Stakeholder Capitalism: A Primer
The movement is based on business practices going back to the 1950s in the world of total quality management and in the academic world going to the 1980s as explained in this recent academic review of the management theory behind Stakeholder Capitalism. It was not created in 2019, as some believe, when the Business Roundtable updated its charter of the organization to address the needs of all stakeholders, which was in effect no more than a press release. Stakeholder Capitalism predate the term ESG by decades.
The concept and principles of Stakeholder Capitalism have existed for decades but there remains confusion about the definition that is either a natural consequence of any new concept or is in some cases an opportunity to poke holes in it. This primer clarifies the definition for Stakeholder Capitalism based on decades of pre-2019 usage. It provides a brief history and a list of the relatively small number of people and organizations whose work has contributed to a better understanding of the virtuous circle of prosperity and a healthier environment created by strategically and systematically engaging all stakeholders in the missions and objectives of the enterprise.
Despite the recent pronouncements from the Business Roundtable and others, the concepts underlying Stakeholder Capitalism did not come down from on high but rather from the practical efforts of academics and business people trying to improve business. The Enterprise Engagement Alliance Youtube.com channel has a regularly updated library of shows consisting of panel discussions with experts in all areas of business and academia on the practical implementation of Stakeholder Capitalism to achieve organizational results. This article was first published in March 2020 and was most recently updated in March 2023. The concept of Stakeholder Capitalism is completely non-partisan as it does not require government involvement.
Click here for an EEA Youtube show conversation on Stakeholder Capitalism between Bruce Bolger, EEA founder and R. Edward Freeman, Professor of Business Administration at the Darden School of the University of Virginia, both early advocates of the field, or this show with Leo E. Strine, Jr., former Delaware Chief Justice, another pioneer and a strict advocate for keeping business out of politics and vice versa.
Click here for a library of Stakeholder Capitalism and human capital management resources. See the footer for information about the activities of Enterprise Engagement Alliance at TheEEA.org or contact Bruce Bolger at 914-591-7600, ext. 230 or Bolger@TheICEE.org.
By Bruce Bolger
- The Definition of Stakeholder Capitalism Consistent With Sound Business Principles and Decades of Practice
- Opponents Focus on an Illogical Definition
- The Contributors to Stakeholder Capitalism Principles
Governors in Texas, Florida, and Louisiana have drawn attention to Stakeholder Capitalism through their proposed measures to curtail state pension funds from investing in investment managers that promote or support ESG (Environmental, Social, Governance) practices, increasingly associated with Stakeholder Capitalism. Nineteen states have now formed a coalition to oppose ESG investing. Sen. Pat Toomey, R., PA., recently made national news by requesting detailed information of standards from more than a dozen ESG ratings firms. Writing recently in opposition to Stakeholder Capitalism in multiple publications and cable media platforms, a former health care entrepreneur and now asset manager, Vivek Ramaswamy, says, without reference to any formal definition, that “Stakeholder capitalism refers—or at least used to refer—to the idea that companies should serve not just their shareholders, but also other societal interests.” Ramaswamy is now running for the GOP nomination for US president on an anti-Stakeholder Capitalism plank using a definition with no basis in established usage.
On the other side of the Atlantic, the European Union is moving rapidly toward establishing ESG and Stakeholder Capitalism as the primary business framework. In late 2022, it recently passed the Corporate Sustainability Reporting Directive, which will apply to all organizations that do business in or with EU companies with more than 250 employees, ar at least 40 million euros in annual sales or a balance sheet of 20 million euros in assets. It requires companies to file detailed human capital practics and analytics affecting their employees and those of their distribution and supply chain partners, as well as equally detailed information on customer and community engagement practices and metrics, and the environment. According to Carmen Lu, Counsel, ESG, for New York-based Wachtell, Lipton, Rosen, and Katz, "I think we are experiencing a kind of key inflection point in the shift to Stakeholder Capitalism. The movement has been going on for many years but with the rise of ESG and now the CSRD law, corporations will be formed to make the shift." She believes that US companies and those around the world that wish to do business in the EU or with large EU companies will have little to no recourse in local courts if they do not want to comply.
For those following the topic, there's a lot of talk about Stakeholder Capitalism, but ask the average business person or American citizen if he or she has heard of it, and the usual response is "no," "sort of" or "maybe." Despite recent references to Stakeholder Capitalism in the New York Times, Fortune, Forbes, the Economist, Financial Times, and on CNBC, Fox News, in some academic journals, and in bills introduced in Congress in the past by senators Elizabeth Warren, Dem., MA; Mark Warner, Dem., VA, and Rep. Cindy Axne, Dem., ID, advocating for human capital disclosures, the debate around Stakeholder Capitalism rests largely below the public radar. Google searches for the term skyrocketed in 2019 after the Business Roundtable changed its definition of the charter of an organization to address the needs of all stakeholders, but as of March 2023, there are only about 720 followers of the subject on Linkedin, up from about 30 in 2020, and not a lot of activity on Twitter, most of it from the anti-ESG crowd.
