Most Americans have probably heard of shareholder capitalism. This is the idea that a company’s only purpose is to maximize its shareholder value. But you might not have heard of stakeholder capitalism. This was a predominant movement in the 1950s that was replaced with Shareholder Capitalism in the 70s due to Milton Freidman. It gained ground again in 2019 when the Business Roundtable (an organization of CEOs of America’s largest companies) issued a statement in support of stakeholder capitalism. Add conscious consumers that have steadily been growing for the past 10 years thanks to support from Millennials and Generation Z and you have a new, rapidly growing sector of the economy. But what is Stakeholder capitalism and why has it come back into fashion?

Stakeholder capitalism takes a different approach from shareholder capitalism in that at its core is the idea that businesses should focus on all stakeholders—employees, customers, suppliers, the communities in which they operate, AND shareholders. The goal is to create long-term value for all parties involved and to pay attention to a larger portion of the market versus internal shareholders only. While some may say this is just a fad, trend, or another buzzword for “good corporate citizenship,” there are real benefits to this approach for your business as well as society at large.

The Five Pillars of Stakeholder Capitalism
The Business Roundtable’s statement on stakeholder capitalism outlines five pillars that companies should focus on:

1. Delivering value to customers: This means businesses should focus on creating products and services that customers want and need at a fair price.
2. Investing in employees: This means providing employees with good jobs and opportunities for career growth. It also includes things like providing benefits such as healthcare and retirement plans.
3. Dealing fairly and ethically with suppliers: This means treating suppliers fairly, paying them on time, and maintaining open communication.
4. Supporting the communities in which they operate: This means giving back to the community through things like charitable donations and volunteerism. It also includes being a good steward of the environment.
5. Generating long-term value for shareholders: This means making decisions that will create sustainable, long-term value for shareholders, rather than short-term gains.

Sounds pretty straightforward, right? For many businesses this can be difficult, however, this is what consumers are looking for when they spend their money. And employees now have the choice to work for a company that subscribes to these five values as opposed to a different kind of company that might lay them off in order to make the quarterly earnings call for its shareholders.

There is no silver bullet nor a perfect answer to what a business should do, however, it is important for business owners and leaders to pay attention to the market as well as evaluate and make strategic decisions based on what is happening in the economy, their community, and their industry.

Why Stakeholder Capitalism?
Stakeholder capitalism is not new. The idea that stakeholders should have a say in how companies are run has been around for decades. However, the current push toward stakeholder capitalism is being driven by a number of factors, including:

1. The purpose-driven consumer is now the #1 consumer. These are consumers that vote with their wallets and support companies that align with their values and have a higher purpose.
2. The rise of the millennial generation and their values. Millennials are the largest generation in the workforce (currently about 45%) and they have different values than previous generations. They care about purpose, social responsibility, and making a positive impact. This is leading businesses to focus more on stakeholder capitalism. According to research, 75% of Millennials believe that its important that a company also give back to society in addition to making a profit. 90% of Generation Z believes the same thing.
3. The COVID-19 crisis. The COVID-19 pandemic has highlighted the need for businesses to focus on more than just profits and take care of their workers AND their customers. It has become clear that an economic system only focusing on short-term profitability goals isn’t sustainable.
4. A decline of trust in the government, media and NGOs. In an age of fake news and political polarization, people are losing trust in many institutions. This has led to a decline in faith in the government, media, NGOs and a desire for businesses to step up and fill the void. Business is the most trusted institution and people are looking to CEO’s and their employers for answers about what is happening in the world right now. Check out Edleman Trust Barometer to see their research on trust and learn more about the trust decline.
5. Increasing economic inequality. According to research from the Economic Policy Institute, CEO pay is up 997% since 1978 while typical worker pay is only up by about 11% during the same time period. There is a growing awareness of the issue of economic inequality, both within countries and globally. This has led to a desire for businesses to do more to benefit all stakeholders, not just shareholders.
6. The rise of social media. Consumers and businesses now have two-way communication. Social media has given voice and power to employees, customers, and other stakeholders. This has made it easier for them to hold businesses accountable for their actions or call them out for not meeting their social contracts.

There are many other reasons for the sudden interest in stakeholder capitalism. However, there can be some potential risks such as, it’s just marketing, it’s impossible to please everyone, and it’s a distraction from creating value for customers to name a few. While this concept is not new, the modern version will go through many revisions as we hash it out in the US economy. Again, this is not a silver bullet, but we cannot deny that capitalism and consumers are changing. Businesses must pay attention to the market and always look for ways to build trust and create long-term relationships with the people who matter most to their business. If you’re not already doing so, now is the time to start considering how you can create stakeholder value for your employees, customers, suppliers, and community.