Does stakeholder capitalism have a future?

Five years ago, CEOs at the US Business Round Table signed, with much fanfare, a declaration that henceforth they would be moving from a business model of shareholder primacy to a broader model that focuses on the interests of all stakeholders. Some greeted this statement with glee – evidence of progress. Others believed it was an empty statement that was ‘only for show.’ That the mere promise of a stakeholder focus in a world where management incentives were still primarily focused on shareholder financial interests should not be allowed to ‘obscure the critical need for external interventions to protect stakeholders via legislation, regulation, and policy design.’

Five years later, it has been argued that ‘the envisioned mass pivot to stakeholderism has not materialized’ while also recognising 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.’

What is stakeholder capitalism?

All this, of course, begs the question of whether we know what ‘stakeholder capitalism’ actually means in practice. It has been said that stakeholder capitalism means whatever one wants it to mean. One article describes four types of stakeholderism – and we could all probably come up with more.

Probably one of the more na?ve and impractical definition of stakeholderism is that boards and management should act in the interests of all their stakeholders. The idea that any business decision can benefit all stakeholders is clearly for the birds. Stakeholders are a widely varied group with different values and interests. All pulling in different directions. Every business decision involves trade-offs between such interests. There will always be winners and losers.

In my experience, most activists pushing for a stakeholder model do so under the assumption that under such a model it will be their particular interests that will be privileged. Environmentalists believe that environmental issues will come to take precedence. Human rights activists argue their case. Labour representatives look to privilege employees’ rights. And on it goes.

Each of these special interests is looking for ways to flex their power – be that through performative activism, through industrial action, or through the various national and international courts – to force companies to privilege their particular cause over others’. For business leaders, this is the stuff of nightmares. For the rest of us, it means that corporate action ends up to some extent being driven by the loudest voices – whether we like those voices or not.

In 2017, I wrote a paper on corporate governance reform in response to a UK government request for consultation. Looking back at it, I found this paragraph: ‘Unfortunately, activist groups do not do themselves any favours by their obsessive single-issue focus and a seemingly willful blindness to the fact that most decisions involve difficult balancing acts between varied and often conflicting interests. It is important that companies have some degree of protection against such behaviours.’

Others argue that stakeholder capitalism is about having companies pursue 'the common good' or some similar phrase. Yet that is also somewhat vacuous since what constitutes 'the common good' is the subject of endless political debate. It is forever contested. Everyone believes that their own particular view of the common good is the right one. Given that everything creates winners and losers, it is even arguable whether such a thing as 'the common good' exists.

Towards political capitalism?

Many will know that, today, I prefer the term political capitalism to stakeholder capitalism (even though I was arguing for shareholder capitalism in my 2017 paper).

Why? Two reasons.

The first is that most of the ‘stakeholder’ pressures that corporations face today are political in nature. Whether it’s how societies should respond to climate change or environmental degradation; how to balance diversity with meritocracy; working conditions for employees and in supply chains; whether, how and what to do business in in countries that might be considered a threat to national security; how to manage different value systems in all the multiple countries where a multinational company operates; and myriad other considerations.

The second is that the need to manage through the diverse and often conflicting interests of various stakeholders is the stock in trade of politics. Where elected representatives have to make decisions for which there is no ‘right answer’; where every citizen is screaming for something different; where every decision inevitably creates winners and losers.

The shareholder primacy model makes it all easier as, when in doubt, one lands on the side of privileging one specific aspect (financial) of one specific group (shareholders). Things are more challenging in a world of political capitalism and many business leaders are finding it tricky to live in a world of shades of grey, being pulled in many opposite directions, and having to deal with the inevitability of creating winners and losers in a world where every stakeholder expects to be the winner.

In that world, both decision making and how to communicate such decisions effectively to the wider world becomes a challenge. Recently speaking to a senior executive in a large financial services company I suggested that some, maybe many, business leaders have never had to develop such skills in the past. ‘I can attest to that’ was his reply.

No surprise. These are political skills not traditional business skills.

What about regulation?

As per the quote earlier in this piece, is there a viable route to ‘stakeholder capitalism’ (or whatever we choose to call it) via regulation, legislation, and policy design?

Of course, that is hard in a world where we don’t really know what such a term means in practice. One could require that boards and corporate leaders adopt a stakeholder approach to their businesses. But putting that down on a piece of paper, even if that paper has the force of law, does not tell us about how to interpret it on a day-to-day basis around the myriad decisions and difficult trade-offs that management has to make every day of the week.

Further, it is likely that such legislation would unleash an inordinate amount of litigation by stakeholders who believe that their particular interests are not being sufficiently looked after. After all, I have yet to meet an activist who believes that their particular cause is being adequately addressed. If that were the case, they’d be out of a job.

Of course, over the years we have had much legislation and regulation around specific issues such as carbon emissions, worker rights, etc. Such legislation protects the interests of different stakeholders one at a time. Corporations must comply with such legislation or regulation. What has been elusive is a way to enshrine the concept of ‘stakeholder capitalism’ in law.

Maybe one way forward is to consider the case set by UK case law with regards to investment decisions for trustees of charities and not-for-profit organisations. In the Butler-Sloss and ors v Charity Commission and anor [2022] Ch 371 (Butler-Sloss), the court ruled that trustees “need to exercise good judgment by balancing all relevant factors.”

“If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.”

In other words, there would be a requirement for directors and management to ensure that there are adequate processes in place to ensure that all relevant factors have been taken into account without pre-judging the outcome of any particular decision. And without presuming that anyone – the courts or anyone else – is in a legitimate position to second guess the difficult trade-offs and judgements made by directors.

This is a framework that demands good decision-making processes while protecting directors from endless challenge around every decision.

Many will find this an imperfect and inadequate solution. Most, or should I say all, public policy decisions are. Yet, it could, maybe, represent a step in the right direction and it’s not clear how we can do better.