Stakeholder theory
Who should be able to make decisions about what a company does and how they carry out their operations? In general, an agreeable answer to that question is the people who own the company or business. However, believers of stakeholder theory and stakeholder capitalism do not believe that the owners should be the only ones directing operations and goals of a business.
What is it?
The concept of Stakeholder theory allegedly originated in The Modern Corporation and private property by Adolf A. Berle and Gardiner C. Means published in 1932. Berle and Means’s support for stakeholder theory is argued by Smith et al. in a paper titled Berle and Means’s The Modern Corporation and Private Property: The Military Roots of a Stakeholder Model of Corporate Governance published in the Seattle University Law Review[1].
Essentially, a stakeholder is defined as anyone who has a stake in the future development or operations of the business. Basically, any person, group, or organization that is affected directly or indirectly by the actions of the business is considered a stakeholder. For a minor comment on the basis of bookkeeping, the system of stakeholder capitalism is based off of stakeholder theory. A technicality that may not be of upmost importance for the current purpose, but still a technicality worth mentioning.
According to Klaus Schwab, founder of the World Economic Forum, stakeholder capitalism is “a form of capitalism in which companies do not only optimize short-term profits for shareholders, but seek long term value creation, by taking into account the needs of all their stakeholders and society at large.”[2]
The major focus of stakeholder theory is on the second half of the definition: long term value creation by accounting for the needs of all society. Allegedly, this economic theory was the norm until the 1970s when Milton Friedman made the case for shareholder capitalism. Some big corporations seem to be leaning back towards the stakeholder model since they “now admit that maximizing shareholder value has failed”.[3]
Key Stakeholders
There are four fundamental stakeholders within this model each with their own purpose: governments, civil society, companies, and the international community. The government’s role is to create prosperity for the most amount of people possible. Civil society’s role is to give purpose to the constituents of the society itself, whereas the companies are meant to induce an economic surplus with a focus on long-term value creation. As per usual, peace is the ultimate goal of the international community. [4]
Now as a side note, some would argue, it is impossible for the government to produce prosperity in and of itself. However, this can turn into a rather deep rabbit hole quickly, so I would recommend Economics in one lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt or any content from Thomas Sowell to enlighten this topic further.
Above is a visual model of stakeholder capitalism courtesy of Klaus Schwab from his book, Stakeholder Capitalism. At the center, the words “people” and “planet” are seen in an infinity like symbol. This is supposed to symbolize how the people and the planet are intertwined, and their prosperity and growth are dependent on one another. Branching off from this, the four key stakeholders are shown along with their respective purpose within the stakeholder model. These are also connected to one another in a circle completely encompassing the people and planet in the center of the model. Everything is connected and all must work together for the common good of the global society and planet. Queue kumbaya session.
Changes to be made
Let’s remember who must perform this model. Even though basically all of society is considered a stakeholder in the business, the business is the entity that must carry out the operations. In other words, the stakeholders are involved or their interests are considered in the decision-making process, but the business executes the actions deemed necessary based on those decisions.
That being said, what exactly must a business do to follow this model of stakeholder capitalism? Some of the examples that are given are rather broad, possibly to expand the influence of the stakeholder as much as possible[5]. The examples include pay “fair” wages, provide excellent customer service, be honest when marketing, and avoid damaging the environment.
I placed the word “fair” in quotes because it is meant to be as broad as possible. Who exactly defines what fair means? The Stakeholder? More specifically the government? It is probable that the definition will change on a case-by-case basis as these broad terms generally are.
One of the examples I found the funniest is that the businesses should “Lobby for higher taxes and avoid tax loopholes”[6]. It just seems that paying the government through lobbying for a cause that will force you to pay the government more is probably not the best business model.
Conclusions and Initial thoughts
Ultimately, stakeholder theory, and therefore stakeholder capitalism, is based off the concept that every business should consider the interests of all possible stakeholders in their operations with a focus on long-term value creation and the greater good of society.
The purpose of this post is to give a basic, possibly even superficial understanding of stakeholder capitalism. As of this writing in early October 2021, it seems as if the number of corporations leaning toward this model is growing. That being said, it is important to understand even just the basics, of what this theory contains.
This post was not supposed to portray stakeholder capitalism in a good or bad light. I tried to write this as objectively as possible besides a few of my sarcastic remarks. For full disclosure, I see this model heading toward some form of socialism rather quickly, however, that case can be argued for basically every economic or political model at least in some form. Regardless, this will definitely be the topic of further studies, keeping in touch to the purpose (and name) of this website as a whole.
To your wealth and future,
James Forsythe
Andrew Smith, Kevin D. Tennent, and Jason Russell, Berle and Means’s The Modern Corporation and Private Property: The Military Roots of a Stakeholder Model of Corporate Governance, 42 SEATTLE U. L. REV. 535 (2019). 1
https://www.weforum.org/agenda/2021/01/klaus-schwab-on-what-is-stakeholder-capitalism-history-relevance/ 2, 4
https://www.forbes.com/sites/stevedenning/2020/01/05/why-stakeholder-capitalism-will-fail/?sh=19413b65785a 3
https://www.investopedia.com/stakeholder-capitalism-4774323 5, 6
