Stakeholder Capitalism: What It Is, Why It Matters, and How to Practice It
Introduction
Capitalism is one of the most powerful forces that shape our world. It drives economic growth, innovation, and prosperity. But it also has its drawbacks, such as inequality, environmental degradation, and social unrest. How can we make capitalism work for everyone, not just a few?
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One answer is stakeholder capitalism, a form of capitalism that considers the interests and needs of all stakeholders, not just shareholders. Stakeholders are anyone who is affected by or can affect a business, such as customers, employees, suppliers, communities, and society at large. Stakeholder capitalism aims to create long-term value for all stakeholders, while minimizing negative impacts on people and the planet.
In this article, we will explore what stakeholder capitalism is, why it matters, and how to practice it. We will also look at some of the benefits and challenges of stakeholder capitalism, as well as some examples of companies and initiatives that are leading the way.
What is stakeholder capitalism?
What is stakeholder capitalism?
Stakeholder capitalism is a system or an ideology in which corporations serve or take into account the interests or needs of all their stakeholders, not just shareholders. Stakeholders include customers, suppliers, employees, shareholders, local communities, and society at large. Stakeholder capitalism aims to create long-term value or work toward a primary goal or mission that benefits all stakeholders.
The concept of stakeholder capitalism goes back to the 1950s and 1960s, when it was common for businesses to consider the well-being of all their constituents, not just their owners. However, in the 1970s and 1980s, the idea of shareholder primacy gained prominence, influenced by economist Milton Friedman's argument that the only social responsibility of a business is to increase its profits. This led to a focus on short-term financial performance and shareholder value at the expense of other stakeholder groups.
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In recent years, however, there has been a resurgence of interest in stakeholder capitalism, driven by various factors such as the climate crisis, social movements, consumer preferences, regulatory pressures, and investor demands . Many business leaders, organizations, and governments have expressed their support for stakeholder capitalism as a way to address the environmental and social challenges facing the world today.
Why is stakeholder capitalism important?
Why is stakeholder capitalism important?
Stakeholder capitalism is important because it offers a more holistic and sustainable way of doing business in the 21st century. Some of the reasons why stakeholder capitalism matters are:
It reflects the reality and complexity of today's business environment. Businesses operate in a globalized and interconnected world where they depend on and impact multiple stakeholders across different domains. Ignoring or neglecting any of these stakeholders can have negative consequences for the business itself as well as for society and the environment.
It aligns with the values and expectations of today's consumers and employees. Consumers are increasingly aware of and concerned about the social and environmental impacts of their purchases. They demand more transparency, accountability, and responsibility from businesses. Employees are also looking for more meaning and purpose in their work. They want to work for companies that share their values and contribute to positive change.
It creates a competitive advantage and a source of innovation for businesses. Businesses that adopt stakeholder capitalism principles can benefit from increased customer loyalty, employee engagement, supplier collaboration, community support, and investor confidence. They can also leverage the insights and feedback from their diverse stakeholders to improve their products, services, processes, and strategies.
It contributes to the achievement of the global goals and the common good. Stakeholder capitalism aligns with the United Nations Sustainable Development Goals (SDGs), which are a set of 17 goals and 169 targets that aim to end poverty, protect the planet, and ensure peace and prosperity for all by 2030. By considering the impacts and interests of all their stakeholders, businesses can play a vital role in advancing the SDGs and creating a more inclusive and sustainable world.
How does stakeholder capitalism differ from shareholder capitalism?
How does stakeholder capitalism differ from shareholder capitalism?
Stakeholder capitalism differs from shareholder capitalism in several ways. The main differences are:
Stakeholder capitalism
Shareholder capitalism
Focuses on creating long-term value for all stakeholders
Focuses on maximizing short-term profits for shareholders
Considers the social and environmental impacts of business decisions
Ignores or externalizes the social and environmental costs of business activities
Engages and collaborates with stakeholders to understand and meet their needs and expectations
Exploits or neglects stakeholders to increase shareholder value
Measures and reports on multiple dimensions of performance, such as financial, social, environmental, and governance (ESG)
Measures and reports on financial performance only
Aligns with the global goals and the common good
Contradicts or undermines the global goals and the common good
However, stakeholder capitalism does not mean that shareholders are irrelevant or unimportant. Shareholders are still one of the key stakeholders of a business, and they deserve a fair return on their investment. Stakeholder capitalism recognizes that shareholders' interests are not necessarily opposed to those of other stakeholders, but rather interdependent and mutually reinforcing. By creating value for all stakeholders, businesses can also create value for shareholders in the long run.
