Stakeholder capitalism isn’t a new idea

April 16, 2021, 1:31 PM UTC
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The development of metrics for ESG performance is helping to implement stakeholder capitalism, writes EY CEO Carmine Di Sibio.
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The COVID-19 pandemic has made very clear the importance of prioritizing the well-being of customers, communities, and workers. But this isn’t just a moral imperative. The truth is that it’s always made good business sense to have a stakeholder-focused long-term strategy. Companies that invest in their employees and communities are better able to weather crises, understand where their future success lies, and build in resilience.

Earlier this year, nearly 70 companies and global business leaders committed to disclose a set of universal metrics to measure their performance in terms of environmental, social, and governance (ESG) factors. It was the culmination of a years-long initiative led by EY and fellow Big Four organizations, in conjunction with our colleagues at Bank of America and the World Economic Forum’s International Business Council, to help businesses align their own strategic goals with society’s. EY works with companies to implement the principles of stakeholder capitalism in the workplace.

It was also a sign that there is emerging consensus that ESG measurement is central to understanding stakeholder impact, and behind the idea that businesses should focus on long-term value creation over short-term gains.

Stakeholder capitalism isn’t a fad. After the Great Depression of the 1930s and well into the boom of the 1950s, businesses put themselves at the heart of communities. This modern push is, in many ways, a return to fundamentals. We’ve long known that we are all better off—and businesses thrive—when the communities around them do too.

Look at the economic boom that took place following World War II. Pulitzer Prize–winning reporter Hedrick Smith credits much of America’s prosperity in this period to a “virtuous cycle” that companies fostered by investing in their employees and their wider communities. 

According to Smith, “The chief executives of the long postwar boom believed that business success and workers’ well-being ran in tandem.” The prevailing attitude was ensconced in the 1953 classic text, long thought to be the foundation of corporate social responsibility, The Social Responsibility of the Businessman by Howard Bowen—which was republished recently given its sustained relevance to today’s discussion of stakeholder capitalism.

Examples abound of growing companies playing a vital role in their communities. Post–World War II, for example, the automobile industry, which often became a hub in a company town, played an outsize role in “one company town” communities, including distributing emergency food supplies and providing housing, expanding the middle class through higher wages, and offering benefits such as health insurance and pensions.

Starting in the 1970s, however, many businesses veered away from this stakeholder capitalism approach—and toward a model centered around shareholder primacy. A significant number of CEOs adopted Milton Friedman’s credo: the social responsibility of business is to increase profits. 

Strategies aimed at extreme cost-cutting have often led to short-term profits but also to a significant loss of jobs, weakened R&D, a winnowing of efforts to positively impact communities, and damaged value over the long runIncome inequality has soared, the public has lost trust in the business community, and capitalism itself has been seen by many as doing more harm than good.

But the tide is turning back toward stakeholder capitalism. Companies are working together, such as with the newly formed New York Jobs CEO Council, to increase access to professional working opportunities for underserved communities. There are many other individual companies—including those in retail and consumer, tech, and telecom—who are investing in STEM and professional scholarships to increase opportunities in the markets where they operate.  

Corporations are uniquely positioned to take action on complex issues ranging from climate change to income inequality to racial justice. We are making some progress: Initial research shows that companies that went above and beyond in supporting their employees—including frontline workers—amid the COVID pandemic enjoyed greater financial gains than their peers. And, over the course of the pandemic, trust in business, perhaps generated by these efforts and other problem-solving initiatives, has actually increased

But we need to do more.

We need to recognize that workforce and community development is not something we do on the margin, or just as part of philanthropic efforts; it is integral to our growth strategies. We should revive the philosophy of stakeholder capitalism that allowed previous generations to prosper.

By working together, modern business leaders can generate profits while protecting our planet, expanding opportunities for more people, and advancing global prosperity. And we can recapture the spirit of inclusive capitalism that forges stronger, more equitable, and more sustainable communities.

Carmine Di Sibio is global chairman and CEO of EY. 

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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