What is Stakeholder Capitalism?

Stakeholder capitalism was a theory of business ethics that emerged in the 1970’s. It argues that shareholders should not be the only group with a concern for returns on their investments. It is a business ethic that includes all stakeholders in a company’s business model. This means that the stakeholders include the investor, but also management, suppliers, workers, suppliers and the communities who serve them. Stakeholder capitalism is an ideology that argues that these groups should be considered for more than just their monetary contributions to a company’s success. It is well proven that our current form of Capitalism is inherently unsustainable because it requires endless growth on a planet with finite resources. And that is where stakeholder capitalism comes in. But don’t stop now, because you are a stakeholder. Read on!

What is Shareholder Capitalism?

What is Shareholder Capitalism?

The way capitalism has functioned in America over the last several decades is known as shareholder capitalism. Shareholder capitalism allows a few people to take control of companies and run them for their own benefit. The good of employees, customers, or society at large has been irrelevant. The focus is exclusively on profit and management’s freedom to pursue those profits without consequence. This system has left the world with more problems than we can manage, with a price tag we can’t afford to pay.

What is a stakeholder in simple terms?

A stakeholder is a person, group, or organization with a direct interest in the business activity of a particular entity. In corporate law and economics, stakeholders are typically members of the company’s management, employees (past and present), suppliers, customers, and the communities that it serves.

What are the 7 principles of Stakeholder Capitalism?

The seven principles of stakeholder capitalism are as follows:

A strong sense of social responsibility
The CEO is accountable for all corporate decisions
Receive no higher compensation than other employees
Corporations should not pursue activities that will harm communities or people
The corporation should take an interest in the community
Support employees’ right to voice their opinions and share information freely
Companies should proactively avoid creating harm to stakeholders through proactive planning

What is the difference between shareholder and stakeholder capitalism?

Shareholder capitalism is a modern invention. It stands in opposition to a much older form of business organization known as “stakeholder capitalism,” under which companies are managed for the good of all of their major stakeholders–employees, customers, and communities. This produced far more stable businesses that did not lay off workers to boost short-term profits.

Why do we need stakeholder capitalism?

What many people don’t realize is that shareholder capitalism actually started falling apart in the 1970’s. Companies began to focus obsessively on maximizing their share prices, rather than growing their businesses or serving their customers’ long-term interests. This produced a bubble economy in which share prices rose and fell with no relation to the underlying health of the companies. Then, in order to pump up their share prices even more, many companies began borrowing money. This gave their shareholders big dividends and the ability to buy back their own shares (this is known as extracting value). When this debt bubble collapsed it nearly dragged the financial system down with it.

What are some of the problems of shareholder capitalism?

One big problem is that it causes companies to engage in short-termism. Instead of investing in people or research, many companies are focused on buying back their own shares. This boosts share prices in the very short term but starves businesses of the investments they need to grow, innovate, and provide good jobs. It also causes them to focus obsessively on their own share prices. Rather than focusing on what is best for customers workers or communities. This then leads to a wide range of problems–from low wages and inadequate health care benefits for employees at major firms, to environmental degradation in the pursuit of short-term profits.

What is the solution for Business Leaders?

The best way to fix this problem is to democratize companies so that they are controlled by all of their stakeholders rather than maximizing the profits of a tiny group of shareholders. This is known as the Triple Bottom Line and requires changing corporate laws, tax laws, and regulatory policies in ways that will empower employees with real bargaining power. It is now imperative that shareholders encourage companies to invest in long-term value instead of extracting value, and create a more sustainable financial system that isn’t so focused on speculative bubbles.

Is socialism a stakeholder capitalism?

No. In a socialist economy, there would be no corporations because all the means of production would be owned by the community as a whole and people’s labor would not be exchanged for a wage. laborers in industries run by work collectives from the state would maintain democratic control over their workplaces and how to use their labor power. But that does not equate to a voice at the boardroom table or a say in how capital is managed.

When did stakeholder capitalism start?

Shareholder capitalism began to replace stakeholder capitalism in the 1970s and 1980s, but really took hold following the economic crises of the early 1990s and the Enron scandal in 2001. There was also more of an emphasis on shareholder capitalism in the 1980s with the advent of leveraged buyouts and hostile takeovers. The financialization of the economy also had more of an effect on shareholder capitalism than stakeholder capitalism.

