Stakeholder Capitalism: A Fad or the Future?

Image of Carolina Posma
Carolina Posma
Published: Jun 15, 2022
Last Updated: Jun 15, 2022

Imagine a world where every company has the same goals as all of its stakeholders. They want to help their employees, they want to help the environment, and they want to improve people's lives in their community. Then, imagine that this company is more successful than ever before because of these goals. It sounds crazy, but it's called stakeholder capitalism and it could be the future of business.

In this blog post, we'll explain what stakeholder capitalism is, how it differs from shareholder capitalism, and why it might be the wave of the future. However, there will also be a critical note on stakeholder capitalism.

What's the Difference Between Stakeholder Capitalism and Shareholder Capitalism?

You’ve probably heard of shareholder capitalism. The idea is that the only stakeholders are shareholders, and that a company's purpose is to maximize its shareholder value. But what you might not have heard of is stakeholder capitalism. This was a movement that already started 50 years ago and gained steam in 2019, with the Business Roundtable (an organization of CEOs of America's largest companies) issuing a statement in support of stakeholder capitalism.

Stakeholder capitalism takes a different approach from shareholder capitalism. The core of stakeholder capitalism is that businesses should focus on all stakeholders—employees, customers, suppliers, and the communities they operate in—and not just shareholders. The goal is to create long-term value for all parties involved.

While it may sound like just another buzzword for “good corporate citizenship," there are real benefits to this approach for your business as well as society at large.

The Five Pillars of Stakeholder Capitalism

The Business Roundtable's statement on stakeholder capitalism outlines five pillars that companies should focus on:

  1. Delivering value to customers: This means businesses should focus on creating products and services that customers want and need, at a fair price.
  2. Investing in employees: This means providing employees with good jobs and opportunities for career growth. It also includes things like providing benefits, such as healthcare and retirement plans.
  3. Dealing fairly and ethically with suppliers: This means treating suppliers fairly, paying them on time, and maintaining open communication.
  4. Supporting the communities in which they operate: This means giving back to the community through things like charitable donations and volunteerism. It also includes being a good steward of the environment.
  5. Generating long-term value for shareholders: This means making decisions that will create sustainable, long-term value for shareholders, rather than short-term gains.

What's Behind the Push for Stakeholder Capitalism?

Whats Behind the Push for Stakeholder Capitalism

Stakeholder capitalism is nothing new. The idea that stakeholders should have a say in how companies are run has been around for decades. However, the current push toward stakeholder capitalism is being driven by a number of factors, including:

  • A decline of trust in the government and media. In an age of fake news and political polarization, it's no surprise that people are losing trust in institutions. This has led to a decline in faith in the government and media, and a desire for businesses to step up and fill the void.

  • The COVID-19 crisis. The COVID-19 pandemic has highlighted the need for businesses to focus on more than just profits. It has become clear that an economic system only focusing on short-term profitability goals isn't sustainable.

  • Increasing economic inequality. The gap between the rich and poor has been growing for years and is only getting worse. There is a growing awareness of the issue of economic inequality, both within countries and globally. This has led to a desire for businesses to do more to benefit all stakeholders, not just shareholders.

  • The rise of social media. Social media has given a voice to employees, customers, and other stakeholders. This has made it easier for them to hold businesses accountable for their actions (or lack thereof).

  • The rise of the millennial generation and their values. Millennials are the largest generation in the workforce and they have different values than previous generations. They care about purpose, social responsibility, and making a positive impact. This is leading businesses to focus more on stakeholder capitalism.

  • The growth of the gig economy. The gig economy - where people work as independent contractors, rather than full-time employees - has made it easier for businesses to mistreat workers. This has led to a push for businesses to do more to protect workers' rights.

  • The rise of environmental, social, and governance (ESG) investing. There is increasing interest in investing in companies that have strong environmental, social, and governance (ESG) practices. This has put pressure on businesses to improve their ESG credentials.

As you can see, there are various reasons for the sudden interest in stakeholder capitalism. However, it's not all good news. There are also some potential risks associated with stakeholder capitalism.

Five Arguments Against Stakeholder Capitalism

Pitfalls to avoid when implementing Stakeholder Capitalism

We've just discussed why there's a push for stakeholder capitalism. While some argue that stakeholder capitalism is a step in the right direction, others contend that it's nothing more than a fad—or even a way for companies to avoid their responsibilities.

