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Opinion: Stakeholder Capitalism Is a 50-Year-Old Field, The 2019 Business Roundtable Pronouncement Muddied the Waters

Davos ManifestoThe 2019 Business Roundtable pronouncement that corporations need to address the interests of all stakeholders and the 2020 World Economic Forum Davos Conference reaffirming the 2013 Davos Manifesto containing the same principles drew welcome attention to a well-established business field but opened the door to virulent opposition based on a distorted definition.

The Genesis of Stakeholder Capitalism Comes From Strategic and Quality Management, Not Social Justice or ESG
Not to Be Confused With Corporate Social Responsibility
It is Just Better Business
The Focus Should Be on Implementation, Not Legal Debate
 
The venerable Harvard Law School Forum for Corporate Governance, the New York Times, the National Review, and many others have published articles on Stakeholder Capitalism using a definition that arose in the last two years. It was conceived by those opposing the Business Roundtable’s August 2019 update of the charter of organizations to address the needs of all stakeholders and a World Economic Forum Davos 2020 Conference reaffirming its original 1973 Davos Manifesto containing essentially the same principles.
 
Enough is enough. The political left and right and legal scholars 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 because of the Business Roundtable’s poorly conceived announcement and the image of corporate titans flying into Davos on their corporate jets to save the world. Today, the focus should be on action, not talk, in much the same way US and European manufacturers turned to total quality management practices to compete with the Japanese.
 
While the Business Roundtable statement was probably well-meaning, its release without a clear definition or what it means in actual practice, the lack of any standards by which the stated practices can be measured, and its timing during a period of heightened social unrest gave rise to inevitable resistance from the left, right and legal scholars along with allegations of greenwashing. And, the fact that an organization that attracts the world’s elite has made so little progress on the principles of its Davos Manifesto after nearly 50 years could the raise eyebrows of “greenwashing” skeptics.
 
Based on its 50 years of academic and business roots, Stakeholder Capitalism is closer to the practices of total quality management than it is to Corporate Social Responsibility or social action. In fact, stakeholder capitalists often oppose business involvement in social issues or politics except to the extent such issues affect the interests of an organization’s stakeholders. Decades of usage suggest Stakeholder Capitalism can be broadly defined as “enhancing returns for investors only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment,” as defined by the Enterprise Engagement Alliance in in coordination with Alex Edmans, author of Grow the Pie, and Martin Whittaker, CEO and Co-Founder of JUST Capital.
 
The recent attacks on Stakeholder Capitalism by the right, the left and some legal scholars are based on a confused idea about a concept that risks holding up an important, non-partisan reform movement whose free-market principles most Americans heartily endorse, when we should be focused on implementation.
 

The Genesis of Stakeholder Capitalism Comes From Strategic and Quality Management, Not Social Justice or ESG

 
The principles of Stakeholder Capitalism predate the Business Roundtable pronouncement by almost five decades, long before “woke,” “ESG”, or even Corporate Social Responsibility. As a review of the academic literature on the principles of Stakeholder Capitalism reveals; its practice in the work of R. Edward Deming, the 20th and 21st century management expert, and in later ISO (International Organization for Standardization) standards known as Annex SL, demonstrate, Stakeholder Capitalism has little to do with pressuring companies on political agendas or “fig leaf” capitalism that is “doubling down on Shareholder Capitalism.” 
 
The history of thinking about a stakeholder view of business began as early as during the 1950s. It was at the heart of the work of the management visionary W. Edwards Deming who in the 1950s was talking about the importance of applying a strategic and systematic approach to quality in manufacturing based on involving employees, customers, and all stakeholders in a continuous improvement process.
 
Stakeholder principles were embraced by the World Economic Forum in its 1973 Davos Manifesto with the following statement: “The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.” There is no call for political activism or social action in its manifesto but rather for organizations to achieve profit goals by creating value, rather than extracting it, and by being good stewards of the resources they consume, which in turn benefits society.  In other words, society is improved by profitable organizations being run well, not by organizations diverting profits to reform society.
 

Not to Be Confused With Corporate Social Responsibility

 
This is why Stakeholder Capitalism should not be confused with Corporate Social Responsibility, social action, or greenwashing. R. Edward Freeman, author of the 1984 academic work, Strategic Management: A Stakeholder Approach, which helped define the field, underlines the point in the forward to the 2010 re-release of his book. “It is ironic that the scholars who have used and developed the idea the most were those in corporate social responsibility. I argued in the book, and continue to believe, that ‘social responsibility’ is one of those ideas that prop up a story about business that is no longer useful.”
 
Freeman’s book, in which he credits work by professors at Wharton in the 1970s and 1980s, helped give rise to an entire field of academic research known loosely as Stakeholder Management, Theory, or Engagement. Many of its practices closely resemble the principles of total quality management in manufacturing and ISO 9001 quality standards, which now require applicable ISO certified organizations to have a CEO-led strategic and systematic management approach that addresses the interests of all stakeholders. In other words, it’s simply better business.
 