Benefits of stakeholder capitalism
For businesses
Stakeholder capitalism can bring many benefits for businesses, such as:
Improved reputation and trust. Businesses that practice stakeholder capitalism can enhance their brand image and credibility among their customers, employees, suppliers, communities, regulators, media, and other stakeholders. This can help them attract and retain loyal customers, talented employees, reliable suppliers, supportive partners, and favorable policies.
Increased resilience and adaptability. Businesses that practice stakeholder capitalism can better cope with risks and uncertainties in their operating environment. They can anticipate and respond to changes in customer preferences, market trends, social norms, environmental conditions, regulatory frameworks, and technological innovations. They can also leverage the resources and capabilities of their stakeholders to overcome challenges and seize opportunities.
Enhanced innovation and differentiation. Businesses that practice stakeholder capitalism can foster a culture of innovation and creativity within their organization. They can tap into the ideas and insights of their diverse stakeholders to develop new products, services, processes, and strategies that meet their needs and expectations. They can also differentiate themselves from their competitors by offering unique value propositions that address social and environmental issues.
Growth potential. Businesses that practice stakeholder capitalism can access new markets and customers that are aligned with their values and mission. They can also expand their existing markets and customers by offering more value and satisfaction. They can also benefit from the growth of the social and environmental sectors, such as renewable energy, circular economy, and social entrepreneurship.
For society and the environment
Stakeholder capitalism can also bring many benefits for society and the environment, such as:
Reduced poverty and inequality. Stakeholder capitalism can help reduce poverty and inequality by creating more jobs, income, and opportunities for marginalized and vulnerable groups. It can also help redistribute wealth and resources more fairly and equitably among different stakeholders.
Improved health and well-being. Stakeholder capitalism can help improve health and well-being by providing better products, services, and working conditions for customers and employees. It can also help prevent or mitigate the negative impacts of business activities on human health, such as pollution, disease, and stress.
Enhanced social cohesion and peace. Stakeholder capitalism can help enhance social cohesion and peace by fostering a sense of belonging, trust, and cooperation among different stakeholder groups. It can also help resolve or prevent conflicts and disputes that may arise from competing or incompatible interests or values.
Preserved natural resources and biodiversity. Stakeholder capitalism can help preserve natural resources and biodiversity by reducing the consumption and waste of materials, energy, water, and land. It can also help protect and restore the ecosystems and habitats that support life on Earth.
Addressed climate change and other global challenges. Stakeholder capitalism can help address climate change and other global challenges by reducing greenhouse gas emissions and increasing resilience to climate impacts. It can also help contribute to the achievement of the United Nations Sustainable Development Goals (SDGs), which are a set of 17 goals and 169 targets that aim to end poverty, protect the planet, and ensure peace and prosperity for all by 2030.
For investors
Stakeholder capitalism can also bring many benefits for investors, such as:
Higher returns and lower risks. Investors who invest in businesses that practice stakeholder capitalism can expect higher returns and lower risks in the long run. This is because these businesses tend to have better financial performance, stronger competitive advantage, more loyal customers, more engaged employees, more supportive partners, more favorable policies, and less exposure to reputational, regulatory, operational, legal, environmental, social, or governance (ESG) risks.
More stakeholder engagement and participation. Investors who invest in businesses that practice stakeholder capitalism can have more stakeholder engagement and participation from these businesses. This is because these businesses tend to involve their stakeholders in their decision-making, governance, and value creation processes. They also tend to seek feedback and input from their stakeholders on their ESG performance, impacts, goals, strategies, policies, practices, initiatives, challenges, opportunities, risks, and opportunities.
