Viewpoint: Harvard Business Review Article Fails to Do Basic Homework on Stakeholder Capitalism...
A highly accomplished Harvard Law School professor outlines what she declares to be the four different versions of stakeholder capitalism theory and calls for the need for a clear definition. It does not look like she did all of her homework on the field. By Bruce Bolger
Instrumental
Classic
Beneficial
Structural
Published this month around the time of the fourth anniversary of the Business Roundtable proclamation that ignited the date about stakeholder capitalism, this Harvard Business Review article, “What Does Stakeholder Capitalism Mean to You?” highlights without offering a clear answer the question addressed by the Enterprise Engagement Alliance in the spring of 2020: what is the meaning of stakeholder capitalism?
The author, Lynn S. Paine, is a Baker Foundation Professor and the John G. McLean Professor of Business Administration, Emerita, at Harvard Business School. Apparent space constraints in HBR did not allow for a review of the sources she used, but her account does not appear to take into account the definition published in August 2020 in Forbes by the author of this article and Alex Edmans, Professor of Finance, London Business School, with input from Martin Whittaker, CEO and Co-Founder of Just Capital. That definition, based on a review of nearly 50 years of literature on stakeholder capitalism, is: “Enhancing returns for investors only by creating value for customers, employees, supply chain and distribution partners, communities and the environment.”
In outlining what Paine believes to be the four different versions of stakeholder capitalism, she correctly concludes: “We have passed the point at which concern about conflicts can be brushed off with easy appeals to a presumed long-term harmony of interests among shareholders, stakeholders, and society. The time has come to clarify what we mean by stakeholder capitalism.”
While there are no panaceas, we know from total quality management in manufacturing that significant enhancements can be made in productivity, quality, stakeholder experiences, and continuous improvement when an organization has a clear purpose, goals, objectives, values, metrics, stakeholder voice, management systems, metrics, reporting, and continuous improvement processes. Such systems do not shield organizations from making tough trade-offs, but they help guide better trade-off decisions that can be more easily explained.
In the article, she outlines four forms of stakeholder capitalism: Instrumental; Beneficial; Classic, Structural. What she calls the Instrumental version aligns most closely with that of the Enterprise Engagement Alliance.
Instrumental
Managers should respect stakeholders’ interests when doing so will maximize long-term returns to shareholders.
“This version of stakeholder capitalism seeks not just to meet stakeholders’ basic claims but also to measurably improve their well-being. It comes in part from a belief that optimizing returns for shareholders over the past four decades has led many companies to underinvest in their other constituencies and has caused a disproportionate share of gains to go to the owners of capital. It is also driven by the idea that running companies to improve the lives of all stakeholders will help address some of the large-scale problems and inequities facing society today, thereby helping to protect the long-term health of the economy and quell growing discontent with capitalism.”
Challenges for instrumental stakeholderism. She writes, “This approach promises real benefits for stakeholders and society, but those benefits go only so far. Although it requires corporate leaders to take stakeholders’ interests into account, it does not require them to respect those interests unless doing so would be financially beneficial for shareholders. From this perspective, an investment in the company’s stakeholders, like any other investment, should be pursued only if it increases net present value, and investments in stakeholders that reduce long-term shareholder value should be avoided. While proponents of instrumental stakeholderism tend to focus on win-win examples like the Cummins case, corporate leaders frequently face pressure and opportunities to generate shareholder value in ways that do not benefit all stakeholders and may even do harm to some of them.”
Comments: First recognizing that there are no perfect solutions in any aspect of life and that trade-offs are inevitable, her observation has a fundamental contradiction: by its very definition, stakeholder capitalism does not look at simply net present value, as the article appears to state, but rather future value creation and the risks of kicking problems down the road. In addition, it helps organizations make better decisions and makes it easier to explain painful tradeoffs when they occur. It can help reduce the balancing act of CEOs under shareholder capitalism in which they always have to weigh conflicting interests of customers, employees, and other stakeholders. Stakeholder capitalism is not a panacea: When challenges arrive, there is simply no way to protect all stakeholders from pain: great leaders do their best to distribute the pain under the banner of a transparent purpose, goals, and objectives. No one can ever always make the right decision, but if there is a clear purpose, goals, and objectives based on the voice of all stakeholders, it is difficult to fault leadership for at least giving it the college try.
