A guide to the four main types
Business leaders are being urged to adopt a multistakeholder approach to governance in place of the shareholder-centered approach that has guided their work for several decades. But through hundreds of interviews with directors, executives, investors, governance professionals, and academics over the years, the author has found wide differences in how those leaders understand stakeholder capitalism. That lack of clarity can put boards and executives on a collision course with one another when decisions requiring difficult trade-offs among stakeholders’ interests arise. It also creates expectations among stakeholders that if unfulfilled will fuel cynicism, alienation, and distrust.
To help reduce the risk of such negative consequences, the author has created a guide for corporate leaders that illuminates four versions of stakeholder capitalism: instrumental, classic, beneficial, and structural. They reflect significantly different levels of commitment to the interests of stakeholders and rest on very different rationales.
A Critical Look at Four Varieties
The past few years have seen an outpouring of articles and statements heralding the arrival of a new and more inclusive form of capitalism often called stakeholder capitalism. The new capitalism promises to strengthen companies, improve outcomes for their constituencies, produce better returns for long-term shareholders, and ultimately strengthen the economy and society as a whole. In line with the new ideology, corporate boards and business leaders are being urged to replace the shareholder-centered approach to governance that has guided their work for the past several decades and, instead, to adopt a multi-stakeholder approach. In speaking with hundreds of corporate directors, executives, investors, governance professionals, and academics over the years, I’ve found wide differences in how stakeholder capitalism is understood and what it is thought to require of companies and their leaders. Failure to recognize these differences has been a source of much confusion and controversy inside companies and in the public debate. In this paper, I describe four varieties of stakeholder capitalism (also called stakeholderism): instrumental, classic, beneficial, and structural. The four types reflect significantly different levels of commitment to the interests of stakeholders and rest on very different rationales. Each has very different implications for how companies and their boards function. As more companies embrace stakeholder capitalism, it is important for boards and business leaders to have a shared understanding of what, exactly, they are embracing, and to prepare themselves and their organizations to deliver on their espoused commitment. This paper is intended as a guide to help corporate leaders do just that. It discusses each type of stakeholderism in turn and concludes with some observations on the challenges presented by each.
Boards are facing a complex new reality as a result of Covid-19. The new environment is characterized by pressures and demands from various stakeholder groups, heightened expectations for societal engagement and corporate citizenship, and radical uncertainty about the future. These factors are complicating board decision-making and challenging the shareholder-centric model of governance that has guided boards and business leaders for the past several decades. A board’s ability to deliberate in a thorough and thoughtful, but efficient, manner and come to a considered conclusion around key issues will be a critical aspect of its effectiveness in the post-Covid era.
Research suggests that well-run boards take the process of self-evaluation quite seriously, often using a combination of director surveys and personal interviews to assess the functioning and effectiveness of the board, its committees, and its individual members. As boards prepare for their next round of self-evaluation, they will want to assess their capabilities and readiness to govern in the wake of Covid-19. This list offers a guide to the kinds of key questions and statements they should consider adding to their surveys or interview protocols.
2nd edition
Q. Who should take the lead in fixing market capitalism? A. Business, not government alone. The spread of capitalism worldwide has made people wealthier than ever before. But capitalism's future is far from assured. Pandemics, income inequality, resource depletion, mass migrations from poor to rich countries, religious fundamentalism, the misuse of social media, and cyberattacks; these are just a few of the threats to continuing prosperity that we see dominating the headlines every day. How can capitalism be sustained? And who should spearhead the effort? Critics turn to government. In their groundbreaking book, "Capitalism at Risk," Harvard Business School professors Joseph Bower, Herman Leonard, and Lynn Paine argue that while robust governments must play a role, leadership by business is essential. For enterprising companies, whether large multinationals, established regional players, or small startups, the current threats to market capitalism present important opportunities. In this updated and expanded edition of "Capitalism at Risk," Bower, Leonard, and Paine set forth a renewed and more urgent call to action. With three additional chapters and a new preface, the authors explain how the eleven original disruptors of the global market system clash with the digital age, and they provide lessons on how to take action. Presenting examples of companies already making a difference, Bower, Leonard, and Paine show how business must serve both as innovator and activist, developing corporate strategies that effect change at the community, national, and international levels. Filled with rich insights, this new edition of "Capitalism at Risk" presents a compelling and constructive vision for the future of market capitalism.
Corporate governance has become a topic of broad public interest as the power of institutional investors has increased and the impact of corporations on society has grown. Yet ideas about how corporations should be governed vary widely. People disagree, for example, on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of whose interests should be considered in corporate decision making is particularly contentious, with some authorities giving primacy to shareholders’ interest in maximizing their financial returns and others arguing that shareholders’ other interests — in corporate strategy, executive compensation, and environmental policies, for example — and the interests of other parties must be respected as well.