These principles, the result of decades of academic study and business practice in quality management, not some recent revelation, may be at the heart of the Business Roundtable pronouncement, but the organization mistakenly published its statement with little substance to anticipate the obvious criticism that this was simply another version of greenwashing from an organization representing “Davos Men,” in the words picked up by New York Times economic correspondent, Peter S. Goodman, for his book, Davos Man. The image was reinforced when the World Economic Forum made its Davos Manifesto the theme of its 2020 January conference, creating the image of the world’s elite flying into a resort on their private jets to “save the world” or, even worse, take it over, as some on the right allege.
 
Whatever objections legal scholars have to what in effect was no more than a press release from the Business Roundtable, their arguments are not based on an accurate history or the practical application of Stakeholder Capitalism. Based on actual practice, similar to quality management, it’s an approach to management that is based on the premise that business creates value for customers, suppliers, employees, communities, and the people with the money. It enhances 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 and if their employees, customers, supply chain and distribution partners, and communities are highly engaged in their success. They will be able to negotiate a difficult and unpredictable external environment more successfully with the enthusiastic support of their stakeholders.
 
Stakeholder Capitalism creates value for those whom a company can affect or be affected by in a major way as it pursues its purpose. It is often known as Stakeholder Management or Stakeholder Theory or Stakeholder Engagement, but 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 socialism, as it is about how to better manage a successful business.
 

It is Just Better Business

 
Stakeholder Capitalism means enhancing returns for investors by creating value for stakeholders, in other words, by making the pie bigger for everyone. It is impossible to optimize value for shareholders if the organization’s customers are disgruntled, employees disengaged, distribution partners unenthusiastic, supply chain partners disinterested, or if their communities are defiant. To the contrary, organizations with high levels of stakeholder engagement have been found in multiple studies to significantly outperform their competitors. The biggest implementation challenge required is for organizations to transparently define their purpose, values, goals, and business models and break down the traditional siloes between sales, marketing, administration, operations, human resources, finance, that are the cause of so much infighting and dysfunction—to instead align them toward a common, well-defined purpose.
 
Opponents of Stakeholder Capitalism apparently are unaware that even well-known shareholder advocates have acknowledged the importance of addressing the needs of all stakeholders. Wrote Milton Friedman in his infamous 1970 New York Times magazine article, “It may well be in the long‐run interest of a corporation that as a major employer in a small community it makes sense to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.” At a Conscious Capitalism conference not long before his death, Friedman was reported to have said. “The differences between (us) regarding the social responsibility of a business are rhetorical. Strip off all the camouflage and it turns out we are in essential agreement.”
 
Likewise, long-time shareholder capitalist advocate Harvard Business School professor emeritus Michael C. Jensen now says: “Shareholder capitalism is stupid: Stop it.”
 
Stakeholder Capitalism reduces the tradeoffs made daily by CEOs in shareholder capitalism. For many organizations, it’s a game of siloeing and continually playing off one set of stakeholders’ interests against those of others in a way that at best causes waste and aggravation and at worst serious friction, especially when it comes to labor relations, product and service quality issues, marketing and public relations or regulatory issues. Stakeholder capitalists clearly define the organizational purpose, goals, and objectives of the organization with the goal of engaging and aligning all stakeholders in a common purpose and goals in which their interests are focused on the common good of the organization. A clear organizational purpose helps set priorities and explain difficult tradeoffs, demonstrated by Airbnb’s ability to rapidly recover after the pandemic despite having had to lay off so many people.
 
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 has a framework for implementation and 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.
 
Stakeholder Capitalism does not require government intervention or have anything to do with pressure from “disinterested” parties with a political agenda. 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 employees with low pay or customers with pour service and quality, 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 and are voting through their actions. Stakeholder Capitalism is being driven by investors, customers, employees, 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.
 

The Focus Should Be on Implementation, Not Legal Debate

 
Because Stakeholder Capitalism is a management process not unlike total quality management and requires no change in corporate statutes--as there are already a public benefits corporation statutes in about 35 states for those companies seeking to purpose a specific purpose—one questions if Stakeholder Capitalism is even a matter for legal debate. Despite extensive research 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 low productivity, accidents, and lawsuits into their business models, just as many did for decades in manufacturing. Companies need to understand that they are enmeshed in stakeholder relationships.  If they can manage this realization, they can improve what they do and create even more value. There’s a lot of education and work ahead, just as occurred in the implementation of total quality management. Is this a management or a legal or political issue?
 
Now people from both the right and left have created false ideas about Stakeholder Capitalism. These ideas stifle and belittle the companies that are working hard to create value for the 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 a 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. It is not conservative to condone the imposition of costs by companies on their local communities and taxpayers or to condone poor quality and service or unsafe products.
 
The inevitable evolution to a stakeholder approach will only accelerate with the recent passage of the European Union Corporate Sustainability Directive, which likely will require any EU organization in 2024 with more than 250 employees and many companies that do business with them to make specific disclosures about workforce management practices and metrics, and how they engage with their customers and communities.
 
The time is now to move on from the debate over straw man definitions and focus on how organizations of all sizes can profit from a practical approach to business management that requires no legislation or political action.
 
Let the free market decide which approach investors, customers, employees, and other stakeholders prefer.

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