On the other hand, its key proponents include the influential JUST Capital advocacy group founded by hedge fund investor Paul Tudor Jones II; the World Economic Forum with its 1973 Davos Manifesto, its newly published Stakeholder Capitalism Metrics, and the recently published book by its founder, Klaus Schwab, aptly named Stakeholder Capitalism; the Business Roundtable, representing the world’s largest companies; the Embankment Project founded by the Rothschild family, EY, and others, which has become the Coalition for Inclusive Capitalism; the International Organization for Standardization; Conscious Capitalism, one of the earliest proponents; B Lab, another early adocate founded in 2007, and the Economics of Mutuality Foundation, a group recently formed by the Mars family. The financial publication Barron's, with its 100 Most Sustainable Companies annual report, has also become a major advocate, as has its sister publication with the Wall Street Journal Management Top 250, produced in conjunction with the Drucker Institute. In early 2022, the concept continued to gain momentum. In his annual letter to investors, BlackRock CEO Larry Fink announced the creation of the Center for Stakeholder Capitalism at BlackRock to "create a forum for research, dialog, and debate" to help "further explore the relationships between companies and their stakeholder and between companies and their stakehoders and beween stakeholder engagement and shareholder value." The Kenan Institute of Private Enterprise on the campus of the University of North Carolina dedicated the year 2022 to the topic of Stakeholder Capitalism and is holding an annual conference on the subject in January 2023: "The Promise and Perils of Stakeholder Capitalism."
So what is Stakeholder Capitalism? The problem is that there is no official definition, without which there can be no way to engage in serious debate. Certainly, it cannot be defined by the Business Roundtable press release of 2019. In fact, one of the earliest proponents of a stakeholder approach to management was the total quality management innovator Edward R. Deming, who as early as the 1950s wrote that "the aim proposed here for any organization is for everybody to gain--stockholders, employees, suppliers, customers, community, the environment--over the long term."
After Deming, one of the earlier references to this stakeholder approach in modern literature comes from the 1973 Davos Manifesto published by the World Economic Forum which reads: "The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders." The only "official" definition we could find is on the web site Investopedia, which appears to be a cause of confusion. Without reference, it uses the following definition: “Stakeholder Capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders and local communities. Under this system, a company's purpose is to create long-term value and not to maximize profits and enhance shareholder value at the cost of other stakeholder groups.” Contributing to the confusion, the economist Robert Reich references the term with that definition in a 2014 blog post. The business authors Doug Sundheim and Kate Starr reference Stakeholder Capitalism in a recent Harvard Business Review article assuming that everyone already understands the term without providing any clear definition as a frame of reference.
This definition has led to interpresentations that Stakeholder Capitalism "has at its core the idea that shareholder interests need to be deprioritized in favor of other goals," as observed by Tom Gosling, a professor at the London Business School, in a recent article, which does not provide a reference for this definition. Nor does the Kenan Institute for Private Enterprise in North Carolina provide a source for its definition in a recent report: "The controversial broadening of a business’ mandate beyond maximizing profits to account for its impact on customers, suppliers, employees and executives (that is) exceedingly complex. Increasing numbers of businesses grapple with the adoption of ESG frameworks and Stakeholder Capitalism’s tenets – along with the inevitable trade-offs between competing stakeholder groups such adoption brings…”
These interpretations, both provided without any source or reference, are not based on the nearly 50 years of usage in the business and academic world, which emphasizes Stakeholder Engagement as a source of value creation, with ethical behavior or attention to the environment seen as a benefit to shareholders, not a tax. Nothing more is asked of business than to act ethically and to see addressing societal and environmental challenges as a business opportunity, which also means not offloading costs on to society and taxpayers, such as underpaying employees so that they need food stamps or Medicaid, polluting the environment or leaving behind abandoned factories or buildings for communities to clean up, creating dangerous products or misleading services, or engaging in discrimination, with its multiple costs.
The recent definitions appear to have been spawned by the Business Roundtable 2019 prouncement that defines it as taking into account the interests of all stakeholders with almost no further explanatory definition. In the academic and business world from which its principles came, which predate the Business Roundtable pronouncement by decades, Stakeholder Capitalism focuses on ethical behavior and aligning and addressing the interests of all stakeholders as a means of achieving organizational objectives, not an obligation, an important distinction. A recent meta-analysis of Stakeholder Engagement academic papers conducted by three professors in Europe defines the underlying theory as the "aims, activites and impacts of stakeholder relations in a moral, strategic, and/or pragmatic manner." It's not about robbing from shareholders to pay other stakeholders, but about growing the pie. Nor is it about diverting profits to support pet political causes as is common in shareholder capitalism.
