The ascendancy of stakeholder capitalism: What is its meaning for corporate governance?

Abstract

We address the recent ascendancy of “stakeholder capitalism” and its potential impact on US corporate governance practice. Utilizing a four dimensional, analytic framework (legal, ethical, economic, and political), the authors evaluate the potential effects of stakeholder capitalism on the existing corporate governance of companies, concluding that stakeholder capitalism is a commitment, not a legal requirement; it is currently being practiced in boardrooms; and yet it is not the responsibility of the company, under stakeholder capitalism, to solve America’s social issues. The article concludes with business policy recommendations for directors concerning likely legal, ethical, economic, and political changes affecting stakeholder capitalism.

Keywords

constituency and benefit corporation corporate governance shareholder perspective stakeholder capitalism stakeholder perspective

Introduction

On August 19, 2019, the Business Roundtable (2019), an association of chief executive officers (CEOs) of America’s leading companies, announced a new Statement on the Purpose of a Corporation (and signed by 181 Business Roundtable CEOs) outlining a “modern standard for corporate responsibility,” one that embraces a philosophy of “stakeholder capitalism” that explicitly recognizes the benefits of all stakeholders, including customers, employees, suppliers, communities, and shareholders, to firm success. On December 2, 2019, the World Economic Forum (2019) released its update—the Universal Purpose of a Company in the Fourth Industrial Revolution—to the Forum’s 1973 Davos Manifesto, a company roadmap placing stakeholder principles into practice, introducing a new statement on what it means for a 21st century business to serve the world.

…[the] new ‘Davos Manifesto’…states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field—particularly in the ‘platform economy’. (Schwab, 2019)

Recently, individual and institutional investors, government regulators, and the public are demanding greater clarity in the purpose of the modern corporation ( The Economist, 2019). There is an important “gap” in the academic literature on this governance phenomenon—perhaps due to most business research focused on strategic choices focusing on the short-term, financial benefits accruing to shareholders at the expense of ignoring other stakeholders’ benefits’ impact on longer term, sustainable firm strategy. Thus, an important research question needs to be addressed: What is the purpose of the 21st century firm under an emerging stakeholder capitalism philosophy influencing corporate governance¹? This study will attempt to begin to address this void in the academic literature by applying a four-dimensional (legal, ethical, economic, and political) evaluative framework to the stakeholder governance approach and analyzing the potential effects of stakeholder capitalism on corporate governance of US, and where applicable, non-US companies.

The study will first review (and contrast) the shareholder and stakeholder corporate governance literature. In the case of the shareholder approach, the authors will consider the contractual approach (Easterbrook and Fischel, 1991), the transaction cost approach (Williamson, 1975, 1985), and the agency approach (Friedman, 1970; Jensen and Meckling, 1976). The stakeholder approach will be addressed primarily through the lens of the seminal research work of Freeman (1984). The study subsequently addresses the existing legal corporate governance structure of US corporations (Kim et al., 2010).

The study turns next to reviewing state-level constituency corporation statues (McDonnell, 2004), a predecessor to the recent development of state-level benefit corporation statutes, the latter which explicitly recognizes the array of stakeholders of the corporation (Alexander, 2018). Further, to assess the potential effects of stakeholder capitalism on US corporate governance, a four-dimensional (legal, ethical, economic, and political) evaluative framework is applied to the stakeholder governance approach. In conclusion, a set of practice-oriented recommendations are provided to managers and directors to mitigate future risk.

The methodology employed in the study is offered to facilitate an exploratory framework for stakeholder capitalism. Based on a foundation of legal, economic, and management theories, analytic insights are developed along a four-dimensional (legal, ethical, economic, and political) framework. Each dimension involves an in-depth analysis of the existing academic literature and business media coverage, with conclusions based on the resulting evidence gathered. Methodology limitations include excluding foundational theories; other dimensions useful for the evaluative framework; and because the study is US focused, limited generalizability.

This study contributes to corporate governance theory in the following ways. First, since their inception, the evidence shows that constituency and benefit statutes have not been widely embraced by US publicly traded corporations. Second, while advocating a moral responsibility, limitations of the Business Roundtable and World Economic Forum proclamations reveal that they do not recognize equality in the distribution of material goods, nor require that corporations eliminate economic inequalities in society. Third, there is evidence that stakeholders help provide the firm access to resources and must also be considered as resources whose value and importance to the firm is contingent on the organization of its network and constituents. Fourth, stakeholder capitalism expands the power of publicly traded corporations beyond the limitations of the business judgment rule to encompass policy issues related to stakeholders and society.