Classic
Companies have ethical and legal obligations to stakeholders that must be respected whether or not doing so is likely to maximize shareholder value. (Note: this is a definition that raises the shackles of the extreme right.)
“This version of stakeholder capitalism holds that at least some stakeholders’ interests must be respected as well as considered. It differentiates among interests, prioritizing those protected by ethical or legal norms over those based on wishes or desires. The core idea is that the former, more fundamental, interests give rise to claims whose validity is not contingent on their contribution to shareholder value and underpin obligations to stakeholders that sit alongside financial and strategic imperatives. This type of stakeholderism recognizes that serving stakeholder interests often contributes to shareholder value, but that some stakeholder interests should be addressed even when it doesn’t. (I call it classic because of its similarity to early expressions of stakeholder theory.)”
Challenges for classic stakeholderism. Compared with instrumental stakeholderism, classic stakeholderism provides much stronger protection for stakeholder and societal interests. As critics of stakeholderism have noted, however, determining which interests must be respected is not always easy. A useful starting point is the norms of corporate conduct that are widely accepted around the world. They include obeying the law, respecting human rights, truth and honesty, honoring promises, protecting health and safety, and so on.”
Comments: Every organization has ethical and legal obligations to respect stakeholders under shareholder capitalism known as laws and regulations. The degree to which organizations are willing to go beyond those obligations in the quest to create value through people is what determines whether or not they are stakeholder capitalists.
Beneficial
The corporate objective is improving all stakeholders’ well-being, rather than just maximizing value for shareholders. (Note: there is a legal statute for organizations with such goals: public benefits corporations.)
Improving outcomes for stakeholders: “This version of stakeholder capitalism seeks not just to meet stakeholders’ basic claims but also to measurably improve their well-being. It comes in part from a belief that optimizing returns for shareholders over the past four decades has led many companies to underinvest in their other constituencies and has caused a disproportionate share of gains to go to the owners of capital. It is also driven by the idea that running companies to improve the lives of all stakeholders will help address some of the large-scale problems and inequities facing society today, thereby helping to protect the long-term health of the economy and quell growing discontent with capitalism.”
Challenges for beneficial stakeholderism. “Although this version of stakeholder capitalism holds out the prospect of ever-improving outcomes for all stakeholders, its critics are right to caution against expecting too much. Like classic stakeholderism, beneficial stakeholderism sometimes entails trade-offs among differing interests. But its concern for a broader set of interests can make those trade-offs even more challenging.
Moreover, there is a real question about how much corporate leaders can invest in their non-shareholder stakeholders without losing shareholder support or running afoul of their fiduciary duties. If, for example, the directors of a traditional Delaware corporation decide to sell the company, they are legally obliged to prioritize shareholders’ short-term financial interests. But even when the company is not for sale, legal, economic, competitive, and capital-markets factors often constrain leaders’ ability to promote the interests of other stakeholders.”
Comments: There simply is no point to improving outcomes for stakeholders unless they contribute to the organization’s sustainable vitality; otherwise, it is not capitalism. That does not mean that a company’s stated purpose cannot include social objectives, as long as such a purpose, goals, and objectives are transparent. Companies with such objectives can take advantage of public benefits corporation statutes in 39 states if this form of beneficial stakeholder capitalism is their goal.
Structural
To protect stakeholder interests, stakeholders other than shareholders should have formal powers in corporate governance. (Note: this has the right wing opponents even more fired up.)
