The Shift to Stakeholder Capitalism — Is It Transformative, or Simply Incremental Improvement?

By Ralph Thurm & Bill Baue

Stakeholder Capitalism — it’s the latest trend, now embraced by such prominent players as the Business Roundtable, World Economic Forum, and Blackrock. But the question is: will it trigger the economic system transformation necessary for addressing humanity’s predicament? Or is this shift from shareholder primacy to stakeholder capitalism simply the same old wine in a shiny new bottle — slow change from the status quo?

We at r3.0 advocate for transformation to a regenerative and distributive economy that supports the thriveability of all beings, so exploring this question is crucially important. As with any development, we test it against the core indicators of transformation: first, does it support the wellbeing of all rightsholders? Second, does it align with sustainability thresholds, allocated to organizations? And third, does it enable true economic indicators, when it comes to costs, benefits, prices, taxes, and compensation? That’s precisely what we will explore in this blog.

First, the necessary background on the movement toward Stakeholder Capitalism by these three organizations:

Business Roundtable Redefines Corporate Purpose: An Economy that Serves All

In August 2019, the Business Roundtable announced a redefinition of its ‘Purpose of a Corporation’ statement — from shareholder to stakeholder primacy — in order to ‘promote an economy that serves all Americans’. This commitment was signed by 181 CEOs of some of the largest US-listed firms, including Amazon, Exxon-Mobil, Honeywell, and J.P. Morgan Chase — many of whom were in the press for a variety of unsustainable behaviours and practices.

Ironically, the Business Roundtable issued practically the same commitment four decades earlier. In 1981, it stated that “[b]alancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concerns of other constituencies also must have the appropriate attention… In contemporary society, all corporate responsibilities are so interrelated that they should not and cannot be separated.”

Perhaps this is why the more recent commitment was greeted with both cheers and jeers. Looking at the commitments in more detail, it shows the classic variety of the main stakeholder groups that a corporation usually addresses and prompting to say that all of them need to be treated equally:

Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

World Economic Forum’s Davos Manifesto

Then, in early December 2019 the World Economic Forum published the Davos Manifesto, in preparation for its 50th anniversary event in January 2020 in Davos. In it, the WEF aimed to clarify the need for ‘stakeholder capitalism’:

A. The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders — employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.

i. A company serves its customers by providing a value proposition that best meets their needs. It accepts and supports fair competition and a level playing field. It has zero tolerance for corruption. It keeps the digital ecosystem in which it operates reliable and trustworthy. It makes customers fully aware of the functionality of its products and services, including adverse implications or negative externalities.

ii. A company treats its people with dignity and respect. It honours diversity and strives for continuous improvements in working conditions and employee well-being. In a world of rapid change, a company fosters continued employability through ongoing upskilling and reskilling.

iii. A company considers its suppliers as true partners in value creation. It provides a fair chance to new market entrants. It integrates respect for human rights into the entire supply chain.

iv. A company serves society at large through its activities, supports the communities in which it works, and pays its fair share of taxes. It ensures the safe, ethical and efficient use of data. It acts as a steward of the environmental and material universe for future generations. It consciously protects our biosphere and champions a circular, shared and regenerative economy. It continuously expands the frontiers of knowledge, innovation and technology to improve people’s well-being.

v. A company provides its shareholders with a return on investment that takes into account the incurred entrepreneurial risks and the need for continuous innovation and sustained investments. It responsibly manages near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.

B. A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.

C. A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder — together with governments and civil society — of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.

Blackrock CEO Larry Fink’s Annual Letter to CEOs

In January 2020, Blackrock CEO Larry Fink published his annual CEO letter, and again (as in 2018 and 2019) he orbited around climate risk, corporate purpose, and stakeholder needs. In his 2020 letter, he says:

We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions. This data should extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data. Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.

The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients — these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.

Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.

As a consequence of all that he writes:

We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

Is Stakeholder Capitalism Sufficient?

What binds all three examples is the assumption that stakeholder primacy is the ultimate end to help stop today’s urgent issues, most prominently climate change. If all stakeholder requests are put into the basket and companies act accordingly, based on dialog and purpose-based behaviour, all is fine. Or so the thinking goes. But, is it really??