From a practice perspective, the study offers the following managerial recommendations. First, directors should reconsider incorporating under a benefit statute, thus explicitly recognizing the value of all stakeholders. Second, the essence of both the Business Roundtable and the World Economic Forum proclamations could be embedded in the corporate mission statement and implemented through its corporate code of conduct. Third, combine longer term firm sustainability with an intensive business lobbying effort focused on reducing benefit statute compliance requirements. Fourth, institute efforts to build ad hoc political coalitions on issues where the firm shares common interests with nontraditional stakeholders, for example, nonprofits.

Contrasting shareholder and stakeholder governance perspectives

The shareholder perspective of corporate governance is primarily based in an economic approach to organizational formation—namely that a firm is conceived as a nexus of contracts between a legal entity (the corporation) and its constituencies, including employees, customers, suppliers, and investors (Hart, 1989; Macey, 1991). Shareholder governance has origins tied to the 18th century joint stock company, where a small group of investors combined their financial resources for a commercial undertaking they could not finance individually (Easterbrook and Fischel, 1991). This form of business organization represented an extension of property rights and the right of contract enjoyed by all individuals (Easterbrook and Fischel, 1991), a contractarian approach built upon a transaction cost economics (TCE) view of the firm.

Under the TCE view, an increased financial return to constituents is predicated on reducing the transaction costs of productive commercial activity by locating this activity into a hierarchical organization, thus reducing the overall costs of production (Williamson, 1975, 1985). Moreover, agency theory, where the agent (“manager”) is modeled to act for the principal (“shareholder”), supplements the contractarian position that the purpose of the firm is the maximization of shareholder wealth, and the board’s role is to monitor and reward management to ensure that this prime directive is followed (Eisenhardt, 1989; Jensen and Meckling, 1976).

Friedman (1970) has espoused the most famous arguments for the shareholder perspective of corporate governance. As employees (“agents”) of the firm, management holds a fiduciary duty to principals (“shareholders”), their job being maximizing shareholder profit while operating within the “rules of the game.”² Friedman (1970) further argues that the social responsibility of a corporation is to ethically and legally maximize profits and not spend company profits on social responsibilities for noncontractual stakeholders—the latter a form of managerial decision-making which violates contractual agreements and expends other people’s money without their consent (Hasnas, 1998).

The modern idea of the “stakeholder” was developed separately by the Stanford Research Institute and Swedish management theorist Eric Rhenman in the 1960s (Freeman et al., 2010). By the 1960s, corporate strategy scholars, such as Kenneth Andrews and Igor Ansoff, used this term explicitly in their writings and strongly suggested that stakeholders might have something to do with a company’s strategy formulation process (Freeman, 1984). Yet, the seminal work in stakeholder theory was developed by R. Edward Freeman in his 1984 book Strategic Management: A Stakeholder Approach.

According to Freeman (1984: 46): “A stakeholder is any group or individual who can affect or is affected by the achievement of an organization’s objectives.” Stakeholder theory is a set of propositions suggesting that firm managers have governance obligations to many stakeholder groups beyond shareholders (Freeman, 1984) (see Figure 1). Yet, Freeman et al. (2010) argue that all stakeholder theory recommends is that corporations should pay attention to affected interests, and shareholder theory is simply a variation of stakeholder theory. Recent research recognizes that most firms are embedded in a complex network of stakeholders, with many of them in independent relationships with each other (Rowley, 1997). Furthermore, Jones and Wicks (1999) have offered a strongly moral-based view, which they refer to as “convergent stakeholder theory.”

Figure 1.

Stakeholders of the corporation.

We next turn our attention to how the shareholder perspective has actually been instituted in publicly traded corporations, using the US legal domain as an example of wealth-maximizing in the corporate governance process.³

Traditional US corporate governance

US corporations consist of those publicly traded (on market exchanges) and those privately held (by an individual or multiples of individuals). The corporate governance process described here is associated with publicly traded corporations and their boards of directors. Each of America’s 50 state governments has its own incorporation laws—although they all generally follow the “Model Business Corporation Act” (Kim et al., 2010).

Under the traditional shareholder primacy model of corporate governance, the shareholders are the legal owners, and corporate officers act as “agents” for the benefit of the firm’s shareholders (“principals”) (Anand, 2008; Kim et al., 2010). The board of directors, a legal requirement of all state incorporation laws, is elected by the shareholders and is delegated authority by shareholders to provide the strategic direction for the corporation; to offer advice and counsel to the CEO; and to monitor the performance of executives to ascertain whether they are meeting the company’s legal and financial obligations (Anand, 2008). Deloitte (2016: 3) further elaborates, arguing that the “board advises management in the development of strategic priorities and plans that align with the mission of the organization and the best interest of stakeholders, and that have an appropriate short-, mid-, and long-range focus.”

