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Stakeholder Capitalism - FAQ

What role should your business play in stakeholder capitalism?

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What is the Davos Manifesto published by the World Economic Forum?

The World Economic Forum published its first manifesto when it was established in 1973. To coincide with its 50th anniversary and with stakeholder capitalism gaining traction, a revised manifesto was published to promote “a better kind of capitalism”. 

Why is the Davos Manifesto important?

The manifesto says that the purpose of a company is to engage all its stakeholders in shared and sustained value creation. It recommends that companies should:

  • Serve customers by providing a value proposition that best meets their needs

  • Treat its people with dignity and respect

  • Consider suppliers as true partners in value creation

  • Serve society at large through its activities, support the communities in which it works, and pay its fair share of taxes

  • Provide shareholders with a return on investment that takes into account the incurred entrepreneurial risks and the need for continuous innovation and sustained investments 

Who are the Business Roundtable and why are they important to stakeholder capitalism?

The Business Roundtable is a group of chief executive officers from leading US companies with combined annual revenues in excess of $9 trillion and more than 20 million employees. They agree that the purpose of a company is to promote promoting “an economy that serves all Americans” and advocate an increase in stakeholder capitalism. 

Why is the British Academy’s publication of its Principles for Purposeful Business important to stakeholder capitalism?

Principles for Purposeful Business is a programme that seeks to reform British business for the 21st century. It identifies what needs to change and how it can be changed.   

  • Adopt and specify the purposes they arecommitted to achieving

  • Be required to adopt a social license to operate as their purposes require and maintain that license through engagement

  • Identify shareholders supportive of their purposes who, through holding significant blocks of shares for extended periods of time

  • Establish board governance that promote the successful adoption and implementation of their purposes.

  • Use a standardised set of metrics that assess the extent to which companies adhere to required standards of conduct in relation to people and planet.

  • Restate their profits to make provisions for the costs of remedying failures to fulfil their purposes

  • Through their shareholders, provide the financial risk capital required

  • Establish partnerships and demonstrate their commitments to them by making the investments required. 

What is the Manifesto for Corporate Governance by the Institute of Directors?

The Institute of Directors (IoD)’s manifesto has been described as a blueprint for the way businesses behave. It supports the development of an industry-led Code of Conduct for company directors.  

What is meant by ESG?

Environmental, social and governance (ESG) is described by consultants Gartner as a collection of corporate performance criteria to assess how a business is run and its impact on the environment and society. It is a constantly evolving concept that has gained huge importance in recent years as more information is gathered and reported on these criteria. The Economist notes that “we are only at the beginning of the beginning of how this traditionally ‘non-financial’ data will matter.  

What is corporate governance and why is this relevant to stakeholder capitalism?

The ‘G’ in ESG means the way a company is run in terms of supervising its management, managing its risks, acting competently, with integrity and in the interests of all of its stakeholders. In the UK, the Companies Act 2006 sets out the legal and governance requirements expected of company directors. The Financial Reporting Council’s Corporate Governance Code explains the rules and emphasises the relationships between companies, shareholders and stakeholders.  

What is a shareholder? What do they own?

A shareholder owns shares in a company. They benefit when the value of their shares goes up and when company profits are distributed to shareholders as dividends. Shareholders can lose out if the value of the company (and the price of its shares) falls. Shareholders are entitled to vote on company resolutions, usually at annual general meetings.  

What is the shareholder approach of the UK’s Companies Act 2006?

The Companies Act 2006 introduced the principle of enlightened shareholder value. However, it maintains what the University of London describes as a dichotomy between the interests of shareholders and stakeholders. The Act states that company directors have a duty to act in a way that promotes the success of a company for the benefit of its shareholders, but when fulfilling this duty, they should also have regard for the wider group of stakeholders.

 

Do UK companies need to comply with the Companies Act 2006?

The Companies Act 2006 brought together various pieces of legislation into a single, comprehensive code of law for UK companies. The Act places statutory duties on company directors – section 172 says company directors have a “duty to promote the success of the company” by acting in good faith. Companies and their directors can face fines or other penalties for non-compliance with the Act. In certain circumstances, company directors can be held personally responsible for wrongdoing.  

What are the legal responsibilities of the directors on a company board?

