The establishment of the Stakeholder Capitalism movement can be officially marked by the Business Roundtable’s updated charter in August 2019 stating that the purpose of a corporation is to address the needs of all stakeholders, not simply shareholders. Since then, the concept has prompted a combination of accolades, skepticism from the left and outright opposition from the right. The debate is a direct result of there being no clear definition of Stakeholder Capitalism or an understanding of the economics of human capital or education about this concept in schools. For the movement to crystallize, the time has come to clarify the definition of Stakeholder Capitalism and for organizations to take advantage of its principles to begin a new path to success through people.
By Bruce Bolger
Only in the US can a practical business concept get caught up in partisan politics. The many people and companies who independently conceived of the principles of Stakeholder Capitalism
over the years had nothing more in mind than finding a more practical, measurable way to profit from an organization’s most precious resources—people. Now, the topic has entered the political discourse as a result of a recent speech on economic policy decrying shareholder capitalism by presidential candidate Joe Biden; by Sen. Marco Rubio’s call last year for “Common Good Capitalism,” and by several bills introduced by Democratic senators and representatives last year calling for human capital disclosures by publicly held or very large companies.
Stakeholder Capitalism is viewed skeptically by the left as window dressing and on the right as creeping socialism. Critics on the left do not object to the principles of Stakeholder Capitalism, but do not trust companies to run their organizations that way on their own volition. They seek legislative action to address the pitfalls of short-term capitalism through taxes on the wealthy and human capital disclosures and statutes that would force CEOs to take more account of the needs of other stakeholders; to more equitably share the pie and to curtail stock buybacks.
On the right, such critics as the Heritage Foundation, some legal scholars at Harvard Law School, and business consultants argue that Stakeholder Capitalism hurts shareholders because it forces CEOs to balance the needs of all stakeholders in a way that makes them effectively accountable to no one; potentially compels them to hurt shareholders in favor of other stakeholders, and because, in any event, human capital practices can’t be measured and compared. The US Labor Department Secretary, Eugene Scalia, has proposed rules to make it easier for pension funds to invest in private equity-funded entities, which people such as Warren Buffet reportedly warn are risky, and more difficult to invest in ESG (Environmental, Social, and Governance) funds, even though such funds generally are outperforming the general stock indices, even during the pandemic. “The department’s proposed rule reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end,” Scalia is quoted as having said in a recent New York Times article
Critics such as Lucien Bebchuk
of the Harvard Law School argue that, based on his definition, Stakeholder Capitalism opens up a fiduciary can of worms and agrees with leftist critics that the new Business Roundtable charter is lip service, pointing out that many CEOs did not disclose their support of the new charter to their boards last year. Replies Josh Bolton, Business Roundtable CEO, in an article in the Financial Times
, “Most of the CEOs who signed that statement believe that that’s the way they’re already trying to run their company now, so why would they need board approval?”
While the skeptics who suspect that Stakeholder Capitalism is simply window dressing have considerable evidence in their favor, those who oppose it on the grounds that it hurts shareholders base this on a distorted definition of the concept that overlooks the financial benefits of Stakeholder Capitalism principles and on the patently incorrect assertion that human capital cannot be effectively managed, measured, correlated with financial results, and meaningfully disclosed.
The Need for a Clear Definition
In almost every case, critics on the right base their opposition on the misreading of an unofficial definition (there is no mention of Stakeholder Capitalism in any established dictionary) that they interpret to mean 1) that CEOs are required to balance the interests of all stakeholders in a way that will undermine accountability and 2) that it forces CEOs to divvy up the pie at the expense of shareholders. Lacking any official definition
, the Enterprise Engagement Alliance uses the definition it created based on principles it developed in 2009 that are consistent the ISO 10018 and Annex SL quality people management framework published first in 2012. These frameworks were developed only for the purposes of identifying a more effective path to success through people with no political ends.
Stakeholder Capitalism is a strategic and systematic approach to achieving organizational goals by addressing the needs of and fostering the proactive involvement all stakeholders—employees, customers, distribution and supply chain partners, and communities. The byproduct of this approach is not only more sustainable returns for shareholders, but greater prosperity for all stakeholders, including related communities, because the goal is to grow the pie, not just divvy it up. It’s not about balancing the interests of all stakeholders, as most CEOs must do every day under Shareholder Capitalism, or pitting the interests of one stakeholder against another, it’s about aligning their interests in a common purpose, brand, culture, and objectives—otherwise known as good leadership. It’s goal is to create a bigger pie from which all can share by recognizing the inter-dependability of stakeholders and the ability to optimize success by aligning their interests.