Under state incorporation laws, a board of directors has four main duties (Kim et al., 2010: 43). First, a fiduciary duty to act in furtherance of the shareholders’ financial interests at all times. Second, a duty of loyalty and fair dealing, related to their fiduciary duty, where a director must place the interests of shareholders before their own individual interests. Third, exercising a duty of care by acting in a way that an ordinary prudent person would, for example, by being informed and making rational decisions. And fourth, that a board of directors has a duty of supervision, by establishing a code of ethics, holding regular board meetings to review firm performance, operations, and general management decision-making, and ensuring accurate financial reporting and objective auditing.

Constituency and benefit corporation statutes

The ascendancy of stakeholder capitalism was preceded by two major stakeholder-oriented state legislative movements—the constituency statute and the benefit statute—offering incorporation alternatives to the traditional shareholder model of corporate governance. In 1983, the first “constituency statute” was passed in Pennsylvania (McDonnell, 2004). Under constituency statutes, a corporation’s officers and directors are allowed to give weight to the interests of non-shareholder stakeholder groups in the performance of their fiduciary duties (McDonnell, 2004). All constituency statutes mention employees and customers, while some mention suppliers, local communities, state and national economies (although each constituent lacks legal standing to sue under these statutes) and specify that directors may consider the long-term and short-term interests of the corporation (McDonnell, 2004). Without clear case law, many directors fear civil actions if they stray from their fiduciary duties to maximize profits (McDonnell, 2004). Nevertheless, 34 states have enacted constituency statutes (Dizikes, 2016).

What has been learned about the effects of constituency statutes on shareholder behavior? Geczy et al. (2015) empirically investigated the impact of constituency statutes on investment decisions by high fiduciary duty institutions, including public and private pension funds, as well as endowments, which explicitly forbid sacrificing monetary returns in pursuit of nonmonetary corporate goals. According to one of the authors of this study:

Our data set—which spanned over thirty years and included all 50 states—demonstrated that HFDIs did not significantly decrease their investment participation in response to the passage of constituency statutes. While we cannot rule out that constituency statutes had some effect on HFDI investment, we can rule out that these investors significantly altered investment behavior after the passage of constituency statutes, as one might expect if these institutions perceived material conflicts with their fiduciary duties. (Tucker, 2015, emphasis in original)

In April 2010, Maryland became the first state to pass “benefit” corporation legislation (Benefit Corporation, 2020). The benefit corporation charter allows a company to differentiate itself as a business with a social conscience, aspiring to a standard higher than shareholder profit-maximization (Alexander, 2018). A benefit corporation identifies the “best interest of the corporation” by specifying its positive impact on society, workers, the community, and the environment, in addition to profit, as its legally defined goals (Alexander, 2018). Benefit corporations expand the fiduciary duty of the board of directors to legally require them to consider shareholders and nonfinancial stakeholders, as well to consider factors other than the highest purchase price at the time of a potential corporate sale (Alexander, 2018). The benefit corporation statutes are located within existing state corporation codes, so they apply to benefit corporations in every respect except for those social and environmental provisions unique to its form (Alexander, 2018). As of 2020, 35 states (and the District of Columbia) have passed benefit corporation laws (Benefit Corporation, 2020).

Tucker (2015) notes that her and her colleagues’ study may provide some insights into the acceptability of benefit corporations and other alternative business forms, as they are “cautiously optimistic about capitalization prospects of alternative business forms,” although “not an unqualified green light for alternative [corporate] entities.” Over the last few years, Warby Parker and Etsy, both benefit corporations, have gone public, with Etsy offering a US$300 million initial public offering (Tucker, 2015). Yet, while more than 3000 companies are now registered as benefit corporations in the United States, this comprises only 0.01% of American businesses (Stracqualursi, 2017).

One factor contributing to slow growth could be onerous reporting requirements. Most states offering benefit corporation status require filing annual benefit reports, available to the public on the company’s website, which assesses the business’ social and environmental performance in meeting its public benefit purpose (Stracqualursi, 2017). If the company fails to show a commitment to working toward these public benefit goals, it can lose its public benefit status (Stracqualursi, 2017). Furthermore, benefit company shareholders have the legal right to bring a derivative action against the company (although usually not third parties) to enforce the business’ stated public benefit purpose (Stracqualursi, 2017).

Given this business history with alternative forms of corporations addressing stakeholder concerns, what can US corporations anticipate as stakeholder capitalism is allegedly being embraced by more American businesses?

