The Business Roundtable pledge needs more work: defining stakeholder capitalism impeccably, and developing an implementation playbook

Stakeholder: I noticed that while our revenue is increasing, our operational costs seem to be rising even faster. How do you see us addressing this imbalance?

Shareholder: That’s a valid point. We’ve been focusing on expansion, which naturally involves higher costs upfront. However, I believe we need a clearer strategy to ensure these investments translate into long-term profitability.

When the Business Roundtable issued its new statement on corporate purpose in August 2019, it brought to a head the longstanding debate between shareholder capitalism and stakeholder capitalism. In a reversal of the BRT’s previous stance in favor of shareholder primacy, the new statement declared its signers’ commitment to “lead their companies for the benefit of all stakeholders.”

It seemed to many commentators that the stakeholder view had finally won. But, skeptics quickly pointed out that nothing had really changed in the governance of the 181 companies, whose CEOs had signed the statement. As research later confirmed, the vast majority of those companies’ boards of directors had not been asked to approve the decision to sign, and the companies’ governance documents largely continued to define shareholder value as their ultimate objective.

Moreover, the shareholder returns continued to be the predominant metric for awarding long-term incentive pay to CEOs of S&P 500 companies, which included about two-thirds of the companies, whose CEOs signed the statement. In response, many stakeholder advocates reasoned that the statement was just the first step in a long journey to rewire U.S. companies to create value for all their stakeholders rather than just for their shareholders. The statement’s signers, by contrast, were somewhat ambivalent about whether they were describing how their companies already operated, or announcing a fundamental shift in direction. Five years later, the debate continues and the envisioned mass pivot to stakeholderism has not materialized.

?

Resting the case on long-term interests

Granted, the term “stakeholder” has become ubiquitous. It is rare to find a listed company that doesn’t claim to be committed in some general sense to all its stakeholders. It’s also true that some companies have taken steps to address stakeholder concerns, improved the flow of information about stakeholders to the boardroom, and introduced performance goals and (modest) incentives to advance certain interests of non-shareholder stakeholders.

Even many supporters of stakeholderism rest their case on the long-term interests of shareholders. As BlackRock Chairman and CEO Larry Fink wrote in his 2021 letter to CEOs, “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.” Meanwhile, shareholder power is only increasing. Delaware, the legal home to more than two-thirds of the Fortune 500 and almost 80% of U.S. initial public offerings, recently adopted legislation expanding the ability of influential shareholders to contract with their investee companies for powers traditionally reserved to the board of directors.

One reason for stakeholder capitalism’s failure to take deeper root has been a lack of consensus about what it requires of companies and what companies owe their non-shareholder stakeholders. Stakeholderism has been interpreted in different ways – one version says that companies should consider the interests of their non-shareholder stakeholders but should serve those interests only if doing so would maximize shareholder value. Another version says that companies have ethical and legal obligations to each of their stakeholders that should be respected whether or not it would maximize shareholder value. In the absence of clarity about what companies owe their non-shareholder stakeholders, it is difficult to operationalize stakeholderism. Therefore, it’s not surprising that mainstream companies have taken only modest or ad-hoc steps to do so.

Another barrier to the widespread adoption of stakeholder capitalism has been the absence of a strong and empowered constituency to promote it. When agency theory emerged in the late 1970s and early 1980s, it found a ready audience in institutional investors, especially large pension funds, that were at the time consolidating America’s shareholdings. After the stock market’s dismal performance in the 1970s, these investors were seeking ways to remain competitive and to meet their obligations to their beneficiaries. Agency theory, with its focus on maximizing returns for shareholders, gave their efforts intellectual legitimacy and empowered them to put pressure on companies and boards to improve returns. In turn, institutional investors used the rhetoric of shareholder primacy to pressure companies not to employ anti-takeover provisions, like poison pills, that were said to deprive shareholders of an opportunity to earn a premium on their shares, and to opt out of state laws allowing directors to take into account the interests of stakeholders other than shareholders when considering a takeover bid.

Back when stakeholderism was viewed as a fringe idea, some critics argued that paying attention to the interests of other stakeholders would distract corporate leaders from the business of maximizing shareholder value. Others argued that calling out the interests of other stakeholders was unnecessary, reasoning that if corporate leaders were sufficiently focused on maximizing shareholder value, they would automatically take other stakeholders’ interests into account if those interests were relevant.

?

Aim to find a powerful constituency for promotion

While the U.S. law provides frameworks for managing the rights and privileges of shareholders and stakeholders, balancing these interests often involves a combination of fiduciary duties, specific legal requirements, and voluntary CSR practices.

For a time, especially in the years just before and after the BRT statement, several large institutional investors voiced their support for stakeholder capitalism, but that support has waned somewhat as political winds and market conditions have shifted and made it more costly. BlackRock, for example, has tempered its public statements, as various state entities have withdrawn billions from its funds, following the adoption of legislation, limiting the consideration of environmental and social factors in investing state funds. Institutional investor support is, at best, likely to continue fluctuating given that investors’ interests and those of other stakeholders do not consistently align. Yet, it is doubtful that stakeholder capitalism can ever become as embedded as shareholder capitalism, without an economically or politically powerful constituency to promote it.

It turns out that a myopic focus on maximizing shareholder value can be self-defeating. Consider the drug-pricing excesses at Valeant Pharmaceuticals, the fake accounts scandal at Wells Fargo, or the airliner safety debacle at Boeing - had these companies paid more attention to serving the interests of their non-shareholder stakeholders, they might well have avoided these calamities, and benefited their shareholders at the same time.

Balancing the interests of both stakeholders and shareholders is crucial for the holistic development of a company. Here are some strategies for achieving this balance:

-???????? Develop a mission statement and vision that reflect the company’s commitment to both financial performance and social responsibility. This helps align strategic goals with the interests of both shareholders and stakeholders.

-???????? Shareholders: Keep shareholders informed about financial performance, strategic decisions, and long-term goals through regular reports and meetings.

-???????? Stakeholders: Maintain open lines of communication with other stakeholders (employees, customers, suppliers, communities) to understand their needs and concerns.

-???????? Implement a governance structure that includes diverse perspectives. For example, having independent directors on the board can help ensure that decisions consider both shareholder and stakeholder interests.

-???????? Focus on long-term value creation rather than short-term gains. Investments in employee development, sustainable practices, and customer satisfaction can lead to sustainable growth and enhance shareholder value over time.

-???????? Set and track both financial and non-financial performance metrics. Financial metrics are crucial for shareholder interests, while non-financial metrics (e.g., employee satisfaction, environmental impact) address stakeholder concerns.

Shareholder: Consistency is crucial for credibility. I think we need to highlight our ethical practices in our communications. Shareholders want to know that their investments are in a company, with strong values.

Stakeholder: Absolutely. Communicating our commitment to ethics not only reassures shareholders, but also strengthens our relationships with other stakeholders. It shows that we’re serious about doing the right thing, which can enhance our reputation and build trust across the board.

?

?