The Enterprise Engagement Alliance definition avoids the debate between left and right altogether by focusing on the simple fact that organizations with a strategic plan to achieve their goals that addresses the needs of and engages all stakeholders—employees, customers, suppliers, communities--outperform competitors by creating rather than extracting wealth through people. According to Harvard Professor Rebecca Henderson in a recent article
, this definition “is just good business,”
The Need for Clear Disclosures
One point both the left- and right-wing opponents at least partially agree upon: the concept of Stakeholder Capitalism has no meaning unless there are clear ways to measure an organization’s strategy for achieving goals by addressing the needs of all stakeholders. Once again, this opposition overlooks multiple ways in which organizations can be assessed and compared, starting with the publication of Corporate Responsibility Reports, otherwise known as Integrated Reports. These reports include information on an organization’s Environmental, Social (People) and Governance practices, starting with a clear statement of purpose specific to each organization. Organizations sincerely committed to Stakeholder Capitalism view these reports as an invaluable marketing tool for investors, customers, talent, supply chain partners, and communities. Click here
for an example of Merck’s Corporate Responsibility Report.
In addition to providing statistics on environmental and governance issues outside the purview of the Enterprise Engagement Alliance, these reports provide information on human capital and safety issues, including information on the number and classifications of employees, training, diversity, etc., and can be gauged by the level of detail provided versus unsubstantiated public relations statements. Companies committed to providing comparable information can turn to ISO 30414 Human Capital Reporting
standards and the Sustainability and Accounting Standards Board
, both of which provide formulas for publication of comparable human capital data. Or, they can become certified by such civic organizations as B-Lab
or implement ISO 10018 quality people management
Beyond the level of specificity provided in their Corporate Responsibility Reports, companies can easily be compared based on the calculation of their human capital return on investment; human capital value added; revenues, costs, turnover, and willingness to refer per employee and customer; diversity and inclusion; training and development effectiveness, willingness to refer, and many more metrics provided by both the SASB and ISO standards. There are at least two human capital analytics platforms that can help organizations benchmark some key human capital performance against those of others. See ESM: Is Your CEO Driving With Only One Eye on the Road
and ESM: AlphaCalc-Performance Dashboard Transforms Human Capital Management
The Need for Action
Beyond establishing the need for a clear definition, the biggest lesson apparent upon the first anniversary of the Stakeholder Capitalism movement is the opportunity for each organization to move beyond talk to action. This begins by establishing a brand and culture driven by a clear purpose, followed by a fully integrated and aligned process for fostering the proactive involvement of all stakeholders by better utilizing current external and internal engagement tactics. Stakeholder Capitalism is not another fancy term for Corporate Responsibility but rather a business leadership model and ongoing process based on having a measurable strategy for wealth creation through people, rather than wealth extraction from people.
The action plan begins with the CEO’s recognition that people truly are an organization’s No. 1 asset and that the competitive advantage goes to organizations that implement clear and measurable strategies that align all activities and stakeholders toward a single purpose transparent and measurable to all.
For More Information
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Tel. 914-591-7600, ext. 230
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THE ONLY BOOKS ON STAKEHOLDER CAPITALISM IMPLEMENTATION
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OTHER RESOURCES TO ACTUALIZE STAKEHOLDER CAPITALISM
Communities: The Enterprise Engagement Alliance and Advocate and the Brand Media Coalition free resource centers offering access to the latest research, news, and case studies; discounts, promotions, referrals, and commissions, when appropriate to third-party solution providers from participating coalition solution provider members.
Enterprise Engagement Resources: EEXAdvisors.com provides the only curated online marketplace to access hundreds of solution providers in all areas of human capital management and enterprise engagement throughout the world.
10-minute short course: click here for a 10-minute introduction to Enterprise Engagement and ISO standards from the Coggno.com learning platform.
• The Engagement Agency at EngagementAgency.net, offering: complete support services for employers, solution providers, and technology firms seeking to profit from formal engagement practices for themselves or their clients, including Brand and Capability audits for solution providers to make sure their products and services are up to date.
• C-Suite Advisory Service—Education of boards, investors, and C-suite executives on the economics, framework, and implementation processes of Enterprise Engagement.
• Speakers Bureau—Select the right speaker on any aspect of engagement for your next event.
• Mergers and Acquisitions. The Engagement Agency’s Mergers and Acquisition group is aware of multiple companies seeking to purchase firms in the engagement field. Contact Michael Mazer in confidence if your company is potentially for sale at 303-320-3777.
Enterprise Engagement Benchmark Tools: The Enterprise Engagement Alliance offers three tools to help organizations profit from Engagement. Click here to access the tools.
• ROI of Engagement Calculator. Use this tool to determine the potential return-on-investment of an engagement strategy.
• EE Benchmark Indicator. Confidentially benchmark your organization’s Enterprise Engagement practices against organizations and best practices.
• Compare Your Company’s Level of Engagement. Quickly compare your organization’s level of engagement to those of others based on the same criteria as the EEA’s Engaged Company Stock Index.
• Gauge Your Personal Level of Engagement. This survey, donated by Horsepower, enables individuals to gauge their own personal levels of engagement.
For more information, contact Bruce Bolger at Bolger@TheEEA.org, 914-591-7600, ext. 230.