Stakeholder Capitalism: A New Business Imperative

We’re living in an era of intense inequality. While billionaires can’t give their money away fast enough, 1 in 10 US households regularly struggle to put food on the table. This disparity has made many people reexamine the systemic forces that uphold inequity. Capitalism included.

Along with individuals, businesses large and small are rethinking their role in society. More and more companies are balancing the drive for innovation and profits with a need to advance social good. In turn, they are embracing stakeholder capitalism.

What is stakeholder capitalism?

In stakeholder capitalism, corporations serve the interests of all stakeholders, including their employees and their local community, not just shareholders. It’s built upon the belief that businesses have a responsibility beyond just their bottom line.

The goal of stakeholder capitalism is to reframe business decisions and priorities to create long-term value for employees, customers, suppliers, local communities, investors, and other stakeholders. Compared to a more traditional way of doing business, stakeholder capitalism operates with a longer, wider, more holistic view. It incorporates the company’s impact beyond its investors and defines success as more than just profit.

This economic philosophy views businesses as part of an ecosystem. The success of the business is dependent upon the economic, social, and physical health of all stakeholders. Every part of this ecosystem must remain healthy for stakeholders to thrive.

Within this framework, social responsibility guides decisions in the C-suite and boardroom. As corporate leaders set priorities, they weigh their organization’s impact on the environment and every person along the supply chain.

When actor and philanthropist Paul Newman made a $300,000 profit the first year he sold salad dressing, he said, “Let’s give it all away to those who need it!” This is an extreme example, but Newman’s altruistic impulse helped redefine what role businesses could play in society. In 1999, Newman co-founded Chief Executives for Corporate Purpose® (CECP) whose motto captures the essence of stakeholder capitalism: “creating a better world through business.” CECP carries on Newman’s legacy today by advising companies of all sizes how to incorporate social impact into their business mission.

Clothing and gear company Patagonia has a long-standing reputation for its environmental activism. In 2002, its founder Yvon Chouinard started the 1% for the Planet initiative, which asks businesses to commit 1% of their annual sales to environmental causes.

Last year, Chouinard transferred ownership of Patagonia to a trust to ensure its profits are used to address the climate crisis. “Earth is now our only shareholder,” he wrote on the Patagonia website. “Instead of extracting value from nature and transforming it into wealth for investors, we’ll use the wealth Patagonia creates to protect the source of all wealth.”

These are just two examples of corporate leaders reorienting their companies to serve all stakeholders. If you’re looking for more inspiration, there are countless brands getting serious about social impact.

If stakeholder capitalism seems reminiscent of kinder times of old, you’re right. Most businesses operated according to its principles until it was abandoned in the 1970s, (no) thanks to Milton Friedman.

The arguments against stakeholder capitalism

Economist Milton Friedman argued corporate leaders should not get distracted by social and environmental issues. Their job is to make profits and keep shareholders happy. He got his way for a while, but the negative impacts of this strategy became too much to bear for businesses and society as a whole. Ultimately, the C-suite had to recalibrate their priorities.

At the 2019 Business Roundtable, CEOs resolved to lead their companies for the benefit of all stakeholders. Keeping those commitments has been challenging.

Two arguments are frequently used against stakeholder capitalism. Some say the required trade-offs are impossible to make, but that is taking a short-term view.

The first argument is that the costs of adopting social impact into a business mission may seem high. But that’s only if you don’t consider the costs of not acting. Look at the recent train derailment in Ohio as an example. Norfolk Southern Railway cut labor and operations costs, and though this cost savings might have looked good in the short-term, these conditions contributed to an incredibly costly disaster that was devastating for the company, the community, and the environment. Considering these possible negative impacts is actually good business. And business leaders are familiar with making complex trade-offs like these.

The second argument claims it’s impossible to balance the competing interests of stakeholders. But this is also familiar ground for executives. CEOs are constantly balancing interests of existing customers, potential customers, employees, shareholders, suppliers, board members, and others. Plus, this argument assumes that these parties’ interests will be perpetually competing. Stakeholder capitalism actually helps leaders find where stakeholder interests overlap with one another.

Why a sole focus on profit isn’t sustainable

There’s nothing wrong with profit, but it’s only one measure of a company’s success. Short-term profit doesn’t always indicate long-term success. Imagine a seafood restaurant chain with a glowing quarterly report showing increased profits and managerial bonuses. But what’s going on behind the numbers?

Their low food costs are made possible by low wages for employees and illegally caught shrimp from ships that are not adhering to local conservation regulations meant to protect wildlife and keep the fishing industry sustainable for the long term.

Over time, the shrimp population that the restaurant depends on gets depleted. Costs go up. Plus, the local community that has depended on the fishing industry for centuries is now left struggling and destabilized.

On top of that, low wages at the restaurant have created an environment where employees aren’t invested in their work. Turnover is high, customer service poor, and managers spend a good portion of their time recruiting and training new staff.

So yes, for the short term, there were high quarterly profits. But the very decisions which made that possible have undercut the potential for long-term success and had a negative impact on the environment and the community. It turns out, decisions made solely with profit in mind have worrisome long-term implications for everyone. And in the end, they can have a negative impact on profit, too.

Why stakeholder capitalism is a necessity for companies and people to thrive

The long-term implications of a business practicing stakeholder capitalism are much rosier.

• Employers: Companies with strong values find it easier to recruit, engage, and retain employees. A recent survey by Qualtrics found that 56% of employees wouldn’t even consider a job from a company whose values didn’t align with theirs. In particular, younger generations are quick to judge prospective employers’ commitment to social good. They wonder what drives your work, besides making your stockholders richer.
• Consumers: People, especially Gen Z and Millennials, make purchasing decisions based on a company’s social and environmental record and image. In fact, a recent consumer culture report found that 83% of millennials prefer brands that align with their values. Corporate leaders practicing stakeholder capitalism don’t have to worry about how their company values will resonate with consumers.
• Investors: ESG ratings influence investment decisions. According to Garter, 85% of investors consider ESG factors in their investment decisions. This more sophisticated and holistic way to assess a company’s record helps investors understand what’s behind a stock price, including factors that could lead to stock trouble in the future.

Stakeholder capitalism is slowly becoming more dominant as companies and investors realize that being a force for good in the world is actually a business imperative. Since the 2019 Roundtable, more and more corporate leaders are making decisions that set their companies up for a sustainable and profitable future for all stakeholders. Many of them are using social impact software like Submittable to make it easier to do more good.