The last decade has seen the rise of a belief that shareholder capitalism has failed and that a new era of stakeholder capitalism is needed. This is more than an academic viewpoint as more and more influential organisations, leading companies, and consultancies have embraced the importance of stakeholders and corporate purpose.
This naive appeal to the belief that corporations need to look beyond their shareholders overlooked the reality that few companies ignore those they considered to be key stakeholders. Indeed, many have already promoted the idea that taking care of key stakeholders was good for the bottom line. While there has been some discussion of obvious stakeholder-shareholder conflicts (e.g., firms were not going to forgo profits by giving products away or paying workers beyond what was necessary in the markets they operated), the reality has diverged from rhetoric about the failings and evils of shareholders and the purity of stakeholders.
But this viewpoint belies two key factors. First, it is almost impossible for a firm to decide who is really going to be a stakeholder and who is not (in other words, a stakeholder decides they are a stakeholder, not the firm). Second, the motives of stakeholders can be as failing and evil as the motives of shareholders, and in many cases, far worse.
One of the benefits of being a shareholder is that it confers on you many rights related to ownership. You have clear rules of interaction with other shareholders and many of those interactions are public. If you are a stakeholder, none of this exists. There is no formal legal and regulatory model for stakeholder rights and management, with your status conferred simply by “being effected by or having an effect on” an organization. What this means is that not only are the usual suspects – customers, suppliers, workers, etc. – stakeholders, so are government officials and politicians, social media companies and their users, newspapers and journalists who express opinions, environmental and social activists, and so on. For most stakeholders, the point is not to aid or influence the firm in the pursuit of its “corporate purpose” but to use the firm as a vehicle to achieve an outcome that benefits the stakeholder or stakeholder group.
And this is where stakeholder capitalism runs into problems, as the firm is simply a marketplace in which these competing stakeholder interests compete. In some cases, it is like a community dance. In others, it is like a fencing competition. In still others, it is more like a knife fight amongst gangs where the losers get bloodied or worse. As the differences among stakeholders get larger and the rewards/losses more severe, the firm’s involvement with these interests becomes less about management and common ground and more about refereeing amongst winners and losers.
The Russian invasion of Ukraine has highlighted a situation where it is clear that many firms have been involved with stakeholders of dubious heritage. But bailing on oligarchs as customers, owners/investors, or suppliers, is remarkably easy when everyone is simply dumping the same or similar people. It was hardly a secret that London was awash with dirty money. What is interesting is that despite the dirtiness of the money, most companies were happy to have oligarchs as stakeholders until it was obvious that other stakeholders found this morally wanting. For Russian firms, the situation is far worse, as one of their key stakeholders is the government controlled by Putin and supporters. For them, unlike Western realtors, bankers, lawyers, and yacht brokers, it doesn’t matter if the stakeholder is evil, as there is no getting rid of that most important of stakeholders.
The Russian situation, while looking unique, isn’t. There are many examples: South Africa during apartheid, Saudi Arabia and Khashoggi, and Chile under Pinochet come quickly to mind.
Perhaps the best recent example is China. Shaomin Li, in his book China Inc., argues that all firms in China are effectively an arm of the government. While this might sound extreme, the evidence is in plain sight. In a document entitled “Opinions on Strengthening the United Front Work of the Private Economy in the New Era”, published in 2020, the Central Committee of the Chinese Communist Party (CCP) effectively declares that the “purpose” of the private companies is to “to further enhance the party’s leadership and cohesion over the private economy”. In China, the “business of business is not business,” but the promotion and strengthening of the CCP. In other words, corporate purpose is national purpose, and it is the duty of all firms to align their corporate purpose to the CCP’s goals. Hence, any Western company working with a Chinese company must know that the core stakeholder of their partner is the CCP. There is no getting around this fact.
However, what we see playing out today has numerous variants. In many circumstances companies must choose whether they deal with corrupt government officials if they want to sell their product or source resources in certain countries. If they choose not to, what is to stop a less ‘morally purposeful’ company to step in to fill the void and satisfy the needs of the stakeholder that is corrupt government officialdom. In more subtle ways, companies avoid offending norms, yet in doing so are clearly preferencing one moral, social, or ethical stance over another. One of the more bizarre cases of this was when Ikea airbrushed its catalogue in Saudi Arabia to get rid of women. Firms find themselves constantly battling conflicting social, political, and religious norms that ultimately reflect stakeholder differences that are, in many cases, non-negotiable and hence have no middle ground.
Companies have, for many years, argued for an amoral, socially ambiguous, “have your cake and not interfere” approach to the world. They have whitewashed their stakeholder relationships with a belief that they are not the determinants of culture, politics, or social norms, and instead they aim to operate with “purpose” over profit. What they have failed to understand is that, ultimately, they must take sides and are actually taking sides with every decision they are making. Before the Russian invasion of Ukraine, the consequences of such non-decisive decision making were small. But the invasion has shown that all decisions have consequences.
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