Three years after the Business Roundtable urged companies to abandon a singular focus on maximizing shareholder value and, instead, strive to generate value for all stakeholders, many corporate leaders are still reluctant to do so. The reasons include fears of being attacked by extremists who consider stakeholder capitalism to be woke and worries that creating and implementing a stakeholder strategy is impossibly difficult. But even conservative economists like Milton Friedman understood the importance of ministering to key stakeholders’ interests. And this article shows how organizations can create and implement strategies that maximize the net value produced for stakeholders.
In 2019, the Business Roundtable essentially declared the end of the era when the end all and be all of major corporations was maximizing shareholder value. Instead, it stated that companies should serve all stakeholders that materially impact and are impacted by its business activities: customers, employees, suppliers, communities, and investors.
But this notion continues to present challenges that make many business leaders reluctant to embrace stakeholder capitalism. One is that extremists continue to suggest that stakeholder strategies are nothing more than woke altruism, which shouldn’t be the concern of corporations. A second is that stakeholder capitalism requires a company to understand how all stakeholders interact and to build and manage a system that generates more value for all.
In the first case, the extremists are wrong. In the second, this article will show how organizations can create and implement a customized stakeholder strategy.
Contrary to the fears of some extremists, stakeholder strategies are not charitable altruism. They do not transfer value outside the company, decreasing the value of the business. Quite the opposite, they are downright Darwinian. Most people remember Charles Darwin for popularizing the concept of “survival of the fittest” — widely used to justify brutally competitive behaviors. Often forgotten is Darwin’s observation that cohesive and collaborative teams generally outperform groups of selfish and contentious individuals. He believed the advantages flow chiefly from the trust that group members feel for each other, which helps them to innovate for the greater long-term benefit of all.
Even Milton Friedman, the arch-champion of free markets, embraced a good stakeholder strategy. Yes, Friedman worried that excessive spending on charitable causes would harm the performance of companies and capitalism. But he also recognized the importance of executives understanding expenditures’ impact on key stakeholders. In his famous 1970 New York Times essay, Friedman wrote of the corporate executive:
Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money…[I]t may well be in the long‐run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.
Friedman viewed all these expenditures as being entirely justified in the company’s own self-interest. And he stressed that companies should “make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
The Complexity Challenge
If the purpose of a company is to create value for its system of stakeholders, then its executives should be able to measure and manage progress toward that purpose. This is challenging in systems that are as complex as business systems are. Companies and their stakeholders interact with each other and their environment in ways that are important to understand and manage but challenging to quantify and predict. Highly engaged employees, for example, can improve customer satisfaction, which in turn accelerates profitable growth, benefitting shareholders, suppliers, communities, and employees themselves. But the effects vary significantly in different companies, cultures, and economic conditions. Moreover, they can take months or years to play out.
Rather than embracing this complex reality and working to measure and manage it more effectively, some managers have turned to simplistic thinking. They are hoping that a complex system of stakeholders can be managed by focusing on value creation for a single stakeholder — which might be employees, customers, environmentalists, or some other constituent. Most often they continue to fixate on the one that is easiest to measure and control: shareholders.
In our recent HBR magazine feature, we provide evidence that simplistic thinking is risky, and a higher purpose is achievable. We explain how stakeholder strategies create superior value for the entire business system, which increases value for the company and for society. We also describe a practical, data-driven approach for designing, measuring, and implementing a system that generates so much value for stakeholders that they will help the company pursue its purpose.
This approach has three steps.
1. Explore outside perspectives.
There is now a plethora of organizations that track the total stakeholder value that companies produce and the value that they generate for individual stakeholder groups. Independent rating agencies such as the Drucker Institute, Just Capital, and the Embankment Project for Inclusive Capitalism offer sophisticated analyses of the complex relationships among stakeholder interests.
2. Move beyond third-party rankings.
These outside organizations assign the same weight to all stakeholders of all companies and rely only on publicly available data. Since one size does not fit all, you need to bolster such external data with insider insights and gain an understanding of the interdependencies among your company’s particular mix of stakeholders.
Armed with that, develop a clear stakeholder strategy. Clarify the purpose of your company, establish criteria for evaluating progress toward achieving it, set priorities among stakeholders, and develop action plans that recognize the complex interdependencies among them. The strategy should aim to create mutual benefits for all of them and increase the net value of the collective system.
3. Sustain the new strategy.
Here are some actions that leaders can take.
Build a culture that embraces the stakeholder strategy.
Educate the board and perhaps change its makeup so it better represents different stakeholder groups. Consider changing metrics and rewards for managers.
Design new organizational structures and processes.
Establish a small center of excellence to help guide the stakeholder strategy and track results. Launch cross-functional agile teams to pursue ways to generate mutual benefits for different stakeholder groups — for example, engage technology experts to improve products for customers while also reducing tedious or dangerous tasks for employees.
Possible new processes include requiring business units to begin their quarterly business reviews with descriptions of their value creation trends and targets; mandating that investment proposals include projections of their impact on different stakeholder groups; developing better ways to collect feedback about stakeholders’ needs, satisfaction, and frustrations; and changing the communication strategy to attract the right stakeholder segments.
Executives are finding that stakeholder strategies are neither altruistic nor unrealistically complex. They can be designed and implemented in ways that increase value for all stakeholders, including shareholders.
Even hardcore profit-maximizers are migrating toward stakeholder strategies. British retailer Next, for example, is pursuing a joint goal: maximizing shareholder value while also increasing value for its non-financial stakeholders. Some call this an enlightened shareholder strategy, but a stakeholder strategy by any other name is still a purposeful step in the right direction. And each step builds greater evidence and confidence that stakeholder strategies aren’t simply worthy aspirations; they make solid business sense.
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