared increases in prosperity is in question as never before.” As the saying goes, a rising tide lifts all boats. So for the first 100 years of capitalism nobody saw the damage being done. After all, more people die today of obesity than starvation. Most people became better off.

However, now we see the shrinking ice caps, the inequality with bosses paid hundreds or even thousand times more than their staff and increasing pollution. The cost of economic growth has become more apparent to everybody.

The best-performing companies are inclusive; they engage their employees and treat them right. In return, the staff are more motivated and the company more profitable. Countries can be run in the same way, by galvanising their population's efforts to maximise growth and instilling a belief that things are being done in a fair, equal and inclusive way.

Industrial capitalism needs an upgrade. Today, the world is dominated by services, experiences and knowledge, not industry. It needs upgrading to stakeholder capitalism.

Haydn Shaughnessy wrote about this back in 2012, in Forbes , The Emergence of Social Capitalism: Adaptation or Threat? Stakeholder capitalism needs to be built with stakeholder businesses. These businesses still have profit as a primary focus, but they recognise and account for their impact on the environment, the communities within which they operate and the management of their suppliers and staff.

Unlike their industrial capitalist parents, stakeholder capitalists don’t work in isolation. They work with others and factor into their costs the impact they're having on the wider environment, the world and on other businesses. It’s a fundamental and very important difference. Yanis Varoufakis refers to it as "democratic socialism" which works for him and his left leaning ideas and Marco Rubio’s calls it “common good capitalism” which works for his Republican right leaning tendencies. However "stakeholder capitalism" would be equally liked and disliked by both sides so making it an ideal name to run with, at least for now.

As Winston Churchill once said:

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

Stakeholder capitalism brings together business, society and government into a single place, where the interests of all three are met equally at the same time.

What is the difference between Shareholder Capitalism and Stakeholder Capitalism?

Stakeholders in a company have a vested interest in it as they are affected by what it does and how it performs. In contrast to stakeholder capitalism, shareholder capitalism focuses more exclusively on achieving beneficial outcomes for companies and their shareholders through profitable growth. In the 1970s, the economist Milton Friedman was an influential voice in support of shareholder capitalism as the way forward for businesses.

Traditionally, business owners are capitalists who own the means of production and pay wages to employees who work on their behalf. Flaws in capitalism concerning the exploitation of workers by factory owners were highlighted in the 19th century, in particular by Karl Marx, the German philosopher who witnessed first-hand the deprivations caused by the industrial revolution on his visits to Manchester. Social reform from the 19th century led to greater protection of employees, an important stakeholder group. 

Marx and Friedrich Engel’s pamphlet The Communist Manifesto viewed capitalism as a historical stage that would be followed by socialism – whether through revolution of political reforms and structural change. The threats to individuals posed by shareholder capitalism have influenced the works of many great authors, from Charles Dickens to George Orwell. 

Shareholder capitalism isn’t in danger of being overthrown, but it is evolving – rapidly. 

Source: Avenis

What are the challenges of Stakeholder Capitalism? 

To be effective, stakeholder capitalism needs to strike the right balance with the demands of traditional shareholder capitalism. In his book Stakeholder Capitalism, Schwab highlights the list of major socio-economic issues that have to be tackled:

  • Rising income inequality and slow wage growth
  • Slowing growth, innovation and productivity
  • Global debt
  • Exploitation of natural resources that is damaging the environment 

The Embedding Project, which helps companies embed social and environmental factors in their decision-making, interviewed hundreds of senior leaders of global companies to identify these key stumbling blocks facing stakeholder capitalism

  • Not all positive contributions offset adverse impacts, for example, making carbon credits to cover carbon emissions
  • Companies need to do more to balance all interests
  • Meeting stakeholder expectations might not be enough in the longer term
  • Focusing too much on stakeholders’ risks and ignoring bigger systems that are at play, for example, a well-intentioned environmental action might destabilise larger ecosystem activity. 

