Yes, Stakeholder Capitalism Can Transform Society

By Bruce Bolger and R. Edward Freeman

 

R. Edward Freeman is Professor of Business Administration, University of Virginia Darden School, and author of "Strategic Management: A Stakeholder Approach," published in 1984.

 

Bruce Bolger is founder of the Enterprise Engagement Alliance at TheEEA.org, an outreach, education, and advisory firm founded in 2008, and author of "Enterprise Engagement for CEOs: The Little Bluebook for People-Centric Capitalists."

Click here for a recent conversation between Bolger and Freeman on an EEA Youtube Channel show and click here for a more informal podcast conversation between the co-authors on  R. Edward Freeman's podcast series.
 

A worldwide movement is well underway that has the potential to transform business and society in the US and around the world without the need for any political consensus, legislation, or tax increases. Surveys show that its principles are popular on almost all sides of the political divide, and its practice can help create greater prosperity, improve the daily experiences of both employees and customers, create opportunities for supply chain and distribution partners, as well as for communities and the environment, all while addressing inequalities across society. 

 

Stakeholder Capitalism is a strategic and systematic approach to achieving organizational purpose and goals by fostering the proactive involvement and harmonizing the interests of all stakeholders—customers, employees, supply chain and distribution partners, communities, investors, and the environment. It’s just better business and should not be confused with either Corporate Social Responsibility or so-called “Woke Capitalism.” Its byproduct is a better world that can be accomplished under almost any government in the world of free enterprise. 

 

Based on practical principles developed in the 1970s and 1980s by academics and businesspeople, Stakeholder Capitalism aims to create returns for investors by creating value for all stakeholders. The concept gained the spotlight when the Business Roundtable representing over 200 of the world’s largest companies decided in August 2019 to change its definition of the purpose of an organization to focus on the needs of all stakeholders, not just shareholders. Recently, a group of bicameral Democratic congressmen have formed a coalition urging the President to create a White House Office for Inclusive Growth to advance the principles of Stakeholder Capitalism. It’s a movement supported by a growing cadre of organizations with names such as Conscious Capitalism, B-Lab, Just Capital, Council for Inclusive Capitalism, Economics of Mutuality, and many others who believe that creating profits and doing good for society do not require a trade-off.

 

While remaining under the radar screen of the public, the movement has attracted broad debate in the business media, including the New York Times. and more recently the Wall Street Journal editorial page. Around each anniversary of the Business Roundtable pronouncement, the concept of Stakeholder Capitalism takes hits from the right, such as the Heritage Foundation, which has declared that it’s a stealth means of robbing from shareholders to fund the “woke” causes of CEOs, and from the left, such as the recent attack by former Labor Secretary Robert Reich, who says it’s just another form of white-washing to distract stakeholders from the organization’s focus on shareholder returns.  

 

Both are wrong. The concept of Stakeholder Capitalism arose organically as a means of improving organizational performance from companies trying to figure out how to do strategic planning in the1960s and by European governments worried about how companies treated their employees. The academics began to chronicle this approach and attempt to improve it upon publication in 1984 of the book Strategic Management: A Stakeholder Approach, by R. Edward Freeman, co-author of this article. This simple and non-partisan concept began to catch on later in the business world in the 2000s, propelled by the Great Recession, the forces of social media, growing interest from investors in ESG (Environmental, Social, Governance), and at the more practical level by the International Organization for Standardization ISO 9001 quality standards and by the organization’s introduction of human capital reporting and people engagement standards during the 2010s and 2020, 

 

Stakeholder Capitalism is about creating wealth through people and the environment. It is a movement based on sound business principles that require the same focus and attention that helped transform America’s quality challenges in the 1990s, when Japanese competition almost destroyed US car manufacturing and did even greater damage to the consumer electronics and appliance industries. As in the 1980s with quality, most organizations today build high levels of employee and customer dissatisfaction and turnover into their business models, such that less than 40% of US employees and 20% worldwide are engaged in their work, according to Gallup. Gallup says that the resulting employee and customer turnover, days lost to absenteeism and injuries, low productivity, and quality, etc. carries a big cost to the economy. America’s satisfaction with customer service has barely changed in over 10 years, hovering in the low 70% range, according to the American Customer Satisfaction Association, just a bit higher than the high-60% range for customer service in government. These present major quality of life issues. 

 

As with the quality management revolution in the 1990s, Stakeholder Capitalism doesn’t need government involvement because it’s simply better business. Academic research and the performance of Exchange Traded Funds (EFTs) indicate that organizations that address the needs of all stakeholders are more productive; create better quality experiences for stakeholders; have higher levels of innovation and productive pushback on company policies and plans, and thereby greater resilience and lower risks. They benefit from lower costs through greater customer, employee, distribution, and supply chain loyalty and referrals, and fewer legal issues or negative social media posts. 
 