What is the origin of shareholder capitalism?

The modern economic system that prioritizes profits for a few elite shareholders rather than long-term stability for all stakeholders originated in the 1970s as a response to the stagflation crisis. It was promoted by influential economists such as Milton Friedman and popularized by business leaders like Jack Welch, Michael Eisner, and Warren Buffett.

How did it start for Corporate Executives?

It started following the stagflation crisis. The stagflation crisis refers to a period of high unemployment and inflation levels, stagnant growth, and increased income inequality in the 1970’s. It started when the Federal Reserve, (the central banking system in the US), raised interest rates to levels that were much too high for an already weak economy, causing it to slow down even further. Once this happened, inflation levels rose and unemployment levels rose. This created a crisis in the US government, but it also caused businesses to rethink their approach to capitalism. This was the perfect storm for the creation of stakeholder capitalism.

Is sustainable capitalism possible?

Not in its current form. This is because capitalism cannot exist without certain key elements such as scarcity and competition. Capitalism depends on increased consumption in order to grow. This creates a never-ending cycle of unsustainable growth and greed that is detrimental to society. The results of scarcity can be seen around the world, and recent weather events reflect it in the environment at large.

It’s also important to note that not all companies or brands are created equal in terms of their environmental or social impact. They should be judged on their actions–not just by what they sell, but how their business affects the communities which they serve, and who serve them.

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Why is stakeholder capitalism a bad practice?

Shareholder capitalism runs counter to our shared values of democracy, equality, and fairness. Decision-making power in corporations should be shared–not hoarded by a tiny group of shareholders who don’t care about the environmental or social impact of its business operations. The negative effects of shareholder capitalism are readily apparent and include labor exploitation, shareholder enrichment, and unsustainable growth. It’s long past time for Shareholder capitalism to be replaced by a more sustainable model of economic production.

Shareholder capitalism may have some positive impacts on society, but they are minuscule when compared to the harm it causes.

How does it affect society?

Under Shareholder capitalism, companies and brands prioritize profit over all other interests–even though the people they hurt the most are their workers, the environment, and the communities who serve them. All of the systems which allow them to remain in business. It is unfair because corporations can operate without fear of repercussions from stakeholders who have been disenfranchised by shareholder priorities. And it is well proven that it is not a sustainable business practice.

What are the benefits of shareholder capitalism?

Shareholder capitalism may have some positive impacts on society, but they are minuscule when compared to the harm it causes. Its few benefits include encouraging innovation and rewarding hard work among employees of certain brands. It also gives consumers more choices by allowing for market competition.

But these can also be present in stakeholder capitalism and other types of economic models. These benefits are not exclusive to shareholder capitalism, and thus cannot be considered benefits that only they can give.

Does capitalism destroy the environment?

Yes, it does. Capitalism is inherently unsustainable because it requires endless growth–and that can’t happen when we live on a planet with finite resources. This is why the world’s climate has changed so drastically in recent years. If you look at the science, you can clearly see that many of our environmental problems are the result of capitalism. Capitalism has destroyed the environment through greed and unsustainable growth for hundreds of years–and it continues to do so today.

One obvious example of this is the amount of plastic being used in the world today. Plastics are a product of capitalism, and they pollute our oceans daily because they’re non-biodegradable. In fact, 80% percent of pollution in our oceans is caused by products that were created for consumer use–not by natural causes.

You can’t improve what you don’t measure.

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How does it affect the environment?

Capitalism destroys the environment because it requires growth which is not sustainable. All of capitalism’s systems–from plastic production to mass consumerism–are harmful to the planet. The world’s oceans are dying because corporations continue to use non-biodegradable plastics, and this makes it impossible for sea life to survive. Everything in our environment is connected, so everything we do has an impact.

What can be done about it?

The simple solution to the problem of capitalism destroying the environment is for companies and consumers to think more critically about what they purchase. If this economic model doesn’t change, then the planet is in serious trouble. Just like humans are connected to everything on this planet–so is the environment. If we want capitalism to stop destroying the environment, then companies must stop prioritizing shareholders over everyone else or they will fail to remain in business.

What are the alternatives to shareholder capitalism?

