The United States is known for having a strong base of capitalism, which essentially means that privately owned companies benefit from private enterprise. Stakeholders for companies include customers, suppliers, employees, shareholders and local communities. Private enterprise was actually built on the premise of stakeholder capitalism with the purpose of creating long-term value. The central philosophy was that maximizing profits was important, as long as it didn’t happen at the expense of other stakeholder groups. Stakeholder capitalism accounted for serving the interests of all stakeholders, as opposed to shareholders only, and this philosophy was central to the long-term health and success of businesses. Business owners and shareholders long believed that stakeholder capitalism was a sensible business decision and an ethical choice.
What Is the History of Stakeholder Capitalism?
During the 1970s, Milton Friedman rose as a notable and highly respected American economist. He successfully made a case for shareholder capitalism. He argued that corporate executives should put the interests of shareholders first. Friedman promoted the idea that a business’s only social responsibility was to use its resources and engage in activities that were designed to increase profits. He also encouraged companies to engage in open and free competition without deception or fraud.
Friedman wrote extensively on the subject of shareholder capitalism. His writings on this theory were highly influential and shaped corporate governance laws in the United States. At about the same time, executive and employee stock-based compensation became the norm where the company’s interests were being aligned with the most important stakeholders — the shareholders. This theory seemed to offer support for shareholder capitalism.
There was also a strong increase in hostile takeovers by what became known as corporate raiders. Investors bought large shares in undervalued companies and attempted to use their power to influence boards to make decisions based on shareholder interests. As experts began to connect the financial upswing to shareholder capitalism, the Business Roundtable came on board in support of shareholder capitalism in 1997.
In the early 2000s, another notable economist, Joseph Stiglitz, argued in favor of going back to the stakeholder capitalism model of governance. Since that time, there’s been a gradual shift toward returning to the stakeholder capitalism model. The stakeholder capitalism model is currently the prevalent model in Europe. Most companies and corporate leaders are also calling for a return to the stakeholder capitalism model.
In many cases, shareholders are also leading the charge toward stakeholder capitalism. It’s not uncommon to see shareholder proposals and resolutions in favor of the stakeholder model. Shareholders also use a strategy called impact investing, which means that they only buy shares in companies that are pursuing making a positive impact on the environment or society. Shareholders may also make a practice of socially responsible investing (SRI), which means that they pass over companies that harm other stakeholders.
The 2019 Business Roundtable Flips Back to Stakeholder Capitalism
In August, the 2019 Business Roundtable released a new “Statement on the Purpose of a Corporation,” which is a vast departure from their prior stance on shareholder capitalism. The Business Roundtable stated publicly that all its member companies share a fundamental commitment to all their stakeholders.
JP Morgan’s chairman and CEO, Jamie Dimon, said at the Business Roundtable, “The American dream is alive, but fraying… Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. Modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
Marc Benioff, billionaire philanthropist and co-founder of Salesforce, attributes his company’s success to stakeholder capitalism. He states, “Capitalism, as we know it, is dead. We’re going to see a new kind of capitalism — and it won’t be the Milton Friedman capitalism, that is just about making money. The new capitalism is that businesses are here to serve their shareholders, but also their stakeholders — employees, customers, public schools, the homeless and the planet.”
The World Economic Forum Davos 2020 to Focus on Stakeholder Capitalism
The World Economic Forum’s 50th Annual Meeting in Davos set the theme for the meeting as “Stakeholders for a Cohesive and Sustainable World.” One of their goals will be how to help corporations to establish new processes for how to update key performance indicators to coincide with the shift to stakeholder capitalism.
Professor Klaus Schwab, founder and executive chairman at the World Economic Forum, stated his concerns about falling short of keeping global warming limited to 1.5°C as an example of why it’s important to return to the stakeholder capitalism theory.
What Does the Stakeholder Model Mean for Stakeholders?
Corporate leaders currently have the choice to adopt the stakeholder capitalism model. At some point, governments could force the model through laws and regulations. Companies can demonstrate their commitment to the stakeholder model for employees by paying fair wages, ensuring safety in the workplace, offering benefits, providing work-life balance and reducing the CEO-worker pay ratio. Customers will recognize the new model by companies that provide good customer service and engage in honest marketing practices. Communities will benefit from corporate investments in local communities and efforts to prevent environmental damage.
A Stanford University study of over 200 CEOs and CFOs of companies in the S&P 1500 Index determined that most executives just don’t get recognized for already doing a good job of addressing stakeholder concerns in their strategic planning processes. About half of the CEOs think that stakeholders can comprehend what they’re doing to meet their stakeholders’ needs. About 33% of the institutional investors believe they favor a stakeholder model and only 10% of the media said that corporations are following a stakeholder capitalism model.
Stakeholder capitalism still has its critics. Some experts believe that corporate leaders will always be self-serving. The idea is that by keeping a focus on shareholders, executives will focus on increasing profits without being distracted. Critics believe that shareholder capitalism will keep corporations active and competitive. There are also some who attribute the immense value of public companies in the U.S. to shareholder capitalism in comparison with public companies in other regions like Europe where the stakeholder theory is the norm.
The evolution of the corporate model clearly demonstrates the need for corporate leaders to stay current with corporate and industry news. Diligent’s Governance Intel software gives leaders the ability to monitor and catalog news outlets so that they can track companies, competitors, topics and industries. The tool is fully customizable to each individual’s needs and expectations by tailoring the sources, volume, frequency and modes of consumption. It’s the modern way to approach governance.