The confusion between Stakeholder Capitalism and Corporate Social Responsibility is understandable. Stakeholder Capitalism has nothing to do with responding to guilt trips or check-off-the-box government disclosures. It sees addressing societal issues as an opportunity to advance the organization’s goals; support the sense of purpose that makes the difference between average and exceptional stakeholder commitment, and create a huge source for talent and customers in the vast communities of low-income communities of all races at a time we need all the employees we can find. People are willing to do what many would feel to be terrible work if they feel appropriately rewarded, a sense of purpose, support, and camraderie. To develop talent for all types of jobs, companies can fund education programs in disadvantaged schools starting as early as elementary school as part of a “farm-team” strategy to develop entry level talent for all levels of the enterprise, in so doing helping address inequalities in education and create potential new customers as well. Companies can profit by funding and supporting entrepreneurs in minority and rural communities to support their own local supply chains or distribution needs. Others can fund local environmental or housing projects that contribute to a better community for employees, customers, and other stakeholders. While the governments battle environmental issues out, we the people can get started in our communities and businesses.  

 

By starting with a clear purpose, transparently shared and updated as necessary given changing circumstances, organizations do not need to change their corporate legal charters, as some lawyers have suggested. If they are transparent in the disclosure of their purpose and goals; the methods and metrics used to address the needs of their stakeholders, and what they are doing to continuously improve, let investors and other stakeholders determine with whom they wish to invest in or do business with. 

 

While government action is not required, it can help in three areas (besides applying the principles of Stakeholder Capitalism to its own operations): 

 

Honor great companies. When the US recognized the importance of addressing the quality issue in the 1990s, Congress created the Malcolm C. Baldrige Quality Award, whose winners received presidential level recognition at the time. Now mostly forgotten, the program still exists and already includes almost all the categories related to people management. National, state, and local politicians or celebrities could highlight and visit the companies in their communities practicing this form of capitalism. This in turn would result in media coverage that would encourage other business owners and boards to adopt Stakeholder Capitalism principles. The media almost always favorably covers the generosity of CEOs. 

 

Create tax incentives for micro-investments and community education. While tax support isn’t necessary, such incentives would encourage more organizations to fund the creation of supply chain or distribution partners or of education programs in disadvantaged communities whose costs likely would be offset by the jobs directly created, not to mention increased spending in the community, related prosperity, and good will. 

 

Promote disclosures of how public companies manage stakeholder relationships. The Securities and Exchange Commission now requires disclosures of human capital practices to the extent material to a company’s business in 10-K reports and is now on track to add specific metrics on employee pay, benefits, turnover, health and safety, and diversity. While much care should be given to account for differences between types of companies or the rigidity of metrics used, or to avoid the check-off-the-box mentality that invariably results, disclosures do require companies to address an issue they might otherwise ignore. Because many stakeholders would be interested in this information anyway, voluntary disclosures are preferred, but the SEC can help as it pertains to public companies. Disclosing how companies treat all their stakeholders could be even more valuable than a Great Places to Work Award or a J.D. Power designation.

 

The Stakeholder Capitalism movement is well out of the gate and now seems inevitable because the pressure is coming from investors, employees, customers, supply chain and distribution partners, regulators, and communities. It will take more time, because while more pundits are talking about the movement, the majority of CEOs remain unwaware because it's not taught in schools. Most Americans have never heard of it; understand the potential impact on their lives, or what many are already doing and what they can do on social media that can accelerate the cause. At this early stage, the biggest risk is not that the movement won’t eventually take off but that it takes so long that it becomes politicized or another bright shiny object that is expected to work magic by one's merely invoking its name.  

 

There is much work to be done. This prosaic revolution could quietly transform many of our lives by making work more meaningful, customer experiences more fulfilling, organizations and communities more diverse, and our resources cleaner, all without partisan rancor.  It can help reform our business practices, so our companies are places where we want our children to work.

 

Very few anywhere in the world would disagree with this vision. 

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• Founded in 2008, the Enterprise Engagement Alliance provides outreach, learning and certification in Enterprise Engagement, an implementation process for the “S” or Social of Stakeholder Capitalism and Human Capital Management and measurement of engagement across the organization.
• The Enterprise Engagement Alliance provides a training and certification program for business leaders, practitioners, and solution providers, as well as executive briefings and human capital gap analyses for senior leaders.
• The EEA produces an education program for CFOs for the CFO.University training program on Human Capital Management.
• Join the EEA to become a leader in the implementation of the “S” of ESG and Stakeholder Capitalism. 

• The ESM information portal and The Enterprise Engagement Advisors Network solution provider marketplace cover all aspects of stakeholder engagement, and the EEA information library lists dozens of resources.
• The RRN information portal and Brand Media Coalition marketplace address the use of brands for gifting, incentives, recognition, and promotions. The BMC information library provides information and research resources.

• Enterprise Engagement for CEOs: The Little Blue Book for People-Centric Capitalists. A quick guide for CEOs.
• Enterprise Engagement: The Roadmap 5th Edition implementation guide. A comprehensive textbook for practitioners, academics, and students.

• Organizations of all types develop strategic Stakeholder Capitalism and Enterprise Engagement processes and human capital management and reporting strategies; conduct human capital gap analyses; design and implement strategic human capital management and reporting plans that address DEI (Diversity, Equity, and Inclusion), and assist with managed outsourcing of engagement products and services.
• Human resources, sales and marketing solution providers profit from the emerging discipline of human capital management and ROI of engagement through training and marketing services.
• Investors make sense of human capital reporting by public companies.
• Buyers and sellers of companies in the engagement space or business owners or buyers who seek to account for human capital in their mergers and acquistions.