Stakeholder or shareholder capitalism?

By Parmi Natesan and Prof Prieur du Plessis

It is a contentious debate: should capitalism be stakeholder or shareholder focused? As seems often to be the case nowadays, each model is presented as the only true way, with the other considered completely wrong.

In short, a lot of heat but not much light. We believe an absolute choice is neither necessary nor desirable; if the goal is to build a profitable, sustainable company, then both have valuable insights to offer.

Traditional shareholder capitalism attempts to realise the best possible financial results for its shareholders. But, say its opponents, an exclusive focus on shareholder value leads inevitably to short-term thinking, with financial capital prioritised over other capitals like the well-being of employees (human capital), surrounding communities (social capital) and the environment (natural capital), which all need to be considered.

However, shareholder and stakeholder capitalism may not be mutually exclusive. Good returns for shareholders are directly dependent on the efforts of employees and business partners, and the loyalty of customers. And a company in conflict with the community is also unlikely to do well.

Even self-interest thus dictates that shareholders should care about stakeholders, especially as today's social media platforms have given them a voice ̶ and thus power ̶ that they did not previously have.

The same thinking applies to regulators. Working with regulators to align with their requirements and collaborate on finding solutions is infinitely preferable to conflict, and makes a lot of business sense.

Now for the reality
That is the theory. In reality, of course, quarterly reporting and entrenched ways of doing things mean shareholder-focused companies do tend to take a short-term approach, prioritising profits now over long-term sustainability.

It is sobering to realise that, according to McKinsey research, 80% of CFOs would reduce discretionary spending on activities like R&D and marketing, both essential to long-term success, in favour of hitting short-term targets. Even though companies that use a five- to seven-year horizon achieve 47% higher revenue growth over 15 years!

In addition, it is worth noting that the vast majority of people (92%) want corporates to embody an economy that benefits everyone, but only half believe they are working towards that goal. Generation Z’s increasing prominence as consumers and employees also is material ̶ just under 40% of consumers boycott products or services based on the company’s social stance, and 80% of consumers say they would switch between equivalent brands if one was better aligned with their values. Similarly, employees want their work to be making a positive impact.

On the other hand, though, many point out that stakeholder inclusiveness can be used to “greenwash” rapacious corporates, actually making them less accountable because it lacks the precise metrics of a balance sheet. “Stakeholderism” also disguises poor executive performance and can be used to excuse poor financial performance or bad decisions.

It is also a fact that in today’s overcharged environment, the universe of stakeholders can become ridiculously large. And because it is impossible to please everybody, companies can find themselves unable to take decisions quickly.

Taking the middle path
The King IV Report on Corporate Governance, like its predecessors, is in favour of a stakeholder-inclusive approach, recognising that money is not the only capital a company uses to create value. There’s no doubt, too, that investors and regulators are tending that way.

Notably, King IV does not open the doors too widely for irresponsible activists either: stakeholders taken into account should be material to the organisation and their “legitimate and reasonable needs, interests and expectations” should be considered. As the Report makes clear, stakeholder inclusivity requires competing interests to be balanced or even traded off on a case-by-case basis. The ultimate litmus test as stated in King IV is the “best interests of the organisation over the longer term”.

For that reason, managing stakeholders becomes a key success lever for the modern corporate. Others include not trying to do too much at once, defining success clearly and setting short-term milestones so that stakeholders can see progress. It is also critical to engage with shareholders to explain how the new approach will benefit them in the long run. At the same time, the company must be aware of the tensions between stakeholders.

Although a company’s shareholders remain an important stakeholder, it makes all the business sense in the world to understand the context in which it operates. Creating a strategy for identifying and managing a wider group of stakeholders, to the benefit of all (including shareholders) in the end, is surely the future.

Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: info@boardgovernance.co.za

Parmi Natesan		Dr Prieur du Plessis