A flaw in stakeholder capitalism is that businesses trying to balance diverse priorities can cause confusion that may lead to so called garbage can organisations. Some people worry that stakeholder capitalism in the 21st century could fail for the same reasons they believe it did in the 20th century. 

Other challenges for businesses to face when they embrace stakeholder capitalism include: 

  • Being too vague on your goals and what success looks like
  • Trying to do too much at the same time
  • Not being accountable
  • Not dealing with resistance to change from shareholders or conflicts between stakeholders 

Another significant challenge is cynicism in the ability of stakeholder capitalism to deliver on its promises. People can be turned off by tokenism and actions that are really no more than public relations exercises – talking the talk rather than walking the walk. Stakeholder capitalism initiatives can also be hijacked for other purposes, for example, as an excuse to cut workforce numbers. 

Implementing Stakeholder Capitalism 

Attention is being given to how best to transition to stakeholder capitalism and ensure it can be sustained. In conjunction with the likes of Deloitte, EY, KPMG and PwC, the World Economic Forum has proposed a set of common metrics that encourage consistent reporting by businesses of sustainable value creation. 

The aim is for these metrics to be used in corporate annual reports across all industry sectors and countries. There are 21 core metrics where information is already reported and a further 34 metrics that are less established. All metrics are aligned with four ESG priorities: governance, planet, people and prosperity. 

A report by the London Business School and the Investor Forum urges investors to use their influence to bridge the perceived divide between the role of shareholders and the expectations of stakeholders. The report recommends action in two key areas: 

  • A systematic approach in responding to stakeholder issues
  • Better alignment of interests between investors and stakeholders 

Consultants McKinsey identifies five steps to getting stakeholder capitalism right

  • Know your stakeholders
  • Understand stakeholders’ needs
  • Define and measure how you will meet stakeholders’ needs
  • Execute your stakeholder capitalism strategy
  • Sustain long-term value creation for all your stakeholders  
WEF-IBC Measuring Stakeholder Capitalism Report 

What are ESG principles?

You may think ESG (Environmental, Social and Governance) principles are only for investors and big business, but they’re not. Small companies have investors even if it’s just the owner and staff that need to feel they have a sense of purpose too.

The world has witnessed three previous major industrial revolutions which have harnessed emerging technology to change the way we live and work. The First Industrial Revolution used steam and water to mechanise industry. The second witnessed the invention of electricity and mass production. And, the third was the age of computers and information.

And that includes business. Business is often seen as corrupt or evil, its only interest being itself, its profits, its shareholders, not so much its customers and employees. But that is changing fast too. We’re all too connected now for anything to exist for itself.

Environmental Principles

Looking after the planet upon which your business operates. For most of us, no all of us, that is still earth. The days of our world being seen as an unlimited resource for us to plunder are over. Where does your energy come from, or the resources you use to serve your customers? Is the planet being slightly depleted every day you are in business? Consider these things carefully.

Social Principles

The social principles are all to do with you how you treat your staff, your customers, partners and suppliers, anybody who comes into contact with your business. Think of all the things you think you should be doing or would like to do, and you’ve about got it – paying people on time, recognition, training, coaching, personal development, equal opportunities, being fair and equitable with everyone, this can all help with employee engagement.

Governance Principles

The governance principles are all about the management structure, in the main those of the directors, owners and shareholders. It is also about the business’ transparency and ethics. It points towards creating a positive culture with the correct values and fair compensation.

So all this makes perfect sense, there’s not much you can disagree with there. These things aren’t generally considered as they don’t help to improve the bottom line when a business is run like a machine when it is very transactional. These things will start impacting your bottom line when they become essential to your customers, employees and suppliers. 

How do companies benefit from ESG principles?

When Marks and Spencer implemented “Plan A” for their customers to have a positive impact on wellbeing, communities and the planet they saved $200M annually. Coca-Cola created a competitive advantage when it reduced the amount of water used with its sustainability approach.

