The power of stakeholders

The last few years have seen a dramatic popularisation of the idea of ‘stakeholder capitalism’, But what are its chances of becoming the new normal?

The last few years have seen a dramatic popularisation of the idea of ‘stakeholder capitalism’, But what are its chances of becoming the new normal?

Stakeholder capitalism – the principle that a company should seek long-term value creation for all its stakeholders, from customers and employees to society as a whole – is becoming mainstream. It is discussed at conferences, proclaimed in speeches and crops up extensively in company reports. But there remains a lack of clarity as to what the term means, how much of an impact it will have on the business environment, and if it can be served alongside companies’ business motives. 

For most, a shift toward stakeholder capitalism means the gradual abandonment of a single-minded focus on creating value for shareholders (known as shareholder capitalism). It is also often assumed to mean that companies must take positions on topics once considered ‘political’, from racial equality and worker rights to climate change and sustainability.  

But stakeholder capitalism is not a new concept. It gained its modern definition in the West in the aftermath of World War II, jostling for intellectual space with rival visions including shareholder capitalism and state capitalism. In Europe and the West, shareholder capitalism, famously popularised by thinkers like Milton Friedman, eventually won out. 

In recent years this consensus has transformed, says Andrew Winston, author and founder of Winston Eco Strategies. “A lot of things have advanced stakeholder capitalism, including the murder of George Floyd and the Black Lives Matter movement, the #MeToo movement, and natural disasters and climate extremes,” Winston says.

In a move that generated headlines around the world, the Business Roundtable threw its support behind stakeholder capitalism in 2019 with a pledge signed by nearly 200 CEOs, including the leaders of Apple, Pepsi and Walmart. Then, in January 2021, Klaus Schwab, executive chairman of the World Economic Forum, published Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet, and the topic was featured at this year’s Davos meeting.

The pandemic effect

While support for stakeholder capitalism predates the emergence of the coronavirus, the pandemic has helped accelerate the pace of change. “It is true that the pandemic has woken many people up to the systems we live in. We're all connected — as in one immune system — which is harder to deny than ever. That leads more naturally to thinking about a business and its impact on all stakeholders,” says Winston. 

In particular, the pandemic has shown how companies can make a substantial difference to the people around them — up to and including questions of life and death. In 2020, firms suddenly found themselves responsible — in a very direct way — for the health and wellbeing of their employees. The experience has pushed companies to make commitments on sustainability, employee rights, and other issues as the world recovers from the economic problems of the pandemic. The involvement of firms in discussions about issues like a ‘green new deal’ have also been a boost for the ideas of stakeholder capitalism. 

Above, all the pandemic has opened a path to the implementation of more radical solutions for old problems. “The pandemic has shown up a false sense of safety and security in the economy,” says Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at the London Business School. “A shaking of faith in this system is going to lead us to re-evaluate the foundations and a fundamental re-think of the social contract.”

Here to stay?

The most encouraging sign for proponents of stakeholder capitalism is that some of its most vociferous champions are young people. Both millennials and generation Z — whether as employees, activists or voters — want companies and CEOs to be taking a stand on key issues and invest in sustainability and the environment. 

From the business standpoint, there is increasing evidence that making commitments in environmental, social, and corporate governance helps to boost earnings, revenue and investment in both the short term and the long term. Wärtsilä is also committed to creating value for shareholders and society at large. The company’s approach to sustainability states that policies that contribute to overall well-being of employees and the environment are key to good economic performance.

At this point, there seems to be no way back. “A small, but growing number of companies are on the stakeholder capitalism path,” says Winston. “The world expects much of business today, and those expectations are only rising.”

Written by
Howard Amos