The four dimensions of stakeholder capitalism

To evaluate the potential effects that embracing stakeholder capitalism will have on the corporate governance of US companies, legal, ethical, economic, and political dimensions have been identified for their complex influence on the firm’s strategic management (see Figure 2).

Figure 2.

The four dimensions of stakeholder capitalism.

Legal dimension

Corporate directors have traditionally been protected by the well-established “business judgment rule” in Delaware and elsewhere. Directors have a fiduciary duty—duty of care and duty of loyalty—which requires good faith, determined by whether a director is not personally interested in the subject of the business judgment, is informed with respect to the subject of the decision reasonably believing the decision to be appropriate under the circumstances, and rationally believes that the decision is in the best interests of the corporation (Aronson v. Lewis, 473 A.2d 805, 812 (1984); Kaplan v. Centex Corp., Del. Ch., 284 A.2d 119, 124 (1971); Robinson v. Pittsburgh Oil Refinery Corp., Del. Ch., 14 Del. Ch. 193, 126 A. 46 (1926); eBay Domestic Holdings, Inc. v. Newmark, C.A. No 3705-CC (Del. Ch. Sept 9, 2010)).

In Revlon v. MacAndrews, the court noted that Delaware had long-standing case law holding that directors could consider the interests of groups other than shareholders, as long as “there are rationally related benefits accruing to the stockholder” (Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.506 A2d 173 (Del, 1986)). The key to defeating a shareholder’s derivative action when other stakeholders are benefitted is an articulation by director defendants that considering other constituencies benefits the enterprise in the long run (Tehrani, 2019).

Nevertheless, as noted earlier, many states now have benefit and/or constituency statutes to further define and iterate the business judgment rule. Some authors argue there is no need for the statutes in light of such cases as cited above (Stout, 2008). The statutes, however, appear to have arisen at least partly from Dodge v. Ford Motor Co. (170 N.W. 6668 (Mich. 1919)). When Ford declared employee salaries would be doubled, prices reduced, and earnings retained to build a new plant, the Dodge brothers (who owned 10% of the stock) filed suit. The Court found the immediate effect would be to diminish the value of the shares and force Ford to pay a dividend. In dicta, the Court stated that the primary purpose of a corporation is for profit of the stockholders and that the profit-making purpose of a corporation is established in its charter of incorporation, which represents a contract among the shareholders (who invest their financial wealth in the corporation) (Easterbrook and Fischel, 1991). Although dicta is not law, for over 100 years, the language from Ford has been taught in law schools and in case law (Dodge v. Ford Motor Co. (170 N.W. 6668 (Mich. 1919)). Thus, even in cases where considering other constituencies may benefit the corporation in the long run, the Dodge v. Ford Motor Co. case sets legal precedent that immediate effects are more important than long-term ones.

Ethical dimension

Stakeholder capitalism, reflecting the evolution of stakeholder theory, is fundamentally grounded in the philosophical principles of distributive justice (Freeman, 1984). Distributive justice is defined as the “economic, political, and social frameworks that each society has—its laws, institutions, policies, etc.—[which] result in different distributions of benefits and burdens across members of the society” ( Stanford Encyclopedia of Philosophy, 2017). Furthermore, distributive justice principles provide moral guidance for the political processes and structures that affect the distribution of benefits and burdens in societies ( Stanford Encyclopedia of Philosophy, 2017). From a distributive justice perspective, the corporation, as a legal “person,” is construed as having moral responsibility throughout its network of stakeholder relationships. The major moral guidance approaches to distributive justice include “strict (economic or material) egalitarianism,” the “difference principle,” and the libertarian view.

Strict egalitarianism calls for the allocation of equal material goods to all members of society (Rawls, 1971). Therefore, with equal distribution of material goods (and burdens), there is no possibility of economic inequality (Rawls, 1971). While the recent public proclamations from the Business Roundtable and World Economic Forum recognize a moral responsibility to benefit all of their stakeholders and society at large, they do not recognize equality in the distribution of material goods, nor do they require that corporations eliminate economic inequalities in society. The “difference principle,” developed by Rawls (1971), states that social and economic inequalities should be allowed only insofar as such differences will lead to the greatest advantage of all (including for the least advantaged) and offer opportunities open to everyone (Rawls, 1971). A libertarian conception of distributive justice stresses individual liberty (as well as self-ownership) to acquire, own, and transfer property without state intervention, but which property ownership are considered just in their own right (Nozick, 1974).

