Fast Company Feature Continues Confusion Between Stakeholder Capitalism and Corporate Social Responsibility
By Bruce Bolger
Why Stakeholder Capitalism Is an Opportunity, Not a Responsibility
It’s About Harmonizing Interests Toward a Common Purpose, Not CSR
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Business for good went bad because a decades-old, common-sense approach to business management was used for the purposes of greenwashing and virtue signaling. That is my simple answer to this Fast Company article, “How Business For Good Went Bad—and What Comes Next.” In it, the author James Surowiecki writes that “It may seem like the second Trump administration single-handedly pulled the plug on stakeholder capitalism, but in reality, it was sputtering for years.”The lack of a definition or clearly understood implementation framework continues to haunt the world of stakeholder capitalism. A practical management theory to enhance organizational performance in a way that is good for society--born out of total quality management, strategy, and business ethics dating back decades--suddenly got conflated with the corporate social responsibility and ESG (environmental, social, governance) controversy of the early 2020s. The challenge is apparent in this Fast Company cover story on stakeholder capitalism.
Should anyone publish a comprehensive report on a field without first defining it? And, if using a definition, shouldn’t its source be revealed? As this cover story once again demonstrates, the lack of a formal definition for stakeholder capitalism continues to create confusion. You will not find one article on the subject (other than in ESM and our other media) that includes a clear definition of the term and where it comes from, since it doesn't exist in any dictionaries.
The Fast Company article concludes that stakeholder capitalism is not dead but evolving. Surowiecki writes that the forces that led to its rise, such as climate change, a socially engaged workforce, and educated consumers, remain powerful. He predicts that companies committed to sustainability and social responsibility will continue to thrive despite the challenges.
The problem with this influential report is that it does not clearly define stakeholder capitalism, only to say that it is about “business for good.” He explains, “After decades of serving shareholders alone, CEOs were embracing the idea that they should also be concerned about stakeholders—employees, customers, suppliers, local communities, and even the planet.” This, he correctly recounts, drew a backlash from both the left and the right, because it’s not clear how this shift in priorities translates into a concrete business strategy. See ESM: How the Business Roundtable Accidentally Set Back Stakeholder Capitalism.
Why Stakeholder Capitalism Is an Opportunity, Not a Responsibility
The big error that Surowiecki and others make is that they conflate stakeholder capitalism, a decades-old management theory, with corporate social responsibility: the notion that companies are obligated to care for all their stakeholders, employees, customers, distribution and supply chain partners, communities, and the environment. This idea was triggered by the Business Roundtable’s 2019 pronouncement that corporations needed to address the interests of all stakeholders and the environment but provided no clear definition beyond that or action plan. What did this really mean? To opponents, it sounds like forcing companies to invest in solving social issues outside of their core purposes. To the left, is sounds like virtue-signaling. In the world of stakeholder capitalism, it’s an opportunity to harmonize the interests of all shareholders and stakeholders toward a common purpose, goals, objectives, and values.
There is evidence that the lack of a clear definition was deliberately used by opponents of reform in shareholder capitalism to create an indefensible straw man definition of stakeholder capitalism. Right-wing opponents argued that, without putting shareholders first, leadership would be in a dysfunctional balancing act between stakeholder and shareholder interests, as argued by the Harvard Law School Lucien Bebchuk. (Of course, the obvious retort is that’s what CEOs do every day when weighing stock buybacks or dividends against pay increases for employees, pricing strategies for customers, and other stakeholder interests.) The Business Roundtable statement led to opposition from the right claiming that it was harmful to shareholders to divert profits to address social and environmental issues and from the left that it was virtue signaling and greenwashing.
The right has not given up on its pursuit of a distorted definition. Writing recently in the Post-Journal, a newspaper serving southwest New York state, Scott Axelson and Michael Dee assert that, “Undeterred by history, modern liberals continue their assault on freedom by pushing ‘stakeholder capitalism’, which is the opposite of free-market capitalism, and is merely Mussolini’s fascism (corporatism) rebranded on a global scale. Stakeholder capitalism is where big government joins with big corporations to enrich themselves as Lords of the Realm, jointly commanding the new serfdom. In free markets, consumers call the shots. The new serfdom of the left calls the shots from Davos. Think of George Soros, Warren Buffet, and a host of other left billionaires.” The authors provide no hint of where this definition comes from.
A year after the Business Roundtable proclamation, the Enterprise Engagement Alliance attempted to address the lack of clarity by creating a definition based on a review of decades of literature on the subject, much of it predating even the concept of ESG (environmental, social, governance), a term created by the financial industry in a 2004 report for the United Nations, Who Cares Wins. (The goal of that report’s authors was to outline a more sustainable path to equitable value creation, not to force companies to donate to environmental or social causes.) The EEA’s definition, published in August 2020 in Forbes, and created with the assistance of Alex Edmans, Professor of Finance at the London Business School, and author of Grow the Pie, and Martin Whitaker, CEO, JUST Capital, is: optimizing returns for investors only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment.
It’s About Harmonizing Interests Toward a Common Purpose, Not CSR
In fact, as this history of the field shows, the right has invented a definition with no basis in literature. The principles date back not to the Business Roundtable pronouncement or social activists but to management consultants starting in the late 1940s Peter Drucker, W. Edwards Deming, the Stanford Research Institute in the 1960s, and the work of R. Edward Freeman, a Professor at the Darden School at the University of Virginia and his 1984 book, Strategic Management: A Stakeholder Approach. His book is said to have inspired the founders of Costco, Whole Foods, and other companies. Opponents of stakeholder capitalism almost always overlook these sources in favor of referencing the World Economic Forum's 1973 Davos Manifesto, published by the bête noir of both the right and the left. It reads: "The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company." There is no reference in the Davos Manifesto to what today is known as corporate social responsibility.
The purpose of the early proponents was not about moral proselytizing but rather to find a more strategic approach to management focused on creating value over the long term for the benefit of all stakeholders and the environment rather than for the short-term benefit of shareholders by extracting value from stakeholders and the environment. No one talked about sacrificing profits but rather about creating them in a more sustainable way, not only for the stakeholders and shareholders, but for the society upon which almost all capitalists depend.
In fact, it’s no coincidence that the early proponents came out of the world of management consulting and total quality management.” As the Fast Company article notes, “What has gotten much less attention is the demand side—that is, what consumers actually want. And that’s important, because, as the University of Michigan’s Marcus Collins puts it, ‘Capitalism will always bend toward consumption. Where the demand is, that’s where capitalism will lean.’”
This is why Surowieki says he believes there is hope for the movement. I might add: capitalism will always bend toward shareholders, as well. The tipping point for stakeholder capitalism arrives when investors recognize the benefits as well. See ESM: Can Human Capital Metrics Outperform Managed Investments?
Enterprise Engagement Alliance Services
Celebrating our 15th year, the Enterprise Engagement Alliance helps organizations enhance performance through:1. Information and marketing opportunities on stakeholder management and total rewards:
- ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
- RRN Weekly on total rewards since 1996. Click here to subscribe; click here for media kit.
- EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020
Management Academy to enhance future equity value for your organization.3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.
4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.
5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.
Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
