POV: What’s needed to move from shareholder to stakeholder capitalism
Recently, I attended a presentation sponsored by a major academic institution. The purpose was to provide guidance to alumni and others interested in joining corporate boards. Repeatedly, board readiness was noted as experience in increasing shareholder value and corporate ROI, traits consistent with a shareholder capitalism mindset. There was no mention of the effects stakeholder capitalism might have on assessing and choosing effective board candidates.
I was both dumbstruck and disappointed. Isn’t stakeholder capitalism being touted by academics, the Business Roundtable, and business leaders as the future of business?
And doesn’t stakeholder capitalism, by definition, call for businesses to serve all stakeholders: the societal community, employees, suppliers, customers, and yes, shareholders?
To make this shift, companies must populate their boards with people who understand the urgent importance of stakeholder capitalism in all its nuances and who are steadfastly dedicated to nurturing companies whose purpose is to achieve long-term profitability and economic prosperity through the betterment of society overall.
So why were these emerging criteria not included as crucial ones for consideration when evaluating people’s readiness for the rarified community of corporate board membership?
When I shared with the presenters my dilemma with their content, they replied that it was in fact “a very astute observation” and that they would need to give it some thought.
While I was relieved to hear their answer, it left me wondering about how we are to make the evolution to stakeholder capitalism. If those who counsel on board composition aren’t endeavoring to populate boardrooms with people who have experience beyond maximizing shareholder value and other purely economic criteria and who have a passion for what stakeholder capitalism can yield for society and for corporations, where are we really headed?
Beyond quarterly results
The above-mentioned meeting is just one small example of the larger systemic issue: company value continues to be dictated by quarterly results and related short-term economic measures.
When and how can we broadly begin to judge corporate success beyond measures like shareholder value? Certainly, many stakeholders are endeavoring to do so. But the shift in how we define corporate success ought to be far more pervasive.
Corporate leaders need to create and codify universal standards for measuring corporate value. Yes, those should include economic measures. But they should also account for principled corporate governance, planet and climate change leadership, careful supplier selection and management, and cultivation of employee dignity as well as other practices that lead to advancing society.
In all candor, this will not be easy, and implementation will be difficult. The great majority of companies lack an understanding of how to capture the kind of data and information necessary to create a basic framework for accomplishing any of this. And new, additional data reporting requirements will be onerous for most companies, at least at the outset.
One very meaningful step in the right direction is a report issued by the World Economic Forum’s International Business Council in 2020: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation. This report was created through a task force that included representatives from the world’s four largest accounting firms, Bank of America, and the World Economic Forum.
The report addresses some of the systemic challenges corporate leaders face in reporting stakeholder value creation, such as a lack of consistency in how performance is measured and in how it is reported. The document states, “This work defines a core set of ‘Stakeholder Capitalism Metrics’ and disclosures that can be used by…members to align their mainstream reporting on performance against environmental, social and governance indicators.”
This is good news indeed, and I urge all leaders to read the full report. Unfortunately, establishing the standards and metrics is just the beginning of the journey. Companies need to invest in the resources necessary to capture the required data and information, and they must adhere to a consistent practice in how they report it.
A ‘unique moment in history’
As Klaus Schwab, founder and executive chairman of the World Economic Forum, has said, “This is a unique moment in history to walk the talk and to make stakeholder capitalism measurable. Having companies accepting, not only to measure but also to report on, their environmental and social responsibility will represent a sea change in economic history.”
Last but certainly not least, investors need to embrace stakeholder capitalism and a company’s performance against it as they go about their valuation of companies and as they determine their investment choices. Some large investors, like BlackRock, have led at the forefront of this movement for quite some time. Yet the majority have stood on the sidelines continuing to reward short-term thinking by most corporations that are managed with an eye toward the next quarter’s earnings report.
Larry Fink, chairman and CEO of BlackRock, perhaps puts it best in his Annual 2022 Letter to CEOs: “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term.”
Achieving a robust business environment focused on the betterment of all stakeholders depends on better informed boards, committed corporate leaders, and forward-thinking investors to drive the necessary change. That said, it is naïve to deny the critical role that long-term profitability will always play in how stakeholders evaluate any given company’s health and value over time. But working together, boards, executives, and investors can remove the shackles imposed by quarterly financial performance measures and allow businesses to focus on the advancement of all stakeholders as they drive sustained and enduring economic value.
Paul Donaher is principal at PJD Consulting, a management consulting agency. Prior, he was a senior managing director at Apple, where he led the company’s in-house global marketing communications group.
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