Economic dimension

Whether firms are regarded as commercial undertakings that combine financial resources from groups of investors (Easterbrook and Fischel, 1991), nexuses of contracts between the firms and constituents (Hart, 1989; Macey, 1991), or the organization of joint-production activities between otherwise atomized actors in the market environment (Coase, 1937; Williamson, 1975), creating economic efficiencies and additional value is a central tenet in theories explaining a firm’s purpose. These ideas often overlap with others related to the existence of firms such as: how firms get the resources they need to survive and thrive (Pfeffer, 1982; Pfeffer and Salancik, 1978), how firm needs are shaped by the demands of stakeholders in the institutional environment (Hannan and Freeman, 1977), and how boards monitor and direct managers (agents) to use resources competitively (Jensen and Meckling, 1976). From among these, three interrelated theories arise. First, firms are indeed networks of various constituents (network theory); second, these constituents help attract resources on which the firms depend (resource-dependence perspective); and third, how valuable those resources are, and how well they are organized, will determine a firm’s advantages vis-à-vis its competition (resource-based view (RBV)).

Both Granovetter (1973) and Burt (1992) theorized that networks can provide valuable resources, particularly with “non-redundant ties and bridges” that can lead to nonredundant information (Borgatti and Halgin, 2011: 1171). “Network perspectives build on the general notion that economic actions are influenced by the social context in which they are embedded and that actions are influenced by the position of actors in social networks” (Gulati, 1998: 295).

Indeed, stakeholder capitalism considers the network of stakeholders as working together to create value for the firm, rather than with indifferent posturing and opportunism toward other stakeholders (Freeman and Liedtka, 1997). Thus, networks of stakeholders help provide access to resources, whose value and importance to the firm may vary, and must therefore also be considered a resource, whose value and importance to the firm is contingent on the organization of its network and constituents. Pirson and Turnbull (2015: 85) argue that network governance can help with board control, as “all [stakeholders] share a common interest in preserving, if not enhancing the operations of the firm on which they depend.”

The resource-dependence perspective (Pfeffer, 1982; Pfeffer and Salancik, 1978) builds upon the idea that firms are dependent on the resources that stakeholders provide to survive and thrive. While the resource-dependence perspective may approximate the stakeholder capitalism model philosophically, from a practical standpoint, shareholder primacy among other stakeholders may emerge, especially when “essentially reducing firms to a collection of future cash flows” (Schneper and Guillén, 2004: 265) creates a financial conception of the firm where the interests of shareholders are seen as more important than other stakeholders’ (Davis and Stout, 1992; Fligstein, 2001). However, the importance of stakeholders and the resources they provide is determined between an important interplay between the firm and the institutional environments in which they operate (Hannan and Freeman, 1977), which may change over time.

The RBV of the firm (Barney, 1991; Wernerfelt, 1984) posits that firm competitiveness and strategy is determined by the resources a firm possesses, how they may be deployed across multiple products and markets (Wernerfelt, 1984), and the extent to which those resources are valuable (V), rare (R), inimitable (I), and non-substitutable (N) as it pertains to creating a sustained competitive advantage (Barney, 1991). The VRIN framework is sometimes alternatively seen as VRIO, where the O represents how resources are organized and deployed. In this sense, how networks of stakeholders are organized to attract scarce resources, which can provide a sustained competitive advantage, plays a key role in determining the ascendency of stakeholder capitalism.

Political dimension

Corporate capitalism, which is characterized by a dominance of hierarchical and bureaucratic corporations (Kristol, 1975), reflects recent support for stakeholder capitalism in corporate governance. Progressives focus their criticism on the immense power and influence that American corporations and large business interest groups have over US government policy in a constitutional democracy (Greider, 2017)—especially when corporations fail to act in the interests of the people and their existence seems to circumvent the principles of democracy. As former President Franklin D. Roosevelt (1938) warned Congress and the American people: “… the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state.”

What is different about stakeholder capitalism is that corporations are being pressured to actively address public policy issues, where government institutions traditionally made the binding political choices for a society. Now, the stakeholder capitalism perspective expands the power of publicly traded corporations beyond the legal business judgment rule to encompass public policy issues related to other stakeholders and society.

Recent progressive criticism of corporate power has been focused on increased industry concentration (across industries), resulting in less economic competition in the United States (Penn, 2016). “Markets work best when there is healthy competition among businesses. In too many industries, that competition doesn’t exist anymore” ( The New York Times, 2015). If progressives are critical of the expansion of corporate power in the economic marketplace, why would they favor expanding corporate power in the political marketplace by supporting stakeholder capitalism (Ramaswamy, 2020)?