For a practical view of Stakeholder Capitalism, Leo E. Strine ranks among the United States' most experienced experts in corporate governance. He currently serves as Of Counsel in the Corporate Department at one of the world’s leading corporate law firms Wachtell, Lipton, Rosen & Katz, and before that was the Chief Justice of the Delaware Supreme Court from early 2014 through late 2019. Before becoming the Chief Justice, he served on the Delaware Court of Chancery as Chancellor since June 22, 2011, and as a Vice Chancellor since Nov. 9, 1998. At a meeting of the Interfaith Center for Corporate Responsibility in fall 2022, he defined Stakeholder Capitalism as "having corporations focus on how they affect the best interests of their stockholders, their workers, their communities and operations, their consumers, and the environment. It’s about making money the right way; seeking profit without externalizing their costs; supporting the basic institutions of society upon which they rely; leaving largely to their human investors, workers, and consumers to decide for themselves and showing respect for freedom of beliefs by not imposing the views of corporate management on any stakeholder group.”
The Definition of Stakeholder Capitalism Consistent With Sound Business Principles and Decades of Practice
Stakeholder Capitalism is not based on the Business Roundtable pronouncement but on the concept of Stakeholder Management theory and practice, which long predates the 2019 pronoucement from the Business Roundtable on the importance of addressing the needs of all stakeholders, as well as the ESG (Environmental, Social, Governance), and CSR (Corporate Social Responsibility) movements. The first book written on the topic was published in 1984: Strategic Management: A Stakeholder Approach by R. Edward Freeman, a Professor of Administration at the Darden School at the University of Virginia. Stakeholder Management is a formal field of academic study in the area of Strategic Management. The Stakeholder Management Interest Group of the Strategic Managment Society of academics has several hundred members worldwide at leading business schools. Click here for a recent meta-analysis of academic research on the subject of Stakeholder Engagement..
When implemented as part of a strategic and systematic process, investing in people has a clear return-on-investment. In 2022, the Barron's List of Sustainable Companies once again outperformed the stock market for the fourth year in a row. Similarly, the JUST Capital ETF, managed by Goldman Sachs had outperformed the S&P 500 through the end of 2020 since its inception 27 months earlier. It tracks companies based on the priorities of Americans surveyed annually on their priorites, which include: workers, prosperity, and the planet. Both funds are following a similar trajectory as the six-year Enterprise Engagement Alliance Engaged Company Stock Index study conducted by McBassi & Co., publisher of Good Company. Between 2012 and 2018, when the study was ended, the ECSI outperformed the S&P 500 by over 37%. The ECSI tracked the stocks of about 40 companies with high levels of customer, employee, and community engagement using metrics from 13 independent sources. Alex Edmans, the Grow the Pie author, shares his research of "100 Best Places to Work" companies and found they consistently outperformed market returns over more than two decades. His findings recently were confirmed by other researchers. Click here for a library of other research studies on the return-on-investment of Stakeholder Management principles.
Terrence Keeley of 1PointSix, an ESG advisory firm, writing in an October 2022 Fortune article, quotes a conversation with Milton Freidman in which the economist says that he unhesitatingly agrees with the concept of Conscious Capitalism as espoused by John Mackey, Whole Foods Founder. “The differences between (us) regarding the social responsibility of business are rhetorical. Strip off all the camouflage and it turns out we are in essential agreement.” In fact, Freidman is specific in his 1970 New York Times magazine article stating that the corporate responsibility of a company is to make money ehtically. Is it ethical to offload or "externalize" on to society the costs of underpaying people, misleading consumers, leaving abandoned buildings, or polluting the air and water, or discriminating against people?
In the recent documentary, Fishing With Dynamite, even Michael C. Jenson, Professor Emeritus at Harvard Business School and considered a 20th century leader in shareholder capitalism, now says, "Shareholder capitalism is stupid. Stop it."
While Stakeholder Capitalism can involve worker ownership through Employee Stock Ownership Plans, if business principals so desire, Stakeholder Capitalism is not to be confused with socialism. It is purely voluntary, other than disclosures required of US public or large companies in the European Union.
In 2004, the United Nations published the document that probably spawned the use of the term ESG--“The Global Compact: Connecting Financial Markets to a Changing World.” Nearly 20 leading banks and the Swiss government supported this report to provide “recommendations by the financial industry to better integrate environmental, social and governance issues in analysis, asset management and securities brokerage.” The report calls on industry to " develop guidelines and recommendations on how to better integrate environmental, social, and corporate governance issues in asset management, securities brokerage services and associated research functions." It contains many of the principles of Stakeholder Capitalism without using the term.