To answer this question, we pose a series of questions aimed at gaining clarification. Do any of the three above-mentioned initiatives:

• Propose a change in economic system design? No.
• Define sustainability? No.
• Distinguish sustainable from unsustainable performance? No.
• Set an intention to serve the wellbeing of all beings? No.

Accordingly, we believe the chances of these three initiatives achieving sustainable outcomes is: ZERO.

What is the fundamental flaw in all this? Why do we let ourselves be fooled by a systemic underperformance of all those constituencies that we should trust and rely on? Do we actually trust them? Are any of the three initiatives mentioned even minimally fit to recreate trust, instigate necessary innovation or increase global resilience? The 2020 Edelman Trust Barometer shows a dire status:

Figure 1: A summary of outcomes of the 2020 Edelman Trust Barometer

At r3.0 we have built our existence as a global non-profit that works on a pre-competitive and market-making level on the premise of the ideation of a green, inclusive and open economy (a term more used in political circles), or call it a regenerative and distributive economy (more used to describe necessary directionality). We ‘backcast’ what is necessary from that ideation and deliver Blueprints that serve as a parallel plan of action to achieve what’s needed. Over the last couple of years in various Transformation Journey Programs, we tested a basic triangulation between

• Rightsholders: replacing the stakeholder concept with the more robust idea of rightsholders;
• Thresholds & Allocations: asserting the need to apply normative sustainability thresholds & organizational allocations (beyond incrementalist ESG); and
• True Measures: implementing “true” measures on costing, benefiting, pricing, taxing, and compensation.

We believe this three-pronged approach can serve as a “recipe” to align nano- (individual), micro- (organisational), meso-(industry, habitat, portfolio) and macro- (economic, environmental and social systems) level actions into one congruent leapfrog towards wellbeing — call it the supra-level ultimate end of what to achieve on a planet with finite resources.

Rightsholders to whom organizations owe duties and obligations

To better understand this triangulation, let’s first look at the aspect of rightsholders. It builds on the concept of stakeholders, first established back in the early 1960s by researchers at Stanford Research Institute and further popularized in the 1980s by academic Ed Freeman and others. What the concept lacks is a normative grounding of the relationship, which the notion of rightsholders introduces. As the term suggests, rightsholders have rights that organizations have duties and obligations to respect. Take, for example, a right to water, in sufficient quantity and quality. Clearly, organizational impacts on water quantity and quality also impact on rightsholders.

By shifting from the more random and subjective nature of the stakeholder idea, embracing the rightsholder concept carries serious implications. The below visual shows sequential impacts from left to right (nano to micro to meso to macro), creating a feedback loop of consequences from the right back to the left. Only when all this is one closed loop, does comprehensive wellbeing become possible. It also implies that wellbeing of the individual is only possible when the ‘whole is well’, referring to the basic flaw in lots of marketing-based approaches about cozy, fancy, good looking solutions that often create collateral damage elsewhere.

Figure 2: Impacts and changes of the rightsholder concept, leading to wellbeing

A Global Thresholds & Allocations Council

Ten years ago, we gained consciousness of our total impact on the planet. And we confirmed that we’re overshooting the thresholds on four of nine major Planetary Boundaries. About three years ago, we added consciousness of our total social impact — and discovered that we’re shortfalling on all 12 major social foundations.

The bad news is that we humans are unconsciously exerting our collective impact toward catastrophic consequences. The good news is that we have the potential to consciously steer our collective impact toward regenerative outcomes. To choose regeneration over degeneration, we need to shift dashboards by which we steer ourselves, since our current dashboards are driving us to unsustainable heights. This is what thresholds & allocation can deliver. Thresholds can tell us about the availability of resources, while allocations define ‘fair shares’ for individual players in any given local, regional or global context, depending on the sort of resource (e.g. while emissions are global, water use is a regional).

What’s needed are new dashboards that navigate us back into the ‘safe and just operating space’ between the thresholds of overshooting ecological ceilings and shortfalling social foundations. Several United Nations bodies (UNEP and UNRISD) have called for a ‘global governance body of scientists, academics, business practitioners, NGOs and other stakeholders to provide guidance on methodologies for determining ecological and social thresholds, as well as guidance on approaches to allocations, all of which are readily and broadly applicable in practice by business, investment, and governing organizations, among others.’