Discussion and recommendations

The Business Roundtable’s recent Statement on the Purpose of a Corporation along with the World Economic Forum’s Davos Manifesto are significant statements that unequivocally recognize that corporations are responsible to all of their stakeholders—not simply their shareholders. Previously, the Organisation for Economic Co-Operation Development (2015) had updated their Principles of Corporate Governance to stress the need for corporations to skillfully consider and balance the interests of all stakeholders. Yet, after reviewing the shareholder and stakeholder approaches to corporate governance, it is evident that even shareholder theory, a theory concerned with how to properly balance (or “trade-off”) legitimate interests, is an instance of stakeholder theory (Freeman et al., 2010: 24).

From a legal dimension, Stout (2012b) argues that US corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price. Furthermore, Stout (2012b) believes that the economic case for shareholder-value maximization is built on false claims regarding the structure of corporations, including that shareholders “own” corporations; they are the only residual claimants on firm profits; and they are recognized as principals who hire and control board directors to act as their agents. In fact, under the “business judgment rule,” directors are protected from being sued by shareholders for a decision that turns out poorly if that board took all reasonable measures to evaluate their decision (Kim et al., 2010: 43).⁴ While constituency statutes have been in place since 1983, and benefit statutes since 2010, neither of these state corporation, stakeholder-based initiatives has been widely embraced by publicly traded corporations.

From an ethical dimension, both the Business Roundtable and the World Economic Forum proclamations recognize the potential moral value (or worth) that the various firm stakeholders (beyond simply shareholders) have in supporting the long-term sustainability of corporations in the market economy and the greater society.⁵ Moreover, these proclamations have a general distributive justice approach, focusing on “providing moral guidance (emphasis added) for the political processes and structures that affect the distribution of benefits and burdens in societies.” To a limited extent, these proclamations resemble a social contracts theory approach to establishing the moral rights of corporations, for example, that through their voluntary consent, corporations are granted rights in exchange for promoting society’s interests (Donaldson and Dunfee, 1999).

From an economic dimension, the purpose of a corporation in society is to create value, that is, goods and/or services, for its customers. Yet, since no economic organization has unlimited resources (including complete knowledge) to draw on to meet all of its corporate governance demands, board and management strategic decision trade-offs are necessary to satisfy stakeholder and organizational demands. This is where the concept of “satisficing” enters into the corporate governance calculus. Satisficing is a decision-making strategy, or cognitive heuristic, which entails searching through the available alternatives until an acceptability threshold is met (Simon, 1956). Satisficing is a key component of Simon’s (1979) concept of bounded rationality, the decision-making assumption that allows company directors to reach a consensus on the necessary socioeconomic trade-offs they confront when approving corporate strategies in a real-world, complex business operating environment.

From a political dimension, many progressives criticize the expansion of economic corporate power in America; yet they support the expansion of corporate political power (through the implementation of stakeholder capitalism as a direct substitute for often inadequate public policy) in corporate governance—an apparent paradox. The mission of the corporation revolves around its economic purpose, while operating within a broader social system. It neither has the public authority (or legitimacy) to independently address, that is, find solutions to, public policy problems. The corporation is bounded by economic and legal constraints but may ethically contribute its expertise within proscribed public policy limitations.

Given the preceding discussion, the purpose of the corporation today is embodied in the following commentary:

Stakeholder Capitalism is a Recognized Commitment, but not a Legal Requirement. The Business Roundtable’s statement on the Purpose of a Corporation is “a fundamental commitment to all our stakeholders,” including customers, employees, suppliers, communities, and shareholders. The World Economic Forum’s Universal Purpose of a Company states that “a company serves not only its shareholders, but all its stakeholders—employees, customers, suppliers, local communities and society at large…through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.” Both proclamations are commitments that offer moral guidance for a board of directors to ethically consider when exercising their corporate governance decision-making authority concerning stakeholder trade-offs when allocating company resources for “corporate strategies that are intended to build sustainable long-term value” (Business Roundtable, 2016).

There is Increased Evidence of Stakeholder Capitalism Practiced in Boardrooms. Stout (2012a: 4) has argued convincingly that the typical company charter broadly defines the company’s purpose as “anything lawful.” State corporate law today provides wide latitude for decisions in the shareholders best interest, allowing for companies to take into consideration stakeholder interests as necessary for the financial success of the corporation under the business judgment rule. The Business Roundtables’ proclamation on the Purpose of a Corporation is an ex post facto acknowledgement of this stakeholder view as it pertains to decision-making trade-offs in the boardroom.

Satisficing is an Emerging Boardroom Practice. In real-world situations, optimal solutions cannot be generated due to asymmetry of knowledge deficiencies. Today, “bounded rationality” (Simon, 1979) requires company directors to reach a consensus on the necessary socioeconomic trade-offs among the organization’s stakeholders (who the corporation relies upon for future resources). Realistically, while all stakeholders’ concerns should be considered in board decisions concerning strategic planning, managerial priorities for resource allocation (and dependency) must be established for short-, medium-, and long-term planning horizons. Thus, not all stakeholders are treated equally.

