From shareholder primacy to stakeholder centricity

The rise of stakeholder over shareholder capitalism has seen a shift in prioritisation within businesses, but it isn’t a case of shareholders versus stakeholders. There is no either/or when it comes to who should benefit from business. Rather, stakeholder capitalism sees a broadening perspective on how shared value can be achieved for all stakeholders

A history of shareholder theory

Shareholder primacy is often considered, somewhat erroneously, as interchangeable with capitalism. At the end of the 20th century, it appeared obvious, and immutable, that businesses existed to maximise profits, and that those profits should be channelled to the people that owned them. 

But this wasn’t always the universally accepted doctrine. In the West, the rationale after World War II was ‘retain and reinvest’, putting profits back into corporations to expand their capabilities. Investment in employees was considered good business practice, because job security and higher incomes would feed into equitable, stable economic growth. 

But shareholder theory began to challenge this premise. In the 1970s, a ‘downsize and distribute’ model became popular, freeing up cash to distribute to shareholders. Value extraction was rated above value creation. Free market thinking, espoused by economists including Milton Friedman, argued for monetarism: less government intervention, and an increase in money supply. Emphasis was placed on inflation, price and human incentives to drive the economy.

The advantages to this approach were apparent. Success was easier to measure, because the practical nature of the new capitalism judged policies on their results, not intentions. It encouraged improved output through competition: without guaranteed sales, or a minimum wage, or subsidies, then it’s every corporation for itself, and every individual has to apply themselves to succeed. 

As a principle, it was simple to understand, reinforcing the belief in later decades that it was the only way to do business.  

The advantages of shareholder primacy

Monetarism held that government-imposed economic policy would create worse results than one driven by market forces. The logic of the market said monopolies in public utilities would mean poorer service for users; minimum wage laws kept people in poverty; welfare programmes did no long-term good. 

Voluntary interactions between consumers and businesses would produce superior results to those created by government edicts. Following these principles, the profit motive was emphasised, and shareholder primacy arose – because the success of a business could be judged by the size of the dividend it generated.

An ardent supporter of the free market system, the Business Roundtable comprises the CEOs of America’s leading corporations. A litmus paper for capitalist theory, in 1978, it started issuing its Principles of Corporate Governance. From 1997, those principles explicitly advocated shareholder primacy: stating that corporations exist principally to serve shareholders above all other stakeholders.

The rise of Stakeholder Capitalism

Shareholder primacy was accepted as the dominant business model for decades. And in a strong economy, it worked well.

The 2008 financial crash, however, raised questions about whether a new style of capitalism was needed, with greater regulation of financial institutions, and consideration of other stakeholders. 

Long-term success rather than short-term gains was desired, and required investment in employees, supply chains and the local community.

The recognition that shareholder theory is no longer entirely fit for purpose has ushered in a new era of shareholder capitalism. The aim is to create shared, sustained economic value for all stakeholders through business activity, including for customers, suppliers, investors, regulators and society as a whole. By serving the interests of all stakeholders, the business itself will be both more successful and more sustainable.

Reflecting the shift to stakeholder theory, in 2019 the Business Roundtable – that lodestone of capitalist ideology – redefined the purpose of a corporation as promoting an economy that serves all. This includes delivering value to customers; investing in employees; dealing fairly with suppliers; supporting surrounding communities; and generating long-term value for shareholders.

Shareholder primacy versus stakeholder centricity

The shifting of emphasis from shareholders to stakeholders requires a perspective on how the two differ  

• Shareholders are individuals, companies or investment institutions that own at least one share in a company. A stakeholder is any individual, organisation or group with a vested interest in the performance of the company and its corporate activities. All shareholders are stakeholders, but not all stakeholders are shareholders.
• Shareholders benefit directly from increases in the value of the business. Other stakeholders may not. Employees and consumers might also be shareholders in the business, but their interest is not solely financial.
• Shareholders have a vote in the management of the company, with a largely financial interest. Their relationship with the business can be short term, lasting only for the period of their investment.
• Stakeholders have a broader focus on the company’s corporate policy and purpose, likely have greater longevity and co-dependency, and can less easily divest from their involvement. An internal stakeholder has a direct relationship with the business; an external stakeholder, such as a creditor, regulator or supplier, is more remotely impacted by its activities.

The goal of stakeholder capitalism

These definitions underline that stakeholders and shareholders are not discrete – there is considerable crossover between the two. There is also crossover between their interests. Mergers and acquisitions, for example, will affect both the value of investors’ stocks, and also employees’ job security. 

The prevailing notion of stakeholder centricity, therefore, is not aimed at prioritising either shareholders or other stakeholders, but rather at recognising the requirements of both. 

Shareholders are integral to the stakeholder capitalism model. Capitalism is the operative word here, and one which often gets obscured by the sharpening focus on corporate social responsibility (CSR) and environmental, social and governance (ESG) issues. Whatever its investment in the greater good, the role of every company remains to stay in business and return a profit. 

Stakeholder capitalism is not a process of subjugating the needs of the business in order do the right thing. It does not map out a plan in which all businesses have to be philanthropic before they are profitable. It is rather a model for establishing the best way to make sustainable, long-term returns for investors, by responding to the needs of all stakeholders – including those with a purely financial interest. 

If a business is to have an honest, authentic relationship with profit, it needs to both make money and create value for all.