JUST Capital Survey Highlights the Key Source of Waste in Shareholder Capitalism
By Bruce Bolger
Americans Seek the Benefits of Stakeholder Capitalism Without Knowing What it Is
The Hidden Costs of Shareholder Capitalism Revealed
The Stakeholder Capitalism movement has shown little sign of gaining widespread attention or corporate focus, based on a recent JUST Capital survey released this past week timed for publication on the third anniversary of the Business Roundtable pronouncement. In addition, there was almost no coverage in the national media covering the anniversary or assessing the state of the movement, as did occur around this time last year.
Although the JUST Capital survey did not attempt to analyze the economic impact of a failure to shift to Stakeholder Capitalism principles, survey respondents provided an indication of why a focus on shareholders leaves profits on the table along with the hidden damage of caused by unnecessarily unpleasant customer and employee experiences.
Americans Seek the Benefits of Stakeholder Capitalism Without Knowing What it Is
Despite the almost total lack of media coverage and awareness of the movement, the survey reveals that more than 90% of Americans believe in the economic benefits of Stakeholder Capitalism:
- 94% want to see businesses contribute to an economy based on serving all Americans.
- 95% want to see businesses help build an economy in which each person can succeed through hard work and creativity.
- 92% want to see businesses help build an economy that allows each person to lead a life of meaning and dignity.
- Promote an economy that serves all Americans (48%).
- Build an economy that allows each person to succeed through hard work and creativity (54%).
- Build an economy that allows each person to lead a life of meaning and dignity (48%).
The Hidden Costs of Shareholder Capitalism Revealed
The study also reveals the hidden costs of a shareholder-first business model: over one-third of customers and employees believe that large companies have a negative impact on them (see chart below), suggesting that a lot of people have little loyalty to the companies they work for or buy from. These findings largely correlate with the latest Gallup survey of employee engagement as well as the American Customers Satisfaction Index findings both showing employee and customer satisfaction at near record lows.
These finding helps explain the high cost of the current Shareholder-focused business model: an estimated $7.8 trillion in waste due to low employee engagement, according to Gallup. A lot of this waste is due to the inability of organizations to make the connection between customer and employee engagement, based on the work on the “Service Value Profit Chain” by Harvard Business School professors James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger, first presented in the 1990s. Organizations leave money on the table when they fail to connect employee and customer satisfaction. “The service-profit chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity.”
Further support for the impact of employee satisfaction and financial returns interestingly comes from professors in China in a recently published study by Chenyu Shan and Dragon Yongjun Tang, “The Value of Employee Satisfaction in Disastrous Times: Evidence from COVID-19” (March 30, 2022).” It finds that “employee treatment is an important but challenging element of corporate environmental, social, and governance (ESG) policies. Satisfying employee needs can increase corporate productivity but is also costly to shareholders. Using unique data for Chinese publicly listed firms, we show that having satisfied employees is valuable to the firm. Specifically, firms with higher employee satisfaction scores withstand COVID-19 better, in terms of stock market performance. Such an effect is more pronounced for firms with more intangible assets and in knowledge-based industries. Moreover, higher employee satisfaction scores predict better operating performance. While not fully revealed in tranquil times, the effect of employee satisfaction is materialized when the firms experience negative shocks, such as COVID-19. Our findings suggest that firms can do well in crisis periods by doing good in normal times.”
In other words, there is a direct correlation between creating value for customers, employees, and other stakeholders and financial results that is being overlooked by most organizations. Nowhere do shareholders fit into the actual process of creating profits other than by providing the financial resources, and sometimes guidance and relationships; yet, in many cases, they receive the most focus of leadership, often because they are shareholders too and untrained on what is simply a better way of doing business.
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