All companies of any size can benefit from thinking about how they can operate more efficiently. Working more efficiently increases productivity and profitability, which becomes a competitive advantage.

Your company’s purpose, values and beliefs should be reflected in all that you do. Just considering ESG principles in your decision making is enough to get started. If your staff follow suit, then you’re on your way, nothing will develop a positive working culture better than a shared sense of purpose.

How investors are integrating ESG principles

Investors will consider these aspects of your business too. They’ll want to see you can make a profit while addressing these ideas, especially when your investors are thinking long term. There is not a single way of integrating ESG into your business. Zurich looks at ESG Integration with training, providing information, reviewing processes and the active involvement of the owners.

Is Corporate Social Responsibility (CSR) the same as Environmental, Social and Governance (ESG)?

People are sometimes confused as to the difference between CSR and ESG as the two encompass the same topics. But the fundamental difference between CSR and ESG is the perspective from which it was taken. CSR is more about the activities that businesses must do to build relations with stakeholders, while ESG is taken from an investor’s point of view by taking into consideration non-financial factors as well as financial factors in investment decisions.

Source: SK hynix Newsroom 

Sometimes, though, in some businesses’ implementation of CSR, the term greenwashing has come into existence. Greenwashing means that companies mislead people into thinking that they are environmentally conscious but in reality they are not making any efforts to be sustainable.

How to measure Stakeholder Capitalism?

As they say, “what gets measured, gets managed”, so how to measure stakeholder capitalism? A part of the answer lays with ESG; Environmental, Social and Governance criteria, and a white paper commissioned by the World Economic Forum’s International Business Council (IBC) called Measuring Stakeholder Capitalism - Towards common metrics and consistent reporting of sustainable value creation. This contains 21 core metrics and 34 expanded metrics with the goal of creating a global reporting system.

The framework divides the metrics into four areas — principles of governance, planet, people, and prosperity — that serve as the foundation for ESG reporting standards.

Each of these considers the 17 SDGs:

Stakeholder Capitalism SDG Principles of Governance Metrics

Stakeholder Capitalism SDG Principles of Governance Metrics

SDG12: Responsible consumption and production, SDG16: Peace Justice and strong institutions, SDG17: Partnerships for the goals

Stakeholder Capitalism SDG Planet Metrics

Stakeholder Capitalism SDG Planet Metrics

SDG6: Clean water and sanitation, SDG7: Affordable and clean energy, SD12: Responsible consumption and production, SDG13: Climate action, SDG14: Life below water, SDG15: Life on land 

Stakeholder Capitalism SDG People Metrics

Stakeholder Capitalism SDG People Metrics

SDG1: No Poverty, SDG3: Good health, SDG4: Quality Education, SDG5: Gender Equality, SDG10: Reduced Equalities

 

Stakeholder Capitalism SDG Prosperity Metrics

Stakeholder Capitalism SDG Prosperity Metrics

SDG1: No poverty, SDG8: Descent economic growth, SDG9: Industry innovation and infrastructure, SDG10: Reduced inequalities

To Wrap It Up

Stakeholder capitalism is concerned not only for the shareholders but for all those who have a stake in the business – the employees, suppliers, customers, partners, society and the planet. To address the challenges of stakeholder capitalism, we must set ourselves to incorporate the ESG (environment, social and governance) principles not only with our reporting systems (or metrics) but also to embed these principles into the fabric of our businesses. We must approach this in such a way that our stakeholders have no doubt that we hold their best interests at heart. We can do this by being transparent in our governance, taking the utmost care to show how we value our people and by making firm decisions that support our environment.

Stakeholder Capitalism FAQ

Paul Freudenberg - Awardaroo!

About Paul Freudenberg

Paul Freudenberg founded Awardaroo in 2005. With over 25 years in project and programme management and 17 years in business productivity improvement, Paul has set the mission of Awardaroo to help increase the business productivity of 10M businesses to amplify profitability, create a greener planet and build a better world by 2030, WATCH VIDEO.

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