To answer this call, r3.0’s approach for a Global Thresholds & Allocations Council (GTAC) is incubating to serve this vital function, by providing authoritative guidance for translating thresholds from macro-level boundary conditions (or “guardrails,” if you will) into meso- and micro-level applicability through allocation mechanisms (for fair sharing of resources) for creative solutions.

Specifically, GTAC will do three primary things:

• vet, validate, and stimulate threshold determinations and allocations approaches for fairly sharing resources (and responsibilities for respecting thresholds);
• facilitate widespread usage by supporting development of off-the-shelf methodologies for applying thresholds & allocations; and
• promote trust by adjudicating disputes over threshold determinations and allocation claims.

What’s needed now is broad institutional support for the GTAC, from governments, investors, companies, foundations, academia, NGOs, multilaterals, and others, in order to realize this vision for creating a regenerative and distributive economy and society. Without such a body as the GTAC, it is hard to envision humanity maneuvering back into the safe and just operating space between the ecological and social thresholds. But with a GTAC, humanity has a chance to direct earth’s self-regulation back into the conditions in which human civilizations have thrived. That’s rightsholdership expressed in measurement, data, accountability and disclosure. It is how to prove the duty to stay within the ‘safe and just operating’ space, with the obligation to ensure to do everything necessary to achieve it.

But Thresholds & Allocation, thinking in economic, market, fiscal and monetary policy terms, can be even more. Supply and demand are really just proxies for scarce resources and human needs, which are obviously interrelated. If we replace supply and demand with resource thresholds and population allocations, we may be able to establish a 21st Century economy that is truly regenerative and distributive. Key to this development will also be the emergence of the Global Thresholds & Allocations Council. This potential was developed in a discussion with James Quilligan from Economic Democracy Advocates, a keynoter at the 2018 r3.0 conference.

True Measures of Cost, Benefit, Price, Tax, and Compensation

In consequence, what, then, would be the ingredients of such a regenerative & distributive economy? We summarise it as the Five Ts: True costing, true benefiting, true pricing, true taxation, true remuneration.

Figure 3: The Five Ts that comprise a Regenerative & Distributive Economy

We at r3.0 believe it is the interplay and simultaneous effects of these five fundamental shifts that allow markets to steer in a regenerative and distributive direction.

• True Costs cover the actual impacts on nature and humanity, eliminating the perverse “externalization” of negative effects only and “internalization” of positive effects only;
• True Benefits: balances “depreciation” with “appreciation” of positive effects;
• True Prices: Price aligns with sustainable impact, with unsustainable products and services rising beyond affordability;
• True Taxes: Levy adverse impacts (resource overuse, pollution) and liberate positive impacts (labor) from taxation;
• True Compensation: Link incentives to sustainable outcomes, including sustainable levels of income and benefits.

This finishes up the triangulation that we believe is necessary to spur the emergence of a Regenerative and Distributive Economy. In order to make way for this level of ambition, we need to set aside the faith we’ve placed in incrementalist efforts, and recognize the need to transcend them with higher levels of ambition. So, we end this blog with a “Top 10” list of incrementalist concepts need to be put into the history books as ‘necessary but not sufficient’:

• Shareholder Primacy & Trickle-Down Economics
• Monocapitalism
• Escape Routes (Bunkers, Planetary Colonization)
• “Sustainability” without Prosperity, Wellbeing and Intergenerational Equity
• Leadership that isn’t Stewardship
• Enterprise & Portfolio Risk that don’t recognise Systemic & Existential Risk
• Environmental / Social / Governance (ESG) & Corporate Social Responsibility (CSR)
• Impact Valuation / Impact Investing
• Sustainability Reporting without Sustainability Context
• Stakeholder Capitalism

The one can’t be well when the whole isn’t well — it’s time for turning our system upside down. The ingredients are known, they can be tested from bottom-up in regenerative communities popping up everywhere around the world. The idea that industries or financial markets will lead the leapfrog is illusive, but there is a chance they can become the followers of this turnaround, simply because they need to. It’s time to decide which side of history humanity wants to be on. At r3.0 we have made our choice and are supporting, designing, catalysing and amplify the transformation.