Solving Society’s Social Issues may not be the Responsibility of Stakeholder Capitalism. The board’s ethical responsibilities are now explicit (and need to be acknowledged), but the legal, economic, and political boundaries need to be recognized and respected. However, in its limited institutional role in American society, the publicly traded corporation may collaborate with nonprofits and government to assist in helping to find solutions (rather than contribute) to societal problems.⁶ The public policy leadership role, however, is embodied in government institutions.

These perspectives reflect the current state of the stakeholder capitalism perspective of corporate governance in the 21st century but also lead any reflective manager to ask: “How might the purpose of a corporation under a stakeholder capitalism perspective …?” This question is addressed by providing recommendations on how to tackle the risk assessment process in general terms that may then be adapted to each firm and industry’s unique value chain. In other words, managers can benefit from knowing: (1) In what ways might the stakeholder capitalism perspective change? And, (2) How likely is it that these changes will occur? If managers know this, they may more effectively model the risk to their value chain and improve their stakeholder management process. So, revisiting the dimensions of stakeholder capitalism discussed previously, we provide recommendations for managers moving forward.

The Likelihood of Legal Changes Affecting Stakeholder Capitalism: The legal dimension of stakeholder capitalism is similarly affected by political change but tempered by how legislation is passed and recognized within the United States. For instance, the ruling in Dodge v. Ford Motor Co., 170 N.W. 6668 (Mich. 1919) was the non-precedential opinion of the court that the primary purpose of a corporation is to create profits for stockholders. The decision was binding on those litigants, a ruling taught, perhaps erroneously, in law schools for more than 100 years to argue precedent. Precedents, such as the US Supreme Court’s 2010 ruling in Citizen’s United v. Federal Election Commission that “permits corporate money to influence elections and thereby implement corporations’ values (Ramaswamy, 2020: A17),” are often difficult to overturn and require fundamental changes in the legal system. Naturally, the appointment of Federal and US Supreme Court judges and justices are of great concern to corporations and strategies to manage the risk of sudden changes, brought about by political change, are what “Citizen’s United” was about. One legal strategy for managers and directors would be to reconsider the option of incorporating under a benefit statute, which would instantiate an explicit legal framework on the corporation explicitly recognizing the value (and demands) of stakeholders. However, such legal definitions often bring about increased scrutiny and costs that may potentially be higher than any benefits sought, especially in the near term.

Recommendation: As part of any stakeholder capitalism risk and opportunities assessment, managers must consider how much their company’s internal policy for stakeholder management aligns with current or potential laws (and enforcement). In most cases, profound legal changes in the short term are unlikely; however; monitoring the sorts of events that might trigger sweeping regulative change (e.g. lopsided elections and appointments to supreme courts) that could affect key stakeholder groups is recommended—as is potentially establishing a strategic response team. Unless a firm’s current stakeholder management policies are partially aligned with the regulations resulting in adopting a benefit corporation status, or will need to be in the future, managers may be better off avoiding additional costs and scrutiny resulting from such designation.

The Likelihood of Ethical Changes Affecting Stakeholder Capitalism: As the ethical dimension of stakeholder capitalism is grounded in philosophical principles of distributive justice (Freeman, 1984), inequality in the distribution of the “benefits and burdens” in societies ( Stanford Encyclopedia of Philosophy, 2017) is arguably the primary change agent. Consequently, as inequality rises, so too does the risk of change in the stakeholder model of governance. Managers must therefore account for the likelihood of sudden increases in inequality (e.g. economic recessions, natural disasters, etc.) or gradual and systemic increases (e.g. wage distribution, job loss to outsourcing or automation, etc.) that may trigger change and how each might impact the stakeholders within their value chain. Since both the Business Roundtable and the World Economic Forum proclamations recognize the potential moral value (or worth) that the various firm stakeholders (beyond simply shareholders) have in supporting the long-term sustainability of corporations, this form of moral guidance should be embodied by managers and directors in the mission statement of the corporation and further interpreted through its corporate code of conduct/ethics. This ethical strategy has implications not only for US-based firms (for cross-border applications) but also for non-US host country firms and multi-national enterprises (MNEs).