Agency theory, a new model of governance promulgated by academic economists in the 1970s, is behind the idea that corporate managers should make shareholder value their primary concern and that boards should ensure they do. The theory regards shareholders as owners of the corporation—but raises grave accountability problems: shareholders have no legal duty to protect or serve the companies whose shares they own; they are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds; they may buy and sell shares without restriction and are required to disclose their identities only in certain circumstances; and they tend to be physically and psychologically distant from the companies’ activities. Joseph Bower and Lynn Paine examine the agency-based model’s foundations and flaws and its implications for companies before proposing an alternative model that would have at its core the health of the enterprise rather than near-term returns to its shareholders. Their model would refocus companies’ attention to innovation, strategic renewal, and investment in the future.
Aptiv's board must decide whether a joint venture with an auto maker is the right next step in the company's efforts to develop and commercialize a production-ready autonomous driving system. While many commentators believed that Aptiv's self-driving technologies had the potential to revolutionize vehicle use and generate enormous financial returns, the company was in a high-profile and increasingly capital intensive race among some of the world's technology giants to achieve that goal - and much more investment would be needed. As the management team began exploring the possibility of working with a partner to share the costs and accelerate their research and development activities, they turned to the board for strategic guidance. The case describes the role of the board and its Innovation and Technology Committee (ITC) in the company's transformation from a traditional auto parts supplier to a high-technology firm focused on the future of mobility and lays out the factors directors are weighing as they consider the possibility of forming a major joint venture with a vehicle manufacturer.
The five commissioners of the California Public Utilities Commission (CPUC) listened intently at a public forum in April 2019 as PG&E Corporation's out-going chairman Richard Kelly described the company's proposed new board. PG&E, which provided electricity and natural gas to millions of Californians, had once been recognized for its vision in foreseeing energy's potential to reshape the state and power its economy. But PG&E was now in the crosshairs of investors, regulators, and the public for something else entirely: its role in a series of deadly and destructive wildfires that had ravaged the region and precipitated PG&E's bankruptcy months earlier. Called "the first climate-change bankruptcy," it was the largest utility bankruptcy in U.S. history. The commissioners at the CPUC, PG&E's primary regulator, were particularly concerned about PG&E's governance and had convened the forum to solicit opinions from experts and the public and to hear for themselves what steps the company was taking to improve it. The Commissioners are considering whether to make specific recommendations regarding the board's composition and functioning, including how the board assesses and compensates PG&E's CEO. A principal issue is the use of non-financial metrics to evaluate and reward CEO performance.
In February 2018, the Remuneration Committee together with the full Board of Directors of the Scotland-based engineering company The Weir Group had to decide whether to seek a shareholder vote at the upcoming Annual General Meeting in April on a proposal to reform the company's executive remuneration system. The stakes were high: two years earlier shareholders had so roundly rejected a proposal to reform the company's executive pay arrangements that the result had hit the headlines. A new pioneering proposal had been put together-one that, if successful, would not only mark a dramatic change for the company but would also serve as a test case for executive pay reform in the whole United Kingdom. Should they go ahead? How a second failure to get shareholders' approval would be recorded in the chronicle of a company soon to celebrate its 150th anniversary?
In 2014, the Allergan Inc. board of directors received a surprise takeover offer from Valeant Pharmaceuticals in alliance with hedge fund activist Bill Ackman's Pershing Square Capital Management. In the unprecedented arrangement between an acquirer and a hedge fund activist, Pershing Square had quietly amassed a 9.7% stake in Allergan prior to the Valeant bid, making Pershing Square Allergan's largest shareholder. The case presents students with many of the decisions Allergan's directors faced amid challenges to Allergan's governance, management, and business model. In particular, the Allergan board must decide whether to pursue a $10 billion acquisition of Salix Pharmaceuticals while under threat of a proxy contest and a special shareholder meeting to vote on replacing Allergan's directors with a slate more favorable to the Valeant merger. The proposed Salix acquisition would give Allergan a new therapeutic market but would also make Allergan too big for Valeant to acquire.
Market capitalism, a system that has proven to be a remarkable engine of wealth creation, is poised for a breakdown. That sounds dire, and it is. Increasing income inequality, migration, weaknesses in the global financial system, environmental degradation, and inadequate government and international institutions are just a few of the forces that threaten to disrupt global market capitalism in the decades ahead. In conversations with business leaders around the world, the authors found that virtually all of them shared a deep concern for the sustainability of the market system, but their beliefs about how to respond varied widely. Some said that changing their behavior would be unnecessary or even inappropriate. Others were unsure how to deal with issues seldom thought to be the responsibility of individual firms. The authors call for business to be both innovator and activist in protecting and strengthening market capitalism. Instead of seeing themselves as narrowly self-interested players in a system that is overseen by others, business leaders must spearhead entrepreneurial activity on a massive scale-devising strategies that provide employment for the billions now outside the system, inventing business models that make better use of scarce resources, and creating institutional arrangements for coordinating and governing neglected and dysfunctional aspects of market capitalism.
