What is Stakeholder Capitalism? And How is it Different from Shareholder Capitalism?Jan 20, 2023
By Meghan French Dunbar
Maybe you saw the Business Roundtable’s statement that the new definition of business is to benefit not just a company’s shareholders but all of its stakeholders. Or perhaps you read an article in the Harvard Business Review about updating the traditional model of business that has reigned for the past half-century toward something called stakeholder capitalism.
Regardless of the initial inspiration, this new term has piqued your interest and has you wondering, “What is stakeholder capitalism all about?”
We’ve got you covered. Read on for everything you need to know about this new business paradigm and how it’s different from shareholder capitalism, CSR, Corporate Sustainability, or ESG.
Stakeholder Capitalism Foundations
What is stakeholder capitalism?
Stakeholder capitalism is the theory that the purpose of business is to optimize the value that a business creates for all of its stakeholders — those impacted by the business's decisions — while pursuing a purpose larger than profit. Primary company stakeholders typically include team members, customers, community members, vendors, shareholders, and the environment, but can also extend to government, media, team members' families, professional associations, and more.
What does this definition actually mean?
If “optimize the value that a business creates for all of its stakeholders while pursuing a purpose larger than profit” sounds like a big bowl of jargon soup, that’s totally fair. In practice, here’s what stakeholder capitalism actually looks like.
A company that “optimizes value for company stakeholders” knows who their stakeholders are, regularly engages with those stakeholders to understand their needs, and prioritizes finding ways to benefit each of their stakeholders. To be clear, "benefit" is not the same thing as reducing harm.
For example, a key stakeholder for most companies is its employees. Many companies see the only value that they provide to their employees as the money that the company pays to each person in exchange for their labor — and that money is typically the least amount of money that the company can possibly pay to the employee and have them still agree to work there.
A stakeholder business takes a different approach. First, they find ways to engage with their team members — either direct conversations, surveys, or other means — and identify what employees actually value. With every team it’s different, but common things that team members value include additional time off, having a say in decision-making, transparency, employee ownership, community involvement, professional development opportunities, feeling cared for in the workplace, flexible working hours, mentorship, and more. You’ll notice here that only one of these (employee ownership) had to do with increased financial prosperity. Value can be delivered to your team members in many ways — and the same goes for your other stakeholder groups.
So, when we say “optimize value for company stakeholders,” we’re talking about companies that strive to bring as much value as possible to the people or entities that are in relationship with the business itself — and in a best case scenario, that value is determined by the stakeholder group itself.
The latter half of our definition, “while pursuing a purpose larger than profit,” refers to companies that don’t see making as much profit as possible as the sole reason that the company exists. Rather, stakeholder businesses typically see themselves as existing to help address a worthy cause, and see increasing their profits as enhancing their ability to make progress toward addressing that cause.
What this looks like in practice is companies like Greyston Bakery. While the company makes money by selling brownies, the company's purpose is to provide employment for individuals who are conventionally hard to employ, providing them with a stepping stone to get their lives back on track. The more brownies the company sells, i.e., the more money it makes, the more people it can employ, ultimately serving its higher purpose.
Patagonia and Eileen Fisher, both clothing companies, found a higher purpose in advancing environmental sustainability. Cafe Momentum, a restaurant in Dallas, found its higher purpose in reducing juvenile recidivism rates. L&R Pallet in Denver found its purpose in hiring refugees. BIGGBY Coffee found its purpose in helping employees lead a life they love. In all cases, across all different industries, company leadership determined that the purpose of the company was to address a societal issue while making money.
Taken all together, “a company that strives to optimize value for all stakeholders while pursuing a purpose larger than profit,” means a business that works to address a larger societal issue through its operations, while simultaneously doing all it can to provide value for those in relationship with the company. For a more in-depth explanation, read The Stakeholder Capitalism Model in Practice.
How is it different from shareholder capitalism?
Over the past 50 years, most businesses have adopted the paradigm of shareholder capitalism, which proposes that the purpose of a business is to maximize the value it creates for its shareholders. Under this paradigm, the sole measure of success for a company is how much profit it generates for the company’s owners, be they investors, executives, founders, etc. Oftentimes this profit is generated by extracting as much value as possible from company stakeholders by taking action like reducing employee pay and benefits, outsourcing services, pitting vendors against each other, hiking up prices, etc.
Conversely, stakeholder capitalism proposes that the purpose of business is to optimize the value that a business creates for all stakeholders, which includes but is not limited to solely shareholders. The measure for success for a stakeholder business includes profit but also examines how much value the company generates for all stakeholders and how much progress the company made toward its larger purpose. Profit is generated by providing value to company stakeholders, rather than extracting it.
Hopefully we’ve helped you move from curious about stakeholder capitalism to relatively informed. Regardless of where you are on your business journey, there are ways to begin transforming to this new paradigm and be part of the future of business.