Here are five arguments against stakeholder capitalism:

  1. Shareholders will retain primacy. A study shows that most companies that signed the Business Roundtable statement pledging for stakeholder capitalism still prioritize shareholders.

  2. It's just marketing. Some argue that stakeholder capitalism is simply a way for companies to make themselves look good without actually doing anything to benefit employees, customers, or the community. They claim that companies will use social purpose and cause marketing as tools to distract from the fact that they're not actually doing anything to improve the lives of their employees or the planet.

  3. It's impossible to please everyone. With so many stakeholders to consider, it may be impossible to make decisions that satisfy everyone. This could lead to paralysis and ineffectiveness. What's more, it can even be difficult to figure out who the stakeholders are. Anyone can claim to be a stakeholder. This can cause politicization when deciding which stakeholders to prioritize.

  4. It's a distraction from creating value for customers. Some argue that the focus on stakeholder capitalism is a distraction from the real issue, which is creating value for customers. They contend that companies should focus on customer value because that's what drives economic growth and creates jobs.

  5. It's a slippery slope. There’s a risk that companies will use stakeholder capitalism to justify any decision they make. For example, they might claim that a decision is good for employees even if it's really just a way to cut costs.

So, while there is a push for stakeholder capitalism, it's not all good news. There are also some potential risks associated with stakeholder capitalism. Do you think stakeholder capitalism is a step in the right direction? Or is it just a fad?

Key Pitfalls To Avoid When Shifting Your Company To Stakeholder Capitalism

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When you're ready to move your company towards the stakeholder capitalism model, there are a few potential pitfalls to be aware of. This way you can make sure you're not living proof of the critiques we've just discussed.

Here are eight key pitfalls to avoid:

  • Not defining success clearly enough. One of the key steps in moving towards stakeholder capitalism is clearly defining what success looks like for all of your stakeholders. However, this can be easier said than done. It's important to take the time to really think about what success means for each stakeholder group, and to be as specific as possible. Otherwise, you run the risk of setting goals that are too vague or unrealistic, which can lead to frustration and discouragement down the road.
  • Trying to do too much at once. Another common mistake companies make when shifting to stakeholder capitalism is trying to do too much at once. It's important to remember that this is a marathon, not a sprint. You can't (and shouldn't) try to fix everything overnight. Instead, focus on taking small steps and making gradual progress. Trying to do too much at once will only lead to burnout and frustration.
  • Not being transparent or accountable. As we mentioned before, stakeholder capitalism only works if companies are willing and able to be transparent and accountable to their stakeholders. This means regular communication about your company's purpose, plans, and progress. It also means being open to feedback and criticism, and making changes when necessary. If you're not willing to be transparent and accountable, stakeholder capitalism is not the right model for you.
  • Not anticipating resistant shareholders. The fourth pitfall is that some shareholders may resist the change. Shareholders are often more interested in short-term gains and may view stakeholder capitalism as a threat to their bottom line. It's important to engage with shareholders and explain how the shift to stakeholder capitalism will ultimately benefit them in the long run.
  • Using stakeholder capitalism as a way to mask other problems. Another pitfall is that stakeholder capitalism can be used as a way to mask other problems within a company. For example, a company might claim to be focused on environmental sustainability, but at the same time, their employees are working in terrible conditions.
  • Setting standards that are too high. The sixth pitfall is that companies may find it difficult to live up to the high standards they set for themselves. For example, a company might commit to becoming carbon neutral, but find that it is harder than expected to achieve this goal. It's important to be realistic about what your company can and cannot accomplish, and to set achievable goals.
  • Not being aware of tension between stakeholders. The seventh pitfall is that there may be tension between different stakeholders. For example, employees might want higher wages, while shareholders might want to see a return on their investment. It's important to find a balance that meets the needs of all of your stakeholders.
  • Not tracking short-term progress. While it is important to have long-term goals, it is also necessary to set short-term objectives in order to track progress and ensure that the company is making headway. Metrics and evidence are essential in this process, as they provide a way to gauge whether or not the company is on track. Without short-term objectives, it would be difficult to tell if a business is making any progress at all.

Final Thoughts

So what does this all mean for you? The future is uncertain, but the one thing we know for sure is that there's no time like the present to start thinking about your stakeholders.

This is an important way to build trust and create long-term relationships with the people who matter most to your business. If you're not already doing so, now is the time to start considering how you can create value for your employees, customers, suppliers, and community. 

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