More alignment with values and mission. Investors who invest in businesses that practice stakeholder capitalism can have more alignment with their values and mission. This is because these businesses tend to have a clear and compelling purpose that guides their actions and decisions. They also tend to have a positive impact on society and the environment, which aligns with the values and mission of many investors.
Challenges of stakeholder capitalism
Measuring and reporting on stakeholder value
One of the challenges of stakeholder capitalism is measuring and reporting on stakeholder value. Unlike shareholder value, which can be easily quantified and communicated by financial metrics such as earnings per share or return on equity, stakeholder value is more difficult to measure and report. This is because stakeholder value involves multiple dimensions of performance, such as social, environmental, and governance (ESG), which are often qualitative, subjective, or intangible. Moreover, there is no universal or standardized framework or methodology for measuring and reporting on ESG performance or impact.
To overcome this challenge, businesses that practice stakeholder capitalism need to adopt or develop appropriate tools and methods for measuring and reporting on stakeholder value. Some of the possible solutions are:
Using existing ESG frameworks or standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), or the Task Force on Climate-related Financial Disclosures (TCFD).
Creating customized ESG indicators or metrics that reflect the specific context, goals, strategies, impacts, and stakeholders of the business.
Engaging with stakeholders to identify and prioritize the most relevant and material ESG issues and outcomes for the business.
Integrating ESG data and information into the financial statements and reports of the business.
Verifying and validating ESG data and information by external auditors or assurance providers.
Disclosing ESG data and information to stakeholders through various channels and platforms, such as websites, social media, newsletters, or annual reports.
Aligning stakeholder interests and expectations
suppliers may want longer payment terms, and shareholders may want higher dividends. How can a business balance and satisfy all these stakeholder demands? To overcome this challenge, businesses that practice stakeholder capitalism need to adopt or develop appropriate strategies and practices for aligning stakeholder interests and expectations. Some of the possible solutions are:
Communicating and consulting with stakeholders regularly and transparently to understand and address their needs and expectations.
Creating a shared vision and mission that articulates the purpose and values of the business and inspires and motivates all stakeholders.
Establishing a stakeholder governance structure or mechanism that enables stakeholder representation, participation, and influence in the decision-making, governance, and value creation processes of the business.
Developing a stakeholder value proposition or model that defines and demonstrates how the business creates value for each stakeholder group.
Implementing a stakeholder feedback or evaluation system that measures and monitors stakeholder satisfaction, loyalty, engagement, and impact.
Recognizing and rewarding stakeholder contributions, achievements, and performance.
Balancing short-term and long-term goals
A third challenge of stakeholder capitalism is balancing short-term and long-term goals. Stakeholder capitalism requires a long-term perspective and orientation, as it aims to create sustainable value for all stakeholders over time. However, businesses also face short-term pressures and challenges, such as market fluctuations, customer demands, competitive threats, or regulatory changes. How can a business reconcile these conflicting time horizons and priorities?
To overcome this challenge, businesses that practice stakeholder capitalism need to adopt or develop appropriate tools and methods for balancing short-term and long-term goals. Some of the possible solutions are:
Setting clear and realistic short-term and long-term goals that are aligned with the vision and mission of the business.
Using scenario planning or foresight techniques to anticipate and prepare for future trends, opportunities, risks, and uncertainties.
Applying a systems thinking or holistic approach to understand and manage the interrelationships and interdependencies among different stakeholder groups, issues, and outcomes.
Allocating resources and capabilities strategically and efficiently to achieve both short-term and long-term goals.
Evaluating and reporting on both short-term and long-term performance, impacts, progress, and challenges.
Educating and engaging stakeholders on the importance and benefits of taking a long-term view of value creation.
Examples of stakeholder capitalism in action
Companies that adopt stakeholder capitalism principles
There are many examples of companies that adopt stakeholder capitalism principles in their business models, strategies, policies, practices, initiatives, or cultures. Some of these examples are:
Patagonia: Patagonia is a US-based outdoor clothing and gear company that is known for its environmental and social activism. Patagonia has adopted a stakeholder capitalism approach through its mission statement, which reads: "We're in business to save our home planet." Patagonia pursues this mission by donating 1% of its sales to environmental organizations, using organic and recycled materials, supporting fair trade and labor practices, encouraging repair and reuse of its products, and advocating for environmental causes and policies.
