R. Edward Freeman, Professor of Business Administration, Darden School at the University of Virginia,
Mark DesJardines, Associate Professor at the Tuck School of Business at Dartmouth College.
Bidhan (Bobby) Parmar, Associate Professor, Business Administration, Darden School at the University of Virginia.
Jeff Harrison, W. David Robbins Chair of Strategic Management at University of Richmond.
Enhancing Returns for Investors By Creating Value Stakeholders
It’s Time to End the Ad Hoc Approach to People Management
Enough is enough. The political left and right cannot be allowed to hijack a well-established academic and business field and potentially snuff out an important business reform movement taking shape around the world.
The recent attacks on Stakeholder Capitalism by the right and the left are based on a confused idea about the concept that risks holding up an important, non-partisan reform movement that most Americans heartily endorse.
Stakeholder Capitalism says that any business creates value for customers, suppliers, employees, communities and for the people with the money to invest. It creates wealth for investors by creating value for all the other stakeholders, as stakeholder interests are interconnected. This has always been true in business and is even more important today given our interconnected digital world. Stakeholder Capitalism suggests that businesses will be more successful if they have a strong purpose and a sense of ethics. They will be able to more successfully negotiate a difficult and unpredictable external environment.
Stakeholder Capitalism has little to do with what the right is calling “woke” capitalism,” which means pressuring companies on political agendas and which the left is calling “fig leaf” capitalism that is “doubling down on Shareholder Capitalism.” Both the left and the right are in the grip of the old story about business that claims it’s all about the money. The left wants to be able to continuously criticize that view, and the right wants to exalt it. Both ignore the real progress that has been made by many businesses over the last 40 years demonstrating that capitalism can be a force for good.
The history of thinking about a stakeholder view of business began in the 1960s long before the Business Roundtable 2019 update of the charter of an organization to address the interests of all stakeholders, despite the huge spike in interest the pronouncement created.
Stakeholder Capitalism is a practical approach to creating value for those whom a company can affect or be affected by in a major way as it pursues its purpose. It is called that because it is based on Stakeholder Management or Stakeholder Theory or Stakeholder Engagement. Regardless of the label it’s about how any business can do better by paying attention to its stakeholders. It is not the same idea as Corporate Social Responsibility or ESG (Environmental, Social, Governance), although both these movements draw inspiration from Stakeholder Management theory. And, it is clearly not about Democratic Socialism, as it is about how to better manage a successful business with no need for government involvement other than to stay out of the way.
Let the free market decide which approach investors, customers, employees, and other stakeholders prefer.
Stakeholder Capitalism means enhancing returns for investors by creating value for stakeholders, in other words, by making the pie bigger for everyone. The biggest implementation challenge is that it requires organizations to transparently define their purpose, values, and goals and break down the traditional siloes between sales, marketing, administration, operations, human resources, finance, that are the result of so much infighting and dysfunction—to instead align them toward a common, well-defined purpose. Shareholders and other stakeholders have less cause to object if an organization announces a decision aligned with a transparently disclosed purpose.
Stakeholder Capitalism does not require government intervention or have anything to do with pressure from “disinterested” parties with a political agenda, as the right alleges. It is based on principles developed decades ago founded on the premise that investors, customers, employees, and other stakeholders favor organizations that seek to achieve their goals by addressing the needs of all their stakeholders, rather than exploiting them, and that as a result Stakeholder Capitalists have a competitive advantage over the narrower view that only shareholders count.
People around the world have lost faith in a capitalism that makes money by extracting as much wealth as possible from their stakeholders and the environment for the benefit of a few.
Stakeholder Capitalism is being driven by investors, by entrepreneurs, and others who have recognized that paying attention to stakeholders is just a better way to run a business. Even investors in large public companies have recognized that environmental, social, and governance issues are the last bastions of value creation and at the same time the greatest source of risk for most public enterprises.
Despite extensive research and simple logic demonstrating a clear connection between stakeholder commitment and financial and other measures of performance (such as job and/or product satisfaction); despite even the Great Resignation, most companies have an ad hoc, reactive, and poorly managed approach to stakeholder management. Many organizations continue to build high and undisclosed costs of customer and employee turnover, disengagement, poor quality and productivity, accidents, and lawsuits into their business models. The current situation is a bit like the poet Moliere’s character who finally understands that he is speaking prose. Companies need to understand that they are enmeshed in stakeholder relationships. If they can better manage these relationships, they can improve what they do and create even more value.
The answer from many has been that they can’t measure the value created for stakeholders. Today we know this to be false. There are many measures for how and what value gets created for customers, employees, and suppliers. Perhaps we need more work on measuring value created for communities, but this doesn’t seem like an insoluble problem. The difficult problem is figuring out the business model for a company so that it knows if it adopts a particular strategy for customers, what will be the effects on the other stakeholders. These interaction effects are important, and we have little research on how to understand them.
Now people from both the right and left have both created false ideas about Stakeholder Capitalism. These ideas stifle and belittle the companies that are working hard to create value for their stakeholders and shareholders. Stakeholder Capitalism is our best chance for reform in a free market economy. Most people around the world both conservative and liberal prefer a capitalism that creates returns by investing in people, communities, and the environment--meaning more job and customer satisfaction and cleaner air and water--rather than by extracting wealth forcing taxpayers to underwrite the cost of underpaid employees, and for all of us to endure toxic workplaces and poor quality and service.
- 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.
Click here for complete information on Enterprise Engagement Alliance benefits and to join.