Recommendation: Managers should be looking for “trigger events” that may directly result in legal changes (e.g. major changes in composition of the legislative and judicial branches of government), but these often are indirectly correlated to events that highlight inequality (e.g. recessions, natural disasters, and pandemics). Of course, managers should continually evaluate how they will be perceived, ethically speaking, because of increases in inequity. Having a team that provides both ongoing strategies for gradual changes in their stakeholder capitalism policies and a plan for rapid response to sudden unforeseen trigger events is “good business.” Perhaps a task force to examine how much value is potentially tied to various stakeholder groups may be a departure point, followed by a determination as to how much oversight and resources should be dedicated to monitoring and planning on an ongoing basis.

The Likelihood of Economic Changes Affecting Stakeholder Capitalism: The economic dimension of stakeholder capitalism broadly encapsulates the three other dimensions as interrelated antecedents. The economic efficiency, or profitability, of firms will likely be at the heart of the purpose for a corporation, legally speaking, and this is contingent on adjusting to important stakeholders’ needs in the institutional environment (Hannan and Freeman, 1977; Pfeffer and Salancik, 1978). Unless significant inequality leads to political, and in turn legal change, and the short-term risk is high if a sudden system shock, such as occurred as a result of the 2020 Covid-19 pandemic, or perhaps climate change, the changes to stakeholder capitalism are likely to be slow and limited. However, modifications driven by firm economics are more likely to occur in the short term and present less risk than opportunity. For example, the costs of maintaining compliance to remain designated as a “Benefit Corporation” may, ironically, outweigh the benefits of such a designation currently. But, if there were reduced compliance requirements costs, and more targeted investment portfolios that focused on longer return horizons, managers might find such a designation helpful in investing in core competencies, such as R&D. The result of a longer term firm sustainability philosophy, coupled with an intensive business lobbying effort for reduced benefit statute compliance requirements by state governments, would be a positive strategy for managers and directors to embrace.

Recommendation: At the heart of all managers’ decisions related to stakeholder capitalism is economic efficiency and costs to benefit analysis. Managers should be constantly monitoring options to increase the maximize benefits of stakeholder capitalism and creating strategies to minimize the costs. This should include effective marketing campaigns targeting the most vital stakeholder groups as well as potential lobbying campaigns that reduce regulative pressures for existing legislation or that tied to benefits corporation statutes that can be prohibitively expensive. Managers need to develop a plan to monitor and evaluate such strategic initiatives on an ongoing basis, crucially establishing the bottom-line metrics that ultimately answer the cost-to-benefit question for executives.

The Likelihood of Political Changes Affecting Stakeholder Capitalism: The political dimension of stakeholder capitalism is significantly linked to the ethical one in that government institutions, traditionally, are thought to be responsible for making political choices in the best interests of the society. Certainly, the political climate in the United States has become more volatile and divisive, and inequality is only likely to exacerbate this trend—leading to greater unpredictability in elections and policy outcomes that affect stakeholder leverage. In this area, it is recommended that managers and directors be more proactive in managing equality of benefits, especially to key stakeholders that may sway elections. For example, managers and directors of US, as well as other foreign-based, firms and MNEs, may institute efforts to build ad hoc coalitions focused on issues where there are common interests, such as with nontraditional stakeholders, for example, nonprofit organizations or community groups. The costs of forced compliance related to policy change may, however, be greater than proactive mitigation or strategies that go beyond satisficing.

Recommendation: Beyond the internal strategies and policies that a firm has formulated for stakeholder capitalism, are the stark political and legal realities. Naturally, managers whose firms are well positioned for the regulative pressures politicians can impose should be lobbying to maximize the rewards and incentives for their effective stakeholder management campaigns. Those managers not well positioned should be lobbying for disincentive policies that mitigate benefits competitors may seek until such time they may effectively compete. All managers should be sure to closely examine the ability of targeted politicians to actually affect change, one way or another, and of course be wary of the appearance of impropriety and scandal that may be incumbent with those politicians more easily swayed.

A future research agenda holds the potential for a rich array of topics of inquiry. For example, given that there are formal commitments by MNEs being made to embrace stakeholder capitalism, how serious are these firms in showing evidence of implementing this commitment in their corporate strategy? What policy formats are these commitments taking? While many of the firms committing to the stakeholder capitalism model are Western-based MNEs, will this stakeholder capitalism commitment be fully embraced in other areas of the world where there are domestic competitors operating from a shareholder perspective, thus placing these MNEs at a short-term economic disadvantage? Lastly, how does this public commitment to stakeholder capitalism affect the number of firms in the United States that decide to register as benefit corporations?

In conclusion, stakeholder capitalism is now recognized as a concept that boards of directors and executives have explicitly acknowledged. Yet it is a commitment that will be carried out, and potentially expanded, based only on transparent ethical decision-making acknowledging the bounded rationality of legal, economic, and political constraints posed by the organization’s resource capabilities and public policy environment.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

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