Stakeholder Capitalism is Capitalism

As geopolitical challenges mount and inflation concerns grow, there is a natural tendency for companies to seek safe harbor, to focus on maximizing returns as the measure of value of a company. Proponents of this view argue that the rise of stakeholder capitalism and its broader focus on a company’s impact on shareholders, the environment, and employees and communities distracts companies from their core mission of producing value.

I could not disagree more. Those who rally for a renewed focus on shareholder capitalism offer a false choice. Any approach that narrowly defines value and rewards only in quarterly profit reports is destined to fail. The past five decades have laid bare what a narrow focus on short-term profits over sustained value creation produces: environmental degradation that increases risks and costs to the company, rising inequality that deprives companies of consumers and hollows markets, and governance shortcomings that have led to corruption, incompetence, and waste.

So how are we to settle this debate? We can let the market guide us. People are telling corporate leaders that they expect more, and consumers are shifting their spending to businesses they feel good about. Investors are demanding more on environmental, social, and governance (ESG) to understand which companies are creating broad-based value sustainably. According to EY, 39 percent of investors are currently invested in ESG products—an increase from 33 percent in 2020. It would be a breach of fiduciary duty to ignore these voices, and the market is working to catch up. The number of firms with at least one ESG fund has grown nearly 300 percent since 2016, according to Deloitte. The world’s second largest asset manager State Street points to ESG as providing a bigger and more accurate picture of a company’s value creation and sees ongoing improvements in data and analytics as certain to drive further demand for and growth in ESG.

Inclusive capitalism or stakeholder capitalism—whatever your terminology to describe a capitalism that produces broad value creation—is about more than doing good. It is above all about meeting market expectations and driving business excellence. Companies practicing capitalism inclusively and sustainably strengthen the economy and society as a byproduct of their pursuit of profit, which makes their example all the more important to watch and learn from.

At the Council for Inclusive Capitalism, there are more than 275 business leaders who are showing through their actions, which now number nearly 600, how pursuit of profit can be done in ways that strengthen economies and societies by advancing the UN Sustainable Development Goals and creating value that lasts. These are leaders and companies such as Alistair Phillips-Davies of Scottish Southern Energy (SSE) that recognize the commercial opportunity of the energy transition. SSE is working to support a vibrant supply chain for the UK’s offshore wind sector, creating new jobs and economic value. Under Thasunda Brown Duckett’s leadership, TIAA is addressing significant gaps in financial education, particularly in low- and moderate-income communities and among people of color. Brian Moynihan of Bank of America is sharing rising profits with the bank’s front-line workers with multiple wage increases, understanding that more money in the pockets of workers and in communities in which the bank operates increases commercial activity. Brian’s walk back from charging overdraft fees is also notable. Making profit at the expense of the most vulnerable weakens society and the bank’s consumer base.

The most valuable companies of the future are those that recognize today that sustainability, inclusivity, and strong governance are critical to their bottom lines. These companies will outperform and outlast their peers by producing value that multiplies the positive effects of capitalism beyond those privileged to hold a share.