It’s been five years since 181 CEOs of some of America’s largest corporations — like Apple, Walmart, and Pepsi — signed a pledge that was promoted in a full-page ad in The New York Times to "lead their companies for the benefit of all stakeholders," vs. only for the benefit of those who could afford to own shares in their stock.
The splashy pledge from 52-year-old lobbying group The Business Roundtable appeared to indicate that the CEOs would shift from focusing solely on shareholder value to concentrating on the needs of employees, communities, and other stakeholders. To recognize the pledge, the group recently issued a statement saying that the companies have done a good job at this mission.
Not so fast, says Lynn Paine.
The Harvard Business School professor and expert on corporate boards argues that little has changed when it comes to one very important issue: corporate governance.
In a recent Harvard Business Review article, Paine cites research showing:
Boards were never asked to approve the pledge.
Shareholder value remains the ultimate objective of most corporations.
Shareholder returns continue to be the main driver of CEO compensation.
"If they had intended a change in governance, you would have expected the CEOs to have talked to their board of directors... or worked with the board to rewrite their corporate governance guidelines to say, 'Our purpose is now to serve our stakeholders rather than just our shareholders,'" Paine said in an interview with The BiGS Fix. "But we didn't really see changes like that."
One of the problems, she noted, is that there isn’t an agreed definition of stakeholder capitalism.
"I personally don't know what they committed to in signing the statement. And I am not sure they do either," said Paine, who co-chairs Harvard Business School’s executive programs on corporate governance. "'Stakeholder capitalism' means different things to different people, and the statement itself is very vague on what companies owe their stakeholders."
Still, Paine thinks the pledge did have an impact: "Companies are talking a lot more about their stakeholders and some are even linking a small part of CEO pay to outcomes for other stakeholders."
A PR exercise — or not?
Academic Edward Freeman, who has been called the "father of stakeholder capitalism" because he planted the seeds for this concept 40 years ago when it seemed like no one was listening, believes that the pledge has had more impact than it appears.
"It made a huge difference," Freeman, now a professor of business administration at the University of Virginia Darden School of Business, told The BiGS Fix. "If nothing else, it’s a good start. People are thinking about this idea."
Asked about what changes have been made to governance mechanisms, Freeman said that’s the wrong question to ask.
"The right question is: 'What are companies doing? Are they actually paying attention to, let's say, their employees as much as they are paying attention to customers? Are they paying attention to their effects on communities? Are they paying attention to things like global warming?'" Freeman asked. "I think the answer to that is: 'Yes, they are.'"
Has the backlash been overblown?
Despite the progress, there has been a growing backlash against corporate programs for diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG), with fewer mentions of these topics on earnings calls this year and companies pulling back on investments in these areas. Ford, Harley-Davidson, Lowe’s, and John Deere are among the most recent companies to dial back their DEI efforts.
So, what’s happening? Are companies, under pressure from Republican political efforts, moving away from the idea of stakeholder capitalism and instead doubling down on shareholder capitalism?
Freeman said he doesn’t think current trends are a sign of a return to shareholder capitalism but rather, a handful of companies coming under fire for their efforts on stakeholder issues such as DEI.
"I haven't paid a lot of attention to the backlash, to be honest with you, because I think there's less there than meets the eye," Freeman told The BiGS Fix. "I don't know companies that ... are now back to ... [destroying] the environment willy nilly. It’s just not happening. They understand that, you know, things like global warming threaten them and threaten their employees. I kind of take it as companies are being a little more careful about what they say."
HBS's Paine agrees that there is no going back now and that most likely, leaders are merely becoming quieter about their stakeholder capitalism efforts.
"In my view, it's not really a return to... 'Now we're going to put on blinders so we don’t consider our stakeholders,' or 'We're going to just think short term and ignore the long-term consequences,'" Paine said. "Some of the big challenges, like climate change and racial and economic inequality, are so big you can't really ignore them."
She thinks the "quieter" approach might, in fact, be even more powerful. There's less of a chance of companies exploiting these efforts for publicity or simply copying other companies' efforts.
Finding the right balance
The notion of stakeholder capitalism can be traced back nearly a century. The word "stakeholder" first surfaced in the mid-1960s, Paine said, but the concept of having obligations to multiple constituencies dates back to a speech made in 1929 by the chairman of General Electric and it was discussed in a 1932 Harvard Law Review article, "For Whom Are Corporate Managers Trustees?"
Geoffrey Jones, an HBS business history professor, told BiGS in a previous interview that it is possible to serve both shareholders and other stakeholders at the same time.
"You can be deeply responsible and build successful businesses and brands," Jones said.
One of the examples he cited in the interview is Patagonia, a sportswear brand known for clothing that is environmentally responsible. Customers are willing to pay a little more for clothing that is ethically produced and built to last — and the company is highly profitable.
When Indra Nooyi took the helm of PepsiCo, she set an intention to ensure that the company would be a good corporate citizen — and she built that into the business model. In an article for Harvard Business Review, Nooyi explained her idea of "Performance with Purpose," which included delivering superior financial returns; reducing the amount of sugar, salt, and fat in its products and increasing healthy options; limiting the company’s environmental impact; and putting more women in leadership positions.
At first, Nooyi faced resistance both inside and outside of PepsiCo, but she stuck to the plan and the results speak for themselves: revenue grew by 80% and the stock outperformed not only the consumer staples sector but also the S&P 500.
PepsiCo "has succeeded both commercially and ethically," Nooyi wrote in HBR. "It has learned to balance the short term and the long term, carefully thinking through the level and the duration of returns. A real sense of purpose is integrated into the company’s core operations. It’s the only way to make capitalism work for everyone."
Paine said she looks for companies to have performance measures that are tied to improving the welfare of each stakeholder.
"Let's say a board is discussing whether or not to make an acquisition. You would expect a systematic review of how it’s going to affect each stakeholder group... employees, customers, communities, the environment, and so on" Paine explained. "I'm talking about the kind of rigorous analysis that’s done today for the impact on shareholders... a richer information base for making decisions that bring stakeholders into it."
Freeman said, "I think stakeholder capitalism tells us there's a new version of what a business model is. It's not just about what's going to pay, it's about what you stand for, what your purpose is."