Three years after the Business Roundtable urged companies to abandon a singular focus on increasing shareholder value and, instead, strive to create value for all stakeholders, many corporate leaders are reluctant to do so. this. The reasons include the fear of being attacked by extremists who consider stakeholder capitalism to have awakened and worry that the creation and implementation of a stakeholder strategy is impossibly difficult. But even conservative economists like Milton Friedman understood the importance of serving the interests of key stakeholders. And this article shows how organizations create and implement strategies that maximize the net value created for stakeholders.
In 2019, the Business Roundtable is important MANILA the end of time when the end of all and all major corporations is maximizing shareholder value. Instead, it states that companies must serve all stakeholders who materially affect and are affected by its business activities: customers, employees, suppliers, communities, and investors.
But this idea 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 awakened altruism, which should not be the concern of corporations. The second is that stakeholder capitalism requires a company to understand how all stakeholders interact and to build and manage a system that provides added value for all.
In the first case, the extremists are wrong. Secondly, this article will show how organizations can create and implement an adapted stakeholder strategy.
Not Charity
Contrary to fear of some extremists, stakeholder strategies are not charitable altruism. They don’t transfer value outside the company, reducing the value of the business. On the contrary, they are truly Darwinian. Most people remember Charles Darwin for popularizing the concept of “survival of the fittest” — widely used to justify brutally competitive behavior. Often forgotten is Darwin’s observation that cohesive and cooperative groups often outperform groups of selfish and quarrelsome individuals. He believes that the advantages come from the trust that group members feel for each other, which helps them to change for the greater long-term benefit of all.
Even Milton Friedman, the arch-champion of free markets, embraced a good stakeholder strategy. Yes, Friedman worries that spending too much on charitable causes will hurt the performance of companies and capitalism. But he also recognized the importance of executives understanding the impact of spending on key stakeholders. In his fame 1970 New York Times essayFriedman wrote to corporate executives:
As long as his actions raise prices for customers, he spends customers’ money. Until his actions lowered the wages of some employees, he spent their money…[I]It may be in the long-term interest of a corporation that is a major employer in a small community to devote resources to providing facilities to that community or to improving its government. It can make it easier to attract the desired employees, it can reduce the wage bill or reduce losses from theft and sabotage or have other beneficial effects.
Friedman sees all these expenditures as fully justified by the company’s own interests. And he emphasized that companies should “make as much money as possible while complying with the basic rules of society, both embodied in the law and those included in ethical behavior.”
The Complex Challenge
If a company’s goal is to create value for a system of stakeholders, then its executives must be able to measure and manage progress toward that goal. This is challenging in systems as complex as business systems. 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. For example, highly engaged employees improve customer satisfaction, which in turn accelerates profitability, benefiting shareholders, suppliers, the community, and the employees themselves. But the effects vary greatly among different companies, cultures, and economic conditions. Additionally, they can take months or years to play out.
Instead of accepting this complex reality and working to measure and manage it more effectively, some managers revert to simplistic thinking. They hope that a complex system of stakeholders can be managed by focusing on creating value for a single stakeholder – which could be employees, customers, environmentalists, or other constituents. They usually continue to fixate on the one that is easiest to measure and control: shareholders.
In our new Feature in HBR magazine, we provide evidence that simplistic thinking is dangerous, and higher goals are achievable. We explain how stakeholder strategies create more value for the entire business system, increasing value for the company and society. We also describe a practical, data-driven approach for designing, measuring, and implementing a system that will create so much value for stakeholders that they will help the company pursue its purpose.
This method has three steps.
1. Check outside views.
There is now a plethora of organizations that track the total stakeholder value that companies create and the value that they create for individual stakeholder groups. Independent rating agencies such as Drucker Institute, Just capitaland the Embankment Project for Inclusive Capitalism offers a sophisticated analysis of the complex relationships among stakeholder interests.
2. Beyond third-party rankings.
These external organizations give equal weight to all stakeholders in all companies and rely only on publicly available data. Because one size does not fit all, you need to reinforce such external data with insider perspectives and gain an understanding of the interdependencies among the particular mix of stakeholders in the your company.
Using that, create a clear stakeholder strategy. Clarify your company’s purpose, establish criteria for evaluating progress toward achieving it, set stakeholder priorities, and create action plans that recognize the complex interdependencies of their between. The strategy should seek to create mutual benefit for all of them and increase the net value of the collective system.
3. Pursue a new strategy.
Here are some actions leaders can take.
Build a culture that embraces stakeholder strategy.
Educate the board and perhaps change its composition so that 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 stakeholder strategy and track results. Launch cross-functional agile teams to find ways to create mutual benefits for different stakeholder groups — for example, engaging technology experts to improve products for customers while also reducing friction 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; mandates that investment proposals include projections of their impact on various stakeholder groups; develop better ways to collect feedback about stakeholders’ needs, satisfactions, and frustrations; and changing the communication strategy to attract the right stakeholder segments.
Executives find stakeholder strategies neither altruistic nor unrealistically complex. It can be designed and implemented in ways that add value for all stakeholders, including shareholders.
Even hardcore profit-maximizers are migrating toward stakeholder strategies. British retailer Next, for example, is chasing a common goal: maximizing shareholder value while also increasing value for its non-financial stakeholders. Some call it an enlightened shareholder strategy, but stakeholder strategy by any other name is still a purposeful step in the right direction. And each step builds more evidence and confidence that stakeholder strategies are not just wishful thinking; they make strong business sense.
