Stakeholder Capitalism: Why It Matters & How To Get It Right
Stakeholder capitalism argues that companies should benefit more than just their shareholders and customers and also consider the community, society, and environment.
But where does this thinking come from? And does it apply to all organizations?
In this blog, we share more about stakeholder capitalism, including definitions, benefits, and tips for implementing a more stakeholder-led approach in business.
What is Stakeholder Capitalism?
Stakeholder capitalism is an economic system or business model that serves the interests of all stakeholders. Instead of focusing on short-term profits or dividends for shareholders, companies can be set up to produce long-term value that benefits all stakeholders.
The World Economic Forum also defines stakeholder capitalism as a form of capitalism in which companies seek long-term value creation by taking into account the needs of all their stakeholders, and society at large.
Remember, stakeholders are the groups or people who are impacted by, have an interest in, or have an impact on the organization. This typically includes employees, shareholders, suppliers, customers, communities, and other groups.
|Stakeholder Capitalism in Practice: Making the Earth Patagonia’s Only Shareholder
In 2012, American outdoor clothing retailer, Patagonia, joined the Benefit Corporation, a nonprofit network that seeks to transform ‘the global economy to benefit all people, communities, and the planet.’
Patagonia Chair, Charles Conn, shared that this move helped the company clarify their responsibilities, like constantly measuring and managing environmental footprint, while reducing water, carbon, and dangerous chemicals used. They began by reporting on progress to their communities, pricing products to reflect real costs, repairing and reselling used clothing, using recycled fabrics, and investing in regenerative agriculture.
In 2022, Patagonia announced that rather than sell the company or go public, they would make the earth their only shareholder. What this means in practice is that the founder (and his family) have given all their Patagonia equity to a charitable entity that funds environmental conservation. And all value created by the company (dividends) will be directed to conversation projects and advocacy.
Stakeholder vs Shareholder vs State Capitalism
Including stakeholder capitalism, there are three main economic systems:
- Shareholder capitalism – Most companies primarily exist to generate profits that benefit shareholders.
- State capitalism – The government is responsible for directing the economy and organizations within it — and that the organization(s) must uphold state interests above their own business interests
- Stakeholder capitalism – Companies exist to benefit a broad range of stakeholders (including shareholders)
Why Does Stakeholder Capitalism Matter?
So… we know what stakeholder capitalism is, but does it really matter for organizations? What benefits can it offer?
One key point of difference in the stakeholder capitalism model is that it encourages organizations to consider a broader range of perspectives. This can help them:
- Understand their impact on the community (workers, customers, and other groups)
- Consider their impact on the environment
- Think longer term
- Become purpose-led, rather than purely profit-led
- Do more good
- Make better decisions
- Increase transparency and avoid corruption
- Improve resiliency
- Gain a social license to operate
- Encourage more investment
- Attract and retain employees
- Improve customer loyalty
What’s Wrong With Shareholder Capitalism?
Shareholder capitalism, in contrast to stakeholder capitalism, has a strong focus on making money or pushing up the value of shares. This ‘profit at all costs’ mentality can encourage companies to pursue short-term growth, inequitable pay, and ignore environmental and social impacts.
Charles Conn, the chair of Patagonia, shared his thoughts about the good and bad of shareholder capitalism in a Fortune Magazine article:
“It’s a system that has brought us reductions in absolute poverty, longer lives through medical innovation, and many other improvements, as well as great shareholder returns. [Shareholder capitalism] …made its gains at an enormous cost, including increasing inequality and wide-scale uncompensated environmental damage. We have subsidized buoyant shareholder returns by fraying the fabric of our societies and using up the planet we live on.”
Stakeholder capitalism isn’t a new term, with Klaus Schwab (World Economic Forum Founder and Chairman) first introducing the idea of stakeholder capitalism in the Davos Manifesto (1973), a code of ethics for business leaders who attended the World Economic Forum.
But Google Trends show that interest in this topic has been increasing over the last few years.
There are a number of reasons why stakeholder capitalism is now coming to the forefront.
Firstly, more people believe that companies should be held responsible for their actions and potential impacts on future generations — particularly from an environmental sustainability perspective.
Companies that do the wrong thing risk criticism, difficulty hiring staff, and pushback from employees, customers, and the general public.