In the UK, the Companies Act 2006 outlines the statutory duties of company directors. Directors can be personally liable if their company fails to carry out its legal duties, such as filing accounts, as well as losses the company makes that are due to the result of board decisions. Company directors can be disqualified if they act improperly (under the 1986 Company Directors’ Disqualification Act).  

What questions can a board of directors ask themselves to promote stakeholder capitalism?

Company directors need to focus on being ethical and acting in the interests of employees, customers, suppliers and the wider community. They need to know who are their stakeholders and what each of them wants (which can differ widely). They should ask how they can best develop ESG strategies that are fit for purpose and review them regularly.

They can also engage with key stakeholders by creating lines of communication so they find out the right ESG questions to ask themselves. Directors also need to be sure they have the right skills and training to steer stakeholder capitalism forwards and that they have the right senior leadership in place to drive positive progress.  

Why is stakeholder capitalism a challenge for CEOs?

The responsibility for implementing stakeholder capitalism fall into the lap of company leaders. They have the duty (and legal obligation) of doing the right thing for all stakeholders and for coming up with effective and robust strategies to achieve this aim. The challenge is the dichotomy that stakeholder and shareholder expectations don’t always share common ground. If stakeholder capitalism is the way forward, then the challenge for CEOs is to remove barriers that prevent progress. 

Who was Milton Friedman?

Nobel prize-winning US economist Milton Friedman was an advocate of shareholder capitalism. He believed that “an entity’s greatest responsibility lies in the satisfaction of the shareholders”.  

Who was Lord Cadbury and what did his 1992 report say?

The Financial Aspects of Corporate Governance report was published in 1992 by a committee chaired by Sir Adrian Cadbury and comprising members of the Financial Reporting Council, the UK Stock Exchange and the accountancy profession.

The report focused on financial reporting and accountability following several high-profile business scandals. It made recommendations to improve standards of corporate governance. Cadbury was a businessman and chairman of the Cadbury confectionary company (now owned by Mondelez).

The Cadbury family was known for promoting improvements to worker welfare that included building the Bournville model village in Birmingham in the 1890s. 

Why are traditional financial reporting metrics impeding stakeholder capitalism?

Financial reporting metrics traditionally focus on shareholder capitalism requirements: how a business is operating in the interests of those who own it by holding its shares. The World Economic Forum is promoting the establishment of metrics that measure sustainable value creation that will benefit all stakeholders.

 

Who is asking businesses to adopt stakeholder capitalism?

A better question might be ‘Who isn’t asking businesses to change?’. Employees and customers expect much more from companies. So do politicians, legislators and communities. There is a growing consensus that profit-driven shareholder capitalism in its current form can’t solve the world’s problems.

Companies are realising that in many situations, the buck has to stop with them and they are taking appropriate steps along the path of stakeholder capitalism. As McKinsey points out: “There is palpable anger and disgust with the idea of capitalism and the role of business in many societies”.  

What role does trust play in adopting stakeholder capitalism?

Trust that companies will do the right thing is essential. A growing volume of activity around stakeholder activity, for example, in pursuing ESG objectives, can risk eroding trust in companies if it is done badly.

ESG trust is coming under pressure, according to consultants Edelman, with 82% of respondents in a recent survey saying they thought that companies frequently overstate or exaggerate their ESG progress. The World Economic Forum recommends that companies map out levels of trust across stakeholder groups, identify where action is needed, act and then measure progress in building trust. 

What changes need to be made to the economy for stakeholder capitalism?

Developed economies are changing their focus on how they generate growth by embracing stakeholder capitalism ideas. Among the more prominent examples is the growth in renewable energy that supports stakeholders, for example, in the shift from harmful fossil fuels to electric vehicles and solar energy. 

There is also a growing acknowledgement that developed economies have an obligation to support developing countries in tackling climate change which will support their economic growth.

This interdependence between economies was evident at the COP27 climate change conference in Egypt, where world leaders agreed to set up a ‘loss and damage’ fund to help vulnerable countries hardest hit by climate disasters, as well as to make progress to a low-carbon economy. 

The idea of a circular economy that is good for business, society and the planet is gaining traction. It is a sustainable way of keeping materials, products and services circulating for as long as possible.

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