“The three versions of stakeholderism discussed so far all focus on the first pillar of shareholder primacy: Maximizing value for shareholders is (or should be) a corporation’s principal objective. They all call for refinements or changes to that objective or how it is implemented, and they are similar in leaving the traditional governance structures and processes that define the balance of power between shareholders and other stakeholders largely intact. That is to say, they all accept another pillar of shareholder primacy: Shareholders are (or should be) the only constituency with a formal voice in corporate governance. A fourth version—which I term structural stakeholderism—calls for giving nonshareholder stakeholders voting or other powers in the governance process. Advocates of this version seek to hard wire the interests of other stakeholders into the process, rather than relying on corporate directors and business leaders to take them into account, typically by giving those stakeholders a defined role in selecting directors or formal representation on corporate boards.”
Challenges for structural stakeholderism. “The call to add representatives of employees or other stakeholders to corporate boards raises fundamental questions about the nature of boards and the duties of directors—and about the basis of directors’ authority to govern. Although directors are sometimes referred to as shareholders’ “representatives”—and, as noted, are elected by shareholders—they are legally more akin to trustees for the institution than to delegates representing a particular constituency. That is why other shareholders may protest when an activist hedge fund negotiates a seat on the board for its own nominee or offers additional compensation to that director for achieving its goals. As fiduciaries, directors owe care and loyalty to the corporation as a whole and are obliged to exercise independent judgment on its behalf—not to do the bidding of a subset of shareholders.”
Comments. While I have not seen active calls from avowed stakeholder capitalists that companies put representatives of all stakeholders on their boards, it might be a good suggestion. At the very core of stakeholder capitalism is a formal process for listening to the voices of all the stakeholders upon whose engagement any organization depends to optimize results and experiences. This is a foundational tenet of total quality management and it applies equally to people management.
ESM Is Published by The EEA: Your Source for Effective Stakeholder Management, Engagement, and Reporting
Through education, media, business development, advisory services, and outreach, the Enterprise Engagement Alliance supports professionals, educators, organizations, asset managers, investors, and engagement solution providers seeking a competitive advantage by profiting from a strategic and systematic approach to stakeholder engagement across the enterprise. Click here for details on all EEA and ESM media services.
1. Professional Education on Stakeholder Management and Total Rewards
- Become part of the EEA as an individual, corporation, or solution provider to gain access to valuable learning, thought leadership, and marketing resources to master stakeholder management and reporting.
- The only education and certification program focusing on Stakeholder Engagement and Human Capital metrics and reporting, featuring nine members-only training videos that provide preparation for certification in Enterprise Engagement.
- EEA books: Paid EEA participants receive Enterprise Engagement for CEOs: The Little Blue Book for People-Centric Capitalists, a quick implementation guide for CEOs; Enterprise Engagement: The Roadmap 5th Edition implementation guide; a comprehensive textbook for practitioners, academics, and students, plus four books on theory and implementation from leaders in Stakeholder Management, Finance, Human Capital Management, and Culture.
2. Media
- ESM at EnterpriseEngagement.org, EEXAdvisors.com marketplace, ESM e–newsletters, and library.
- RRN at RewardsRecognitionNetwork.com; BrandMediaCoalition.com marketplace, RRN e-newsletters, and library.
- EEA YouTube Channel with over three dozen how-to and insight videos and growing with nearly 100 expert guests.
3. Fully Integrated Business Development for Engagement and Total Rewards
Strategic Business Development for Stakeholder Management and Total Rewards solution providers, including Integrated blog, social media, and e-newsletter campaigns managed by content marketing experts.
4. Advisory Services for Organizations
Stakeholder Management Business Plans; Human Capital Management, Metrics, and Corporate Sustainability Reporting for organizations, including ISO human capital certifications, and services for solution providers.
5. Outreach in the US and Around the World on Stakeholder Management and Total Rewards
The EEA promotes a strategic approach to people management and total rewards through its e-newsletters, web sites, and social media reaching 20,000 professionals a month and through other activities, such as:
- Association of National Advertisers Brand Engagement 360 Knowledge Center to educate brands and agencies.
