A paradigm shift: Shareholder capitalism to stakeholder capitalism

Rising inequality, climatic change, and the impact of COVID-19 are among the few reasons which have created an urgent need for a paradigm shift from shareholder capitalism to stakeholder capitalism as it is an obligation of the companies to play their part in solving the problems of the community they thrive on. Stakeholder capitalism will help them to create a successful, truly value-adding, and sustainable business model. 

• The theme of the Davos manifesto 2020 was stakeholder capitalism, a system in which corporations are oriented to serve the interests of all their stakeholders and create long-term value.
• Shareholder capitalism creates social, economic, and environmental implications that are detrimental to society in the long run. 
• The business Roundtable conference 2019 rejected the idea of maximizing one value to the exclusion of all others. Moreover, serving all stakeholders is an ethical good that can also be a source of competitive advantage.
• COVID-19 has depicted how essential an interdependent world is to address economic, environmental, social, and technological challenges. The fault lines brought about by the pandemic in 2020 are, therefore, critical crossroads.

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Shareholder capitalism can be aptly summarised in the words of the Nobel Laureate economist Milton Friedman – “the business of business is business”. This principle has guided the world economy since the 1970s and focuses essentially on short-term profit returns of shareholders. However, recent years have witnessed growing distrust and resentment against the concept of this form of ‘capitalism’ and the responsibility of business in many societies.

In August 2019, the Business Roundtable, a non-profit association whose members are CEOs of major US (the country that is universally recognised as the citadel of sharholder capitalism) companies, redefined its statement on the purpose of a corporation in order to guide corporate governance. This statement is signed by 181 CEOs who commit to lead their companies by incorporating the interests of all stakeholders including employees, customers, suppliers, shareholders, and communities. More recently, the 2020 Davos agenda of the World Economic Forum prompts this shift from shareholder capitalism to stakeholder capitalism in the light of COVID-19, appropriately reflecting the current political mood. The Davos agenda is a pioneering mobilization of global leaders who have come together to virtually work for a more cohesive, sustainable, and inclusive future. 

The need

Stakeholder capitalism entails creating long-term value not only for shareholders but also for customers, suppliers, employees, communities, and others such as creating a safe and healthy work environment, greater employee security and well-being. For example, Japanese electronics company OMRON encourages employees to exchange and work on their ideas for solving social challenges through the OMRON Global Awards (TOGA) program; while Microsoft uses an Inclusion Index to understand whether employees feel a sense of belonging at work.

Stakeholder capitalism is pertinent to revive the disintegrating legitimacy of business and political institutions. Rising inequalities, financial crisis, climatic change and the collapse of the community trust to populist politics can all be partly attributed to the way companies have been functioning in a selfish manner. Thus, consumers and society expect businesses to embrace responsibilities that can help shareholders, too.

A survey of 34,000 people found that 75% of respondents feel that CEOs cannot stand offstage, watching the action, and must participate in things like training, automation, and immigration. Further, another study has found that companies that take a long-term view—and stakeholder capitalism requires that—perform better w.r.t. earnings, revenue, investment, and job growth. 

Also, shareholder capitalism restraints productive investments. According to the Chief Executive of BlackRock, the world’s largest asset manager, the pressure to keep the share prices high leads to corporate leaders ‘underinvesting in innovation, skilled workforces, or essential capital expenditures.’ Shareholder capitalism can also be held responsible for environmental destruction by pursuing short-term risky behavior, such as fossil fuel extraction or overexploitation of groundwater reserves, which are a prominent threat to the environment. 

COVID-19 has brought to light the appalling challenges that confront us as a society. In India, the sight of tens of thousands of migrants walking back to their villages was a gloomy reminder of the plight of India’s . While white-collar job goers cribbed about ‘Zoom fatigue’, millions of poor Indians had to surrender their livelihood. The government in developing countries like India have limited administrative capacity and fiscal scope to address the challenges of low-income groups. Hence, it is imperative for private sector players to take the lead in job creation, food security and inclusion.

Challenges

Stakeholder capitalism comes with its challenges. Measurement of the company’s impact on its stakeholders is one of the major challenges. For example, it is tough to measure the indirect ESG impact of a company just as its direct impact is measured- scope one, two and three greenhouse gas emissions are disclosed under the GHG protocol. Though challenging, measurement of impact is undoubtedly a valuable undertaking, given how globalized today’s business is. Moreover, a new Davos partnership, which is composed of American banks and the big four accounting firms aims to develop a harmonized system for measuring environmental and social performance. Metrics like these will ease the assessment of private investments that target the Paris Climate accord and the Sustainable Development goals.

The second challenge is that of ensuring accountability through feasible enforcement mechanisms. Steps such as the Davos manifesto of stakeholder-centric organizations are likely to set ethical business standards and curb corporate misadventure. Another antecedent is Airbnb’s reformulated mission of instituting a stakeholder committee on its board.

The third challenge deals with managerial complexity. Globalization has increased corporate mobility to the extent of making local communities and other stakeholders replaceable. On the other hand, a revision of corporate missions to be more focused on the interest of home-country stakeholders possibly dissuades outward foreign investments, thereby hampering globalization.

As the environment becomes increasingly challenging, businesses will find it harder to thrive without the welfare of all stakeholders including suppliers, customers, employees, communities and society at large. Ever since the 2008 financial crisis, the concept of maximizing shareholder value has gained currency in many developed countries with numerous billionaires demonstrating a commitment to it.

The need of the hour is economic growth and business investment for ‘formal’ job creation. Minimum labor standards and formal employment should be necessary conditions for businesses to choose vendors. ‘Inclusion’ should be practiced by companies by, say, creating products and services for low-income consumers. Food security should be made a priority by businesses by building on opportunities that can improve agricultural productivity and help farmers.

Stakeholder capitalism is a ‘win-win’ situation for society and shareholders. It is an obligation of the companies to play their part in solving the problems of the community they thrive on. It will help them to create a successful, truly value adding and ultimately sustainable business model.