This means that profit is increasingly linked to a company’s social and environmental impact.
Secondly, the economic environment is more global than ever. People are increasingly aware that the actions of each person and organization has the potential to impact the planet and broader community. This means that a company’s potential stakeholders could be nearly anyone.
With this in mind, the stakeholder capitalism model may be inevitable — a natural progression from shareholder capitalism and even state capitalism. According to Klaus Schwab, “we should seize this moment to ensure that stakeholder capitalism remains the new dominant model.”
Stakeholder Capitalism: How to Get it Right
If you’re ready to apply a stakeholder capitalism approach to your organization, follow these tips to maximize the potential benefits — and overcome some of the challenges that may arise:
Identify Your Stakeholders
Once you know who your stakeholders are, you’ll be able to gather useful insights from them that will impact your decision making. So, start by listing your organization’s stakeholders. This may include:
- Internal stakeholders – Shareholders, board members, executive team, leaders, employees
- Direct external stakeholders – Suppliers, distributors, contractors, customers, investors, ambassadors, referral partners
- Indirect external stakeholders – Communities, governments, industry bodies, nonprofits, competitors
Note that you will almost certainly have some crossover between the above stakeholders and groups (someone can be a shareholder, supplier, customer, and community member!).
Analyze Your Stakeholders
Stakeholder analysis involves understanding your stakeholders better, including their interest in and influence on your organization, and how your organization will affect them. Then you can segment them based on this understanding, as well as other characteristics.
This will allow you to tailor your stakeholder management approach and communication so that you can focus on the right issues with the right groups.
Track and Manage Your Stakeholders
Stakeholder capitalism means considering a broader range of stakeholders — not just customers and shareholders. This means more complexity, more communication, and often conflicting interests and goals.
Organizations must put systems into place to efficiently manage their stakeholder contacts, communication, analysis, and more. For example, Darzin’s stakeholder relationship management software is designed to support all your stakeholder processes so you can easily add contacts, update records, generate reports, and much more.
The risk of stakeholder capitalism is that any actions taken might look good on the surface, with very little substance underneath. In other words, it’s simply a PR stunt designed to help businesses make more money.
Stakeholder engagement is a great way to ensure that any decisions or programs are informed by stakeholder perspectives, and designed to make a real impact. Get your stakeholders involved in the decision-making process. Give them meaningful ways to participate and be heard, and allow their feedback and ideas to influence decisions and outcomes. In particular, consult your stakeholders to understand what initiatives you can take that will genuinely benefit them (while remaining financially viable for the company).
- Helping stakeholders develop skills
- Supporting stakeholders to improve their wellbeing (as individuals or organizations)
- Improving the natural environment
- Supporting individual or company stakeholders to improve financial performance or circumstances
- Going beyond just customer satisfaction to improve the experiences of other stakeholders, too
|Stakeholder Capitalism in Practice: LEGO Foundation Centre for Creativity, Play, and Learning
In 1986, LEGO established the LEGO Foundation Centre for Creativity, Play, and Learning. This group uses 25% of company profits to sponsor children’s educational programs and fund research into play and learning. Their goal is to reach 75 million children every year by 2032, working with a broad range of partners, from parents and teachers to policymakers, academics, and NGOs.
This initiative is a great example of how business activities can benefit a broad range of stakeholders, while staying true to the underlying mission — and for LEGO, this mission is ‘to inspire and develop the builders of tomorrow’.
LEGO also has other practices in place, like their Responsible Business Principles that defines practices like:
Don’t Overlook Profit
Although stakeholder capitalism is less focused on profits, they do still matter. A business cannot exist long-term and deliver value to stakeholders unless it operates sustainably (and profitably). This means any financial and non-financial goals must be balanced and co-exist.
Finally, it’s important to note that stakeholder capitalism isn’t a short-term play. It requires significant changes to how you do business, manage stakeholders, and communicate with them. So, set some long-term goals, put good systems in place, and commit to the process. This will ensure the changes you make are sustainable for your company and your stakeholders — and deliver real, long-term value for all.
Get Organized with Stakeholder Management Software
Stakeholder capitalism means additional stakeholder requirements — and new layers of complexity. To manage your stakeholders effectively (and stay on top of your tracking, comms, and more), you need the right tool for the task.