Capitalism’s alternatives include democratic socialism, stakeholder capitalism, and sustainable capitalism. Capitalism should be replaced by an economic system that prioritizes equality for all stakeholders–not just shareholders–and encourages long-term stability over short-term profits.

Is capitalism ethically justifiable?

No, it isn’t. Capitalism is an unfair and flawed system that places value on money over people’s well-being–and sustainable alternatives should replace the capitalist model. It also rewards greed, hoarding of capital, and unethical business practices–unlike sustainable capitalism which encourages cooperation among stakeholders for the greater good of society and the environment.

While stakeholder capitalism allows investors to benefit from the company’s success, it does little to protect or reward the interests of non-shareholders and enforces a system that prioritizes profit over people and the planet.

What are some statistics about stakeholder capitalism?

According to a survey conducted by Edelman Berland in 2013, Americans trust corporations less than they did in previous years, and only 30 percent believe that companies take their stakeholder interests into account.
87 percent of Americans believe that corporations should be obligated to consider the interests of a wide range of stakeholders rather than solely focusing on maximizing shareholder value.
Unfortunately, only about 30% think these entities actually do this.
In 2011, private sector workers took home a median compensation package of $29,930–or just over $15 an hour.
A similar worker in the public sector earned $40,000.
Since 1970, CEO pay has increased by 937 percent–or 17 times faster than worker pay (up only 11 percent) and inflation (up 150 percent).

We need to be encouraging innovation and rewarding hard work…

Can capitalism last forever?

No, it can’t. Capitalism is unsustainable and its flaws must be corrected by sustainable alternatives if we want to preserve the planet for future generations. We need to encourage innovation and reward hard work among employees of certain brands. But its negative impacts include destroying the environment and rewarding unethical business practices, purely for profit. These are not sustainable practices when we live on a planet with finite resources. This is why the world’s climate has changed so drastically in recent years.

What is the difference between capitalism and corporatism?

Capitalism is an economic model which prioritizes making money over the well-being of people and the planet.

Corporatism is a political system where corporate interests are prioritized over those of other stakeholders–like citizens, laborers, consumers, or even society as a whole. It puts business first at all costs because it benefits powerful entities that have the money and influence to control policies at an executive, legislative, or judicial level.

How will stakeholder capitalism affect the GDP?

According to the Survey on Capitalism by Edelman Berland, Americans’ trust in corporations has plummeted. But they also realize that companies must fundamentally change course if they are to remain successful within a stakeholder-based economy.

A collaborative system that prioritizes people over profits will likely result in greater financial stability and more long-term success for companies because their interests are now aligned with those of shareholders and other stakeholders.

Improved Quality of Life from the World Economic Forum

It will also create a more prosperous world for employees who see an improved quality of life at work and greater job security through increased labor rights–and that’s not even mentioning the financial benefits. In fact, according to a survey conducted by Gallup, 70 percent of American workers are currently not engaged or actively disengaged at work–which means they’re emotionally disconnected from their workplaces and less likely to be productive.

So, companies that prioritize their employees’ well-being will perform better financially in the long run due to greater engagement among staff members who are more motivated about what they do each day.

Stakeholder capitalism puts business at the service of society

Stakeholder Capitalism Win-Win

This is a win-win situation for shareholders and stakeholders because they share the same interests. This is known as stakeholder capitalism, which puts business at the service of society by creating a system where businesses operate in ways that benefit all major constituencies, not just shareholders. Stakeholder relationships are reciprocal–it’s not one-way.

Stakeholder Capitalism's final words

For the past century, shareholder capitalism has proven that be an unsustainable model that benefits corporations at the expense of workers, communities, and the planet. It’s time for us to reject this model and move towards a more sustainable way of operating our economy. This won’t happen overnight, but over time we can change it.

Caveats and Disclaimers

We have covered many topics in this article and want to be clear that any reference to, or mention of stakeholder capitalism, business leaders, world economic forum, shareholder capitalism, corporate executives, business roundtable, corporate governance, economic growth, stock market, long term value, community, investors or responsibility in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading.

AUTHOR BIO

Research & Curation

Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SMEs and Investment professionals focusing on ESG principles. Their primary goal is to help middle-market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning, and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, UK, Europe, and the global community. If you want to get started, don’t forget to Get the Checklist! ✅

What is Stakeholder Capitalism?