The Rise of Stakeholder Capitalism
The Shift from Shareholder to Stakeholder Primacy
Excerpt from ‘The New Profit Paradigm: Balancing Shareholder Value with Stakeholder Engagement’
This article is an excerpt from ‘The New Profit Paradigm: Balancing Shareholder Value with Stakeholder Engagement’ available on Amazon, Apple Books and Barnes and Nobles.
The genesis of the stakeholder capitalism concept can be traced back to the 20th century, but its rise to prominence has been a particularly defining feature of the past few decades. This shift was, in part, a response to the limitations and criticisms of the shareholder primacy model — a model that espouses the view that a corporation’s primary responsibility is to its shareholders, and the primary metric of success is shareholder value.
The shareholder primacy model, rooted in the economic theories of the 1970s, notably those of Milton Friedman, has dominated the corporate world for several decades. While it has undeniably contributed to significant economic growth and wealth creation, it has also led to undesirable side effects, such as short-termism, wealth inequality, and environmental degradation. The 2008 financial crisis exposed many of these shortcomings and prompted a broader questioning of the model.
In contrast, stakeholder capitalism embraces a more holistic view of corporate responsibility. It recognizes that businesses exist within a complex ecosystem of relationships and that their long-term success is tied to the health of this broader ecosystem. This shift is not just philosophical; it’s grounded in an evolving understanding of how value is created and sustained.
Under stakeholder capitalism, businesses engage with a broader set of stakeholders, including employees, customers, suppliers, communities, and the environment, as well as shareholders. The idea is that by considering and balancing the interests of all these stakeholders, companies can achieve more sustainable and inclusive growth.
A significant milestone in the rise of stakeholder capitalism was the release of the Business Roundtable’s updated Statement on the Purpose of a Corporation in August 2019. This statement, signed by 181 CEOs of major U.S. corporations, affirmed a commitment to lead their companies for the benefit of all stakeholders.
However, the transition from acknowledging the importance of stakeholder capitalism to its effective implementation is not straightforward. Companies face many challenges in identifying their key stakeholders, understanding their interests and expectations, integrating stakeholder considerations into their decision-making processes, and communicating their efforts effectively.
As we navigate through this shift, we can learn valuable lessons from companies that have been early adopters of stakeholder capitalism. These trailblazers, such as Unilever with its Sustainable Living Plan, Patagonia with its commitment to environmental activism, or Salesforce with its 1–1–1 model of integrated philanthropy, have shown that it’s not only possible to do well by doing good but that this approach can also offer a competitive advantage.
But for every success story, there are also cautionary tales — companies that have struggled to balance stakeholder interests, that have failed to live up to their commitments, or that have faced backlash for perceived “greenwashing.” These examples underscore the complexities of stakeholder capitalism and the importance of authenticity, transparency, and accountability in this approach.
Real-world Examples of Stakeholder Capitalism
One of the best ways to understand the principles of stakeholder capitalism is to observe them in action. Several companies around the world exemplify this approach, demonstrating how stakeholder engagement can lead to superior business performance. Let’s delve into a few illustrative examples.
Unilever: Under the leadership of former CEO Paul Polman, Unilever implemented its Sustainable Living Plan in 2010, a blueprint for sustainable business. The plan set ambitious targets to decouple the company’s growth from its environmental footprint while increasing its positive social impact. Unilever prioritized initiatives such as improving health and well-being for billions of people, reducing environmental impact, and enhancing the livelihoods of millions. Their commitment to stakeholder capitalism helped Unilever not only meet societal needs but also increase its bottom line, demonstrating that sustainability and profitability can go hand in hand.
Patagonia: Patagonia, the outdoor apparel company, is known for its commitment to environmental and social responsibility. From donating a percentage of their profits to environmental causes to encouraging customers to repair their gear instead of buying new ones, Patagonia exemplifies stakeholder capitalism in action. These practices resonate with customers who share the same values, creating a loyal customer base that drives sustainable growth.
