The boardroom of the future: stakeholder capitalism and engagement

stakeholder engagement

With increasing importance placed on boards embedding ESG considerations in their decision-making and operations, stakeholder capitalism has become something of a buzzword du jour. A stakeholder capitalist system is built upon a belief that in order to grow sustainably, corporations should serve the interests of all the company stakeholders, diverging their focus away from meeting the needs of shareholders at the expense of all other stakeholders. It is intrinsically linked to sustainability as it is grounded in the view that giving consideration to wider interests, perspectives and impacts leads to long-term value creation.

Contrary to common assumptions, stakeholder capitalism is not a new notion. Even in the first half of the 20th century, the terminology was being used. Business stakeholders — shareowners, employees, customers and the general public — were defined in the 1930s by Harvard professor E. Merrick Dodd; and ‘trying to balance stakeholder interests’ became a common goal of big business in the US over the 40 years thereafter. However, stakeholder capitalism was not always applied successfully. Leaders of corporations rarely had the means or the understanding of how to balance the conflicting needs of various stakeholders.

In the 21st century, it is increasingly understood that stakeholder engagement is the natural means by which to achieve sustainability, as one cannot consider the interests of different parties without understanding them or engaging with them. While the UK first embedded the concept of ‘enlightened shareholder value’ in decision-making through Section 172 of the Companies Act, the COVID-19 pandemic and the recent geopolitical and economic pressures have catalysed discussions around the concept and benefits of stakeholder engagement. In 2019 the Business Roundtable’s Statement on the Purpose of a Corporation marked the beginning of a new era of stakeholder governance, while in 2021 the European Commission made stakeholder governance the foundation of the Sustainable Corporate Governance