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The Challenges and Opportunities of Advancing New Stakeholder Theory

Jul 13, 2023

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photo of Allison Boxer, Matthew Bishop, and Geoff Davis

New Stakeholder Theory is a fast-growing school of thought that many believe will provide a robust intellectual framework for stakeholder capitalism. It focuses on the interconnected relationships between a business and its stakeholders: customers, suppliers, employees, investors, communities, and others who are impacted by the organization. The theory posits that businesses serve a purpose far greater than their profit — that value should be optimized for all those at stake.

The concept is a hotly debated topic in the United States, stemming from a need for a clearer understanding of what it is and what it means for business leaders. As Sorenson Impact Center CEO Geoff Davis explains, “While stakeholder capitalism sounds like a great goal, it doesn’t yet have the robust intellectual underpinning necessary to actually put it into practice.”

Davis joined Sorenson Impact Center’s Managing Director Dr. Allison Boxer and Senior Fellow Matthew Bishop at the recent Stakeholder Conference hosted by a distinguished group of global scholars exploring New Stakeholder Theory. The focus of the conference was to bring together leading academics across the world involved in this important research to identify and resolve key issues restricting stakeholder capitalism from advancing. Here, Davis, Boxer, and Bishop share their perspectives on how to advance new stakeholder theory and why it matters.

What are the key challenges to the adoption and advancement of stakeholder theory?

Davis: We actually need a new theory of the firm: why does it exist and what is it trying to accomplish? This includes defining what a stakeholder is and how to weigh and value different stakeholders, especially when they have varying interests, and figuring out how to weigh differences among and between stakeholders. For example, how does a company determine what to do or say about social issues if some of their employees feel one way, others feel the opposite, and shareholders have a different opinion, not to mention that shareholders are not homogeneous?

Bishop: There has been widespread acceptance of the business case for corporate leaders taking into account the needs of all stakeholders, not just shareholders. But there is little agreement on what that means in terms of who gets a seat at the table — and when — in decision-making processes, and how the revenues generated and disappointments suffered should be shared among the different stakeholders. These details are key to whether stakeholder capitalism is revolutionary or largely rhetorical.

What is one thing you learned at the conference that made you feel especially optimistic about the advancement of stakeholder capitalism?

Boxer: There seems to be at least some agreement that incorporating stakeholder perspectives is the best path toward optimal value creation. Shifting the conversation to put value creation at the center, rather than individual firm profit, is where we can advance business as a force for good in the world.

Davis: Companies that make reactive and symbolic statements on social issues are seen poorly by consumers and regulators, and their share price suffers. This means externalities are getting internalized through the share price, so we’re starting to get alignment.

How would you define an institutional investor’s fiduciary duty in light of this most recent thinking with regard to stakeholder capitalism?

Bishop: In at least some circumstances, focusing only on financial performance and not considering the social or environmental consequences of an investment for those who entrust them with their savings can be a failure of fiduciary duty. Work is still needed on the details of what these circumstances are and what should be the new best practice, but money managers should no longer assume they can use fiduciary duty as a byword for blinkered thinking.

Boxer: I would simply reorient fiduciary duty from the short-term to the long-term. Research by George Sefeim has shown that “adoption of strategic ESG practices is significantly and positively associated with both return on capital and market valuation multiples, even after accounting for a firm’s past financial performance.” I like to think about it this way: A company that makes beer could increase its share price in the short term by exploiting water supplies, paying as little as possible for water, and using it up without the effort of replenishing. But in the long term, once they’ve used up the available clean water, what will be the share price of a beer company with no beer?

What kind of financial and ethical responsibility does an institutional investor have to consider the broader social and environmental impacts of their investment activities?

Boxer: I firmly believe in the ethical responsibility of each individual to work to create the world in which they want to live. At the same time, we may not agree on what that world is. I do think an institutional investor is better served considering the long-term value creation of their investment activities, even outside of a moral argument. If we all focused on optimizing long-term value creation for the world rather than maximizing short-term profit, everyone could work toward a world where the environment, individuals, and the fabric that ties us all together will have a better chance to prosper.

Bishop: The exact answer to this question will vary depending on the type of investment institution — pension fund, sovereign fund, university endowment, for instance. But I’d like to see every institutional investor now recognize they have both an ethical and financial responsibility to think this through seriously. The rise of stakeholder capitalism should be a game changer for institutional investors, so I’m hoping they will embrace the transition eagerly, ideally through a transparent, open process in which a lot of time is spent listening to what stakeholders think and want, especially those to whom they have the clearest fiduciary duty. Judging by this conference, there are now plenty of smart experts in academia and beyond ready to help them get this right.

How would you respond to criticisms of stakeholder capitalism?

Bishop: There are two main criticisms of stakeholder capitalism. One, taken up by some American politicians, is that it is woke posturing that will be bad for firms and for the wealth-creating engine of the economy. To them, I would say that this effort seems to be driven by business leaders who believe it will increase the long-run value of their companies. Attendees of the conference were conscious that capitalism can be improved by being less narrowly focused on shareholders, especially those with a blinkered short-term view. The second criticism is that no one really agrees on how to implement stakeholder capitalism. This is fair, but starting to change thanks to the sort of serious thinking being done at this conference.

Boxer: It’s important to acknowledge that criticism comes primarily from within the United States political discourse. When you look at Europe, Canada, and other parts of the world, stakeholder capitalism is not a hot-button issue in the same way it is in the U.S. When one gets outside of political discourse and thinks about the issues themselves, it’s not as polarizing.

Capitalism is not one monolithic thing. It is a paradigm that shifts over time as the world — and our understanding of the world — changes. Capitalism is the best economic system we have seen thus far in history, and it has done wonders for the world, including lifting millions of people out of poverty and spurring massive infrastructure and innovation at lightspeed. None of that should be discounted. At the same time, we also see some negative externalities as a result of the system as it has operated, such as environmental degradation, increasing income inequality, and the exploitation of some people around the world. A new paradigm of stakeholder theory can help us to think differently about how businesses can operate within capitalism to continue to create massive value, while also accounting for negative externalities.

Davis: As Dr. Boxer said, capitalism isn’t static. It continues to evolve to meet the needs of the times. Stakeholder capitalism recognizes that while short-term profit is important, businesses also have the opportunity — and responsibility — to play a critical role in contributing to the social and environmental well-being of our world. Businesses can enhance relationships with all stakeholders, which can lead to long-term sustainability and business resilience. At the end of the day, this method is about shifting the economic system to better align with our current societal needs and values.

How does stakeholder capitalism help advance the impact sector?

Bishop: There is plenty of evidence that short-term profit maximization overall drives the wrong sort of impact, rewarding behavior that turns a blind eye to social and environmental harm being done by a business activity if there is a fast buck to be made. Genuine stakeholder capitalism would be a constructive contributor to the multi-stakeholder efforts to achieve the sort of positive impact set out in the UN Sustainable Development Goals and COP climate agreement. I am especially encouraged by efforts underway to properly measure the performance of businesses from a social and environmental perspective, especially the impact-weighted accounting being pioneered at Harvard Business School.

Boxer: Impact is all about the effect of businesses on the various stakeholders, so they are intertwined. Research that illuminates how focusing on the consequences of certain stakeholders, or how focusing on one outcome leads to a different, unintended outcome, or when it’s beneficial to a company and when it’s not, can all move the sector forward.

For more on this topic, watch a roundtable discussion on new stakeholder theory, led by Sorenson Impact Center CEO Geoff Davis and featuring a distinguished group of global business and academic leaders. Watch it here.

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