Ironically, many Republicans have supported Stakeholder Capitalism principles by signing into law in their states statutes for "public benefits corporations". Unlike traditional organizations, "whose primary interest is maximizing shareholder value, public benefit corporations balance stakeholders' pecuniary interests, with the interests of those who are involved and affected by the corporation, such as employees and customers, as well as the advancement of their intended public benefit goal," according to a definition from Cornell Law School, which closely aligns with the general definition of Stakeholder Capitalism. In fact, 19 Republicans, including Mike Pence, Sam Brownback, Rick Scott, and Nikki Haley all signed into law such statutes in Red states, along with 17 Democrats and one Libertarian in Blue states.
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Opponents Focus on an Illogical Definition of Stakeholder Capital
Even shareholder capitalists and conservatives have shifted their views. In the documentary "Fishing With Dynamite," Michael C. Jensen, Professor Emeritus of Harvard Business School, says: “Maximizing shareholder value is a stupid idea. Stop it! And it will impose costs on you, the person who’s trying to maximize the value.” He notes that all stakeholders need to be considered “with integrity,” and that the consequences didn’t occur to him and his coauthor at the time. He does, however, accept blame, noting that “we’re all going to make mistakes.”
Arthur C. Brooks, a Harvard professor and social scientist agrees. “The best organizations, the best societies, the best-run companies, the healthiest families—what do they do? They look out for each other. They think about what everybody needs. That’s what going on in good organizations.”
The Contributors to Stakeholder Capitalism Principles
The people and organizations below are listed in an approximate timeline. Please note that there are too many CEOs who have practiced Stakeholder Capitalism principles over the decades to name, so we have highlighted a few of the most notable advocates. Few are known to have used that term as a way of describing their business practices.
R. Edward Freeman. His book, "Strategic Management: A Stakeholder Approach," promoted the benefits of addressing the needs of all stakeholders, a concept that came to be known as Stakeholder Theory.
Leonard Schlesinger and James Heskett, Harvard Professors, whose research on the Service Value Profit Chain was among the first to identify the link between customer and employee engagement and organizational results.
United Nations Global Impact "Who Cares Wins" Study, published in 2004, which advocates for investors, company, and regulators to address environmental, social, and governance factors in their investments and business practices.
The Forum for People Performance Management and Measurement, a research group at the Medill School of Marketing Communications from 2001-2009, that undertook multiple research studies indicating the link between customer and employee engagement and financial results.
John Mackay and Conscious Capitalism. The founder of Whole Foods built its success on the principals of Stakeholder Capitalism displayed throughout each location in word and image.
B-Lab. An organization that audits and certifies sustainable companies, founded in 2007. It helped promote the establishment of public benefits corporations in the US and abroad.
First organizations publish ISO 30414 Human Capital standards conforming human capital reports. Starting in 2020, companies in Europe began publishing human capital reports verified by independent third parties. Click here for examples.
- Founded in 2008, the Enterprise Engagement Alliance provides outreach, learning and certification in Enterprise Engagement, an implementation process for the “S” or Social of Stakeholder Capitalism and Human Capital Management and measurement of engagement across the organization.
- The Enterprise Engagement Alliance provides a training and certification program for business leaders, practitioners, and solution providers, as well as executive briefings and human capital gap analyses for senior leaders.
- The EEA produces an education program for CFOs for the CFO.University training program on Human Capital Management.
- Join the EEA to become a leader in the implementation of the “S” of ESG and Stakeholder Capitalism.
- The ESM information portal and The Enterprise Engagement Advisors Network solution provider marketplace cover all aspects of stakeholder engagement, and the EEA information library lists dozens of resources.
- The RRN information portal and Brand Media Coalition marketplace address the use of brands for gifting, incentives, recognition, and promotions. The BMC information library provides information and research resources.
- Enterprise Engagement for CEOs: The Little Blue Book for People-Centric Capitalists. A quick guide for CEOs.
- Enterprise Engagement: The Roadmap 5th Edition implementation guide. A comprehensive textbook for practitioners, academics, and students.
- Organizations of all types develop strategic Stakeholder Capitalism and Enterprise Engagement processes and human capital management and reporting strategies; conduct human capital gap analyses; design and implement strategic human capital management and reporting plans that address DEI (Diversity, Equity, and Inclusion), and assist with managed outsourcing of engagement products and services.
- Human resources, sales and marketing solution providers profit from the emerging discipline of human capital management and ROI of engagement through training and marketing services.
- Investors make sense of human capital reporting by public companies.
- Buyers and sellers of companies in the engagement space or business owners or buyers who seek to account for human capital in their mergers and acquistions.