Salesforce: Salesforce, a leading cloud-based software company, has embedded the principles of stakeholder capitalism into its business model through its 1–1–1 philanthropy model. The model commits the company to donate 1% of its equity, 1% of its employee time, and 1% of its product to improve communities around the world. This integrated philanthropic approach has helped Salesforce build strong relationships with its stakeholders while enhancing its brand reputation.
Danone: Global food company Danone has been a pioneer in the corporate sustainability movement, with a long history of stakeholder engagement. In 2020, Danone obtained ‘Enterprise à Mission’ status in France, reflecting its commitment to balancing social, environmental, and economic impact. Their mission, “Bringing health through food to as many people as possible,” demonstrates their commitment to stakeholders ranging from farmers and employees to customers and communities.
Interface: Interface, a modular flooring company, has made significant strides in its mission to become a sustainable enterprise. Since the mid-90s, under the leadership of the late Ray Anderson, Interface has significantly reduced its environmental footprint by focusing on design and innovation, aiming for zero waste and zero emissions. Their commitment to environmental responsibility has resonated with customers and employees alike, contributing to Interface’s market leadership.
These companies, along with many others, have demonstrated that stakeholder capitalism is not just a theoretical concept, but a practical and viable approach to doing business. They have shown that when companies consider the broader ecosystem of stakeholders, they can build stronger, more resilient businesses.
It’s worth noting, however, that successful implementation of stakeholder capitalism requires more than just a commitment. It involves a strategic shift in how businesses operate, engage with stakeholders, and measure success. It requires transparent and accountable leadership, effective communication, and the willingness to take a long-term view.
The rise of stakeholder capitalism signals a fundamental shift in our understanding of the role of businesses in society. It marks a move away from a narrow, short-term focus on profits towards a broader, longer-term focus on sustainable value creation. As we delve deeper into this concept and its implications in the following chapters, we invite you to consider how it applies to your own organization and how you can contribute to this transformation.
As we delve deeper into the rise of stakeholder capitalism, it is important to understand the driving forces behind this shift. Technological advancements, coupled with increased transparency and faster dissemination of information, have empowered stakeholders like never before. Consumers are increasingly using their buying power to support companies that align with their values. Employees are looking beyond paychecks, seeking workplaces that offer purpose and positive cultures. Investors, too, are demanding more, considering environmental, social, and governance (ESG) factors in their investment decisions.
The role of regulatory bodies and governments in this shift should not be underestimated. The European Union’s Non-Financial Reporting Directive, for instance, requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. In the US, the Securities and Exchange Commission is also considering how to enhance ESG disclosures.
Another driving force is the growing awareness of the interconnectedness of global challenges such as climate change, social inequality, and public health. The COVID-19 pandemic underscored this interconnectedness, highlighting the need for collective action and the role that businesses can play in such responses. It amplified the voices calling for a more responsible form of capitalism — one that takes into account the broader impact of business decisions.
While the transition towards stakeholder capitalism is gaining momentum, it is not without its critics. Some argue that it distracts from the fundamental role of businesses in creating economic value. Others question the ability of businesses to balance competing stakeholder interests effectively. There are also concerns about greenwashing and the lack of standardized metrics to measure performance on non-financial indicators.
Despite these challenges, the trend towards stakeholder capitalism appears to be more than a passing fad. It’s a reflection of changing societal expectations and a growing understanding of the long-term business benefits of taking a broader stakeholder view. Businesses that can successfully navigate this transition are likely to be more resilient, more innovative, and better equipped to thrive in the long run.
The concept of stakeholder capitalism invites us to question established norms and practices. It encourages us to look beyond the next quarter’s profits and consider the broader, long-term impacts of our business decisions. It prompts us to listen more carefully to the voices of our stakeholders and to engage with them in more meaningful and constructive ways.
The rise of stakeholder capitalism also serves as a reminder of the role of businesses as corporate citizens. It underscores the reality that businesses do not operate in a vacuum but are part of a broader socio-economic system. Their actions can have far-reaching impacts on this system, and with these impacts comes a certain degree of responsibility.
Looking ahead, the move towards stakeholder capitalism is likely to continue and even accelerate. The challenges and opportunities of the 21st century demand a new approach to business — an approach that is more inclusive, more sustainable, and more connected to the broader societal context.