Rethinking the Role of Business
The spread of capitalism worldwide has made people wealthier than ever before and raised living standards to new heights. But capitalism’s future is far from assured. The global financial meltdown of 2008 came within a hair’s breadth of triggering another Great Depression. Despite stirrings of recovery, economies in Europe are still teetering. And powerful forces—income inequality, resource depletion, mass migrations from poor to rich countries, and religious fundamentalism, to name just a few—continue to pose a serious threat to the prosperity capitalism engendered.
How can the future of capitalism be secured? And who should spearhead the effort? Many observers point to government. But in Capitalism at Risk, Harvard Business School professors Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine argue otherwise. While the authors agree that governments must play a role in saving capitalism, they maintain that businesses should lead the way. Indeed, for enterprising companies—whether large multinationals, established regional players, or small start-ups—the current threats to market capitalism present vital opportunities.
Drawing on discussions with business leaders around the world, the authors identify ten potential disruptors of the global market system and diagnose the causes behind existing institutions’ inability to combat them effectively. They argue that companies must stop seeing themselves as bystanders and instead develop innovative business strategies that address the disruptors, produce profitable growth, and strengthen institutions at the community, national, and international levels. The authors then present examples of companies that are already making a difference.
Filled with rich insights, this provocative new book presents a compelling and constructive vision for the future of market capitalism.
Lessons from Nike's Playbook
More and more companies recognize the importance of corporate responsibility to their long-term success—and yet the matter gets short shrift in most boardrooms, consistently ranking at the bottom of some two dozen possible priorities. Many years ago labor conditions in Asian contract factories prompted Nike board member Jill Ker Conway to lobby for a board-level corporate responsibility committee, which the company created in 2001. In the years since, the committee has steadily broadened its purview, now advising on a broad range of issues including innovation and acquisitions in addition to labor practices and resource sustainability.
A close examination of Nike’s experience has led HBS professor Lynn S. Paine to conclude that a dedicated board-level committee of this sort could be a valuable addition to many if not most companies in at least five ways: as a source of knowledge and expertise, as a sounding board and constructive critic, as a driver of accountability, as a stimulus for innovation, and as a resource for the full board.
In an accompanying interview with Paine, Conway discusses the committee’s creation and provides an insider’s perspective on what has made it so effective.
Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance
Today, corporate accountability is as vital to the bottom line as an effective business model. Value Shift makes a strong case for the merits of corporate responsibility and shows how a value-positive orientation contributes to superior performance through better risk management, improved organizational functioning, increased shareholder confidence, and enhanced public standing. Lynn Sharp Paine offers strategies for implementing an enterprise-wide value system and provides the tools need to build companies that can prosper in the new era of corporate accountability.
Value Shift articulates exactly why the superior performers of the future will be those companies that can satisfy both the social and financial expectations of their constituencies. By explaining the larger forces driving the current focus on scandals and ethics, Value Shift points to a new era in the corporation’s development and shows what managers can do to align their companies’ performance with the higher standard expected today.
with Rohit Deshpandé and Joshua D. Margolis
An extensive global survey by three Harvard Business School professors finds that employees agree on core standards of corporate behavior; but meeting those standards will require new approaches to managing business conduct. The compliance and ethics programs of most companies today fall short of addressing multinationals' basic responsibilities, let alone such vexing issues as how to stay competitive in markets where rivals follow different rules. Companies must bring to the management of business conduct the same performance tools and concepts that they use to manage quality, innovation, and financial results.
A Practical Guide for CEOs Managing Multinational Corporations in the People's Republic
To achieve growth and profitability in the world's third-largest economy, multinationals need strong leadership--but China is tough on top executives. Pulsating with opportunity, China attracts foreigners, yet HR professionals continue to rank it as one of the most challenging destinations for expatriates. Many executives sent to lead operations in China are ill equipped to tackle the country's unique challenges. And it's hard to overcome that handicap, because leading in China calls for skills that go beyond--and in some cases conflict with--standard business teaching and practice. Foreign executives must be adept at reworking management orthodoxies in real time to do well there. Success requires cultural understanding and adaptability, market knowledge, the ability to sense and respond to rapid change, and support from headquarters. Most importantly, effective leaders have the crucial ability to play roles that Westerners often view as contradictory: they are strategic yet hands-on; authoritative yet nurturing; and action-driven yet circumspect. Above all, they have the intellectual dexterity to develop new frameworks and capabilities to meet China's particular circumstances. This article illustrates how CEOs have modified accepted wisdom to tackle their biggest challenges in China. Though some of the lessons may seem like common sense to experienced China hands, they're anything but to a freshman expat.
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