ESG Investing

Is Stakeholder Capitalism the Next Normal?


As the coronavirus pandemic continues to unravel global norms, experts and observers are increasingly using one term to describe the possible future of global business and finance: stakeholder capitalism.

What Is Stakeholder Capitalism?

Stakeholder capitalism is an approach that incorporates the needs of every constituent in a company’s operation. Far from a new term or concept, it was a popular management theory in the 1950s and 1960s and informed professor Klaus Schwab’s 1973 “Davos Manifesto,” published two years after the establishment of the annual economic forum.

Since then, tax cuts and deregulation have solidified the widespread acceptance of the idea that a public company’s purpose is to maximize shareholder value, Morningstar’s Jon Hale writes in GreenMoney. This “shareholder primacy” view stands in sharp contrast to the stakeholder engagement endemic in stakeholder capitalism, which places a company’s employees, consumers, communities of operation, and supply chains on equal footing with its shareholders. At its fullest expression, stakeholder capitalism means living wages and optimal working conditions for both staff and suppliers, environmental sustainability across all operations, improved diversity and inclusion, and long-term financial success for the company.

Stakeholder capitalism is sometimes conflated with sustainable investing. In reality, the latter is a strategy for furthering the former. Sustainable investors will look to invest in companies that embrace stakeholder capitalism’s principles of stakeholder engagement and use their role as shareholders to push companies in a more stakeholder-friendly direction.

Stakeholder capitalism places a company’s employees, consumers, communities of operation, and supply chains on equal footing with its shareholders.

Stakeholder Capitalism and COVID-19

Before the COVID-19 pandemic, stakeholder capitalism appeared to be on the rise: in August 2019, the Business Roundtable released a statement declaring that a business’s purpose is stakeholder value. “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country,” wrote the 181 CEOs. Stakeholder capitalism was the theme of the Davos January 2020 forum, which updated Schwab’s original manifesto to more explicitly endorse stakeholder capitalism.

How much action has backed up these statements? As the pandemic wreaked economic chaos in the US, 25% of the 301 largest US employers furloughed employees. Among those companies are members of Davos’s business council and Roundtable signatories. As the New York Times reports, Marriott was paying dividends to shareholders amid its furloughs, while Amazon was accused of ignoring worker requests for better protection from the virus.

Taking stakeholder capitalism from a statement of purpose to a way of doing business starts with building consensus about what needs to change—a challenge that is possible but undeniably difficult. There is currently no single way to evaluate a company’s stakeholder friendliness; even among companies that have pivoted to better labor or environmental standards, revenue, profits, and other financial measures are the primary decision drivers. Regulations and tax incentives to backstop statements like the ones made at Davos and by the Business Roundtable will also be key, as will reaching agreement on what those new policies should be. A world where stakeholder engagement defines the conversation about shareholders, rather than the other way around, is one that is better prepared to weather future crises.

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