Southwest Airlines: Southwest Airlines is a US-based low-cost airline that operates more than 4,000 flights a day to over 100 destinations. Southwest Airlines has adopted a stakeholder capitalism approach through its vision statement, which reads: "To become the world's most loved, most flown, and most profitable airline." Southwest Airlines achieves this vision by putting its employees first, treating them as family, and empowering them to deliver excellent customer service. Southwest Airlines also cares for its customers, offering low fares, no fees, and a friendly and fun experience. Southwest Airlines also cares for its communities, supporting charitable causes and initiatives, and reducing its environmental impact.
Initiatives that promote stakeholder capitalism metrics and standards
There are also many examples of initiatives that promote stakeholder capitalism metrics and standards, such as:
The World Economic Forum's Stakeholder Capitalism Metrics: The World Economic Forum (WEF) is an international organization that engages business, political, academic, and other leaders to shape global, regional, and industry agendas. The WEF has developed a set of universal ESG metrics and disclosures that can be used by companies to measure and report on their stakeholder value creation. The metrics are aligned with existing ESG frameworks and standards, such as the GRI, the SASB, the IIRC, or the TCFD. The metrics cover four pillars: governance, planet, people, and prosperity.
The B Corporation Certification: B Corporation (or B Corp) is a certification that recognizes businesses that meet the highest standards of social and environmental performance, accountability, and transparency. B Corp certification is administered by B Lab, a nonprofit organization that aims to create a global movement of people using business as a force for good. To become a B Corp, a business must complete an assessment that evaluates its impact on its workers, customers, community, environment, and governance. It must also amend its legal structure to incorporate its commitment to stakeholder interests.
The Social Progress Index: The Social Progress Index (SPI) is an index that measures the social and environmental performance of countries or regions. The SPI is based on 50 indicators that cover three dimensions: basic human needs, foundations of well-being
Read more about stakeholder capitalism from reputable sources, such as books, reports, articles , or podcasts .
Assess your current level of stakeholder orientation and performance, using tools such as the Stakeholder Capitalism Metrics, the B Corporation Certification, or the Social Progress Index.
Identify and prioritize your key stakeholder groups and issues, and engage with them to understand and address their needs and expectations.
Define and communicate your purpose, vision, mission, and values, and align them with the global goals and the common good.
Integrate stakeholder value creation into your business model, strategy, policy, practice, initiative, or culture.
Measure and report on your stakeholder value creation, using appropriate ESG frameworks or standards, and disclose them to your stakeholders through various channels and platforms.
Join or support networks or coalitions that promote stakeholder capitalism, such as the World Economic Forum's International Business Council, the Business Roundtable, or the B Team.
By taking these steps, you can become part of the stakeholder capitalism movement and help transform the economy for the better. Stakeholder capitalism is not only a moral imperative, but also a strategic opportunity and a competitive advantage. It is the way to create sustainable value for yourself and for others.
Frequently Asked Questions
Here are some frequently asked questions about stakeholder capitalism:
What are some of the criticisms of stakeholder capitalism?
Some of the criticisms of stakeholder capitalism are:
It is vague and ambiguous, and lacks a clear definition, measurement, or enforcement mechanism.
It is unrealistic and utopian, and ignores the inherent trade-offs and conflicts among different stakeholder groups.
It is inefficient and ineffective, and dilutes the focus and accountability of businesses on their core competencies and financial performance.
It is hypocritical and opportunistic, and serves as a PR stunt or a greenwashing strategy for businesses to avoid regulation or criticism.
How can stakeholder capitalism be reconciled with shareholder capitalism?
Stakeholder capitalism can be reconciled with shareholder capitalism by recognizing that shareholders are one of the key stakeholders of a business, and that their interests are not necessarily opposed to those of other stakeholders, but rather interdependent and mutually reinforcing. By creating value for all stakeholders, businesses can also create value for shareholders in the long run. Moreover, shareholders can also play a positive role in promoting stakeholder capitalism by demanding more ESG disclosure and performance from businesses, by investing in businesses that practice stakeholder capitalism, and by engaging with businesses on their ESG issues and outcomes.
What are some of the best practices or examples of stakeholder capitalism?
Some of the best practices or examples of stakeholder capitalism are:
Unilever's Unilever Sustainable Living Plan (USLP), which aims to make sustainable living commonplace by 2030 by improving health and well-being for more than a billion people, reducing environmental impact by half, and enhancing social impact by sourcing 100% of agricultural raw materials sustainably and enhancing the livelihoods of millions of people.
Patagonia's mission statement, which reads: "We're in business to save our home planet." Patagonia pursues this mission by donating 1% of its sales to environmental organizations, using organic and recycled materials, supporting fair trade Patagonia's mission statement, which reads: "We're in business to save our home planet." Patagonia pursues this mission by donating 1% of its sales to environmental organizations, using organic and recycled materials, supporting fair trade and labor practices, encouraging repair and reuse of its products, and advocating for environmental causes and policies.
Southwest Airlines' vision statement, which reads: "To become the world's most loved, most flown, and most profitable airline." Southwest Airlines achieves this vision by putting its employees first, treating them as family, and empowering them to deliver excellent customer service. Southwest Airlines also cares for its customers, offering low fares, no fees, and a friendly and fun experience. Southwest Airlines also cares for its communities, supporting charitable causes and initiatives, and reducing its environmental impact.
The World Economic Forum's Stakeholder Capitalism Metrics, which are a set of universal ESG metrics and disclosures that can be used by companies to measure and report on their stakeholder value creation. The metrics are aligned with existing ESG frameworks and standards, such as the GRI, the SASB, the IIRC, or the TCFD. The metrics cover four pillars: governance, planet, people, and prosperity.
The B Corporation Certification, which is a certification that recognizes businesses that meet the highest standards of social and environmental performance, accountability, and transparency. B Corp certification is administered by B Lab, a nonprofit organization that aims to create a global movement of people using business as a force for good. To become a B Corp, a business must complete an assessment that evaluates its impact on its workers, customers, community, environment, and governance. It must also amend its legal structure to incorporate its commitment to stakeholder interests.
The Social Progress Index, which is an index that measures the social and environmental performance of countries or regions. The SPI is based on 50 indicators that cover three dimensions: basic human needs, foundations of well-being, and opportunity. The SPI aims to complement traditional economic measures, such as GDP, by capturing the social and environmental aspects of human well-being. The SPI can help governments, businesses, and civil society to identify and prioritize the most pressing social and environmental issues and opportunities.
How can I learn more about stakeholder capitalism or get involved in the movement?
If you want to learn more about stakeholder capitalism or get involved in the movement, you can:
Visit the websites or follow the social media accounts of some of the organizations or initiatives that promote stakeholder capitalism, such as the World Economic Forum, B Lab, or the Social Progress Imperative.
Read some of the books or reports that explain or advocate for stakeholder capitalism, such as Stakeholder Capitalism by Klaus Schwab, The B Corp Handbook by Ryan Honeyman, or The Social Progress Index 2020 by Michael Green.
Listen to some of the podcasts or watch some of the videos that feature or interview some of the leaders or experts on stakeholder capitalism, such as The Great Reset podcast by the World Economic Forum, The B Corp Podcast by B Lab, or The TED Talk by Michael Green on How We Can Make the World a Better Place by 2030.
Join or support some of the networks or coalitions that bring together businesses or individuals who practice or support stakeholder capitalism Join or support some of the networks or coalitions that bring together businesses or individuals who practice or support stakeholder capitalism, such as the World Economic Forum's International Business Council, the Business Roundtable, the B Team, or the Conscious Capitalism movement.
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I hope you enjoyed reading this article and learned something new about stakeholder capitalism. If you have any questions, comments, or feedback, please feel free to contact me. Thank you for your attention and interest. 44f88ac181
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