The Case for Stakeholder Capitalism

Published: 16th November 2020 (5 Min Read)

Company executives need to counter the widespread mistrust of capitalists and the corporate sector. The most recent Edelman Trust Barometer report, published in January before the pandemic struck, included a survey of 34,000 people, 56 percent of whom believed that capitalism was doing more harm than good globally, with majorities in 22 of 28 markets surveyed.[i]

The perceived failure to pay fair taxes, to treat employees of any culture or creed properly or to protect the world we live in needs changing. In many cases these are unfair perceptions, but swathes of industry can do better.

Levels of inequality of income and wealth have been rising for several decades. Encouraged by the free market reforms of the Thatcher and Reagan years, the sense of unfairness was exacerbated by the monetary solutions to the Great Financial Crisis, which have benefited the haves more than the have-nots as asset prices have soared.

This drove the rise of the populist politicians whose rhetoric captured the angry hearts of the dispossessed. But now the populists are faltering. Johnson, Trump and Bolsonaro have simply not led their countries with clarity, conviction or consistency through the Covid crisis. The aforementioned Edelman Trust Barometer also reports a lack of trust in politicians.

Trump has been rejected and Dominic Cummings has been ejected. Brazil’s municipal elections are proceeding currently.

Now is the time to shake hands with neighbours over broken fences. The social agenda has been uppermost throughout the world in 2020. Biden can re-join the signatories of the Paris Agreement, even if he struggles to push all his green agenda through Congress; the EU and China have made huge commitments to investing in “net zero” goals. Trade discussions do not have to focus on rejection.

Economic policy is shifting towards fiscal, for which read social, objectives. This will also deliver more regulation for business to embrace.

Influential global management consultants have for some time been making the case for “stakeholder capitalism”, which is a way of describing many of the attributes of ESG or sustainable investing. They are embracing the opportunity to help senior managers engage with positive change.

In an excellent recent article[ii], McKinsey summarise what corporate executives need to do in 5 Principles:

1. Get the Board on Board – appoint new board members with a diversity of experience, skills, and interests who can reflect the concerns and priorities of a wider range of stakeholders, and change corporate governance guidelines to clearly assert stakeholder, rather than explicitly shareholder, priority, where it is legally possible.[iii]
2. Set and track environmental goals – a core principle of business is that what gets measured, gets managed. So, companies should commit to putting their principles into practice by publishing concrete, achievable, and measurable goals. This approach is particularly apt in relation to the environment, where there are clear and readily measurable metrics to track; factors such as “community engagement” may be important but are also less empirical.
3. Work with suppliers, old and new, to build capabilities and skills – even companies that are sincere in their efforts can cause social or environmental damage via their supply chains. One way to limit such damage is to leverage their expertise and economic clout to improve the practices of subcontractors and suppliers. The principle is clear—a company’s sense of responsibility must go beyond its direct operations.
4. Serve consumers’ long-term needs – while business does not want to overstep its bounds, it also does not want to be indifferent to predictably bad outcomes. Recognizing how goods and products affect consumers and then taking action to reduce the negative consequences is part of stakeholder capitalism.
5. Treat your employees with respect and invest in their futures – workforces are not just costs to be managed. Employees are human beings and should be treated with dignity. In business terms, they are also an incredibly valuable resource, well worth tending to in the present and investing in for the future. Companies that do so could benefit in the long term, by being more attractive to possible hires, and inspiring greater loyalty and productivity among those they already employ.

The free-market economy is one of the most important reasons for the wealth creation and improved quality of life humanity has enjoyed in recent generations.

In 1950, for example, Norway had the world’s highest life expectancy (72.3 years). Now the global average is higher (72.6 years) and in Africa, where it is lowest, it is rising fastest.

In China and India alone, more than 1.2 billion people have lifted themselves out of extreme poverty since their countries began to shift their economic policies toward more market-oriented principles.

None of this could have been done without economic growth. Think of West Germany versus East Germany; South Korea versus North Korea; or Costa Rica versus Cuba. The US versus the USSR.

The success was attributable to attention to the end customer’s interests and flexibility in catering to them. Stakeholder capitalism is the post-GFC, post-Covid expression of this.

Sources:

[i] https://www.edelman.com/trustbarometer

[ii] https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-case-for-stakeholder-capitalism

[iii] https://corpgov.law.harvard.edu/2020/11/15/shareholders-rights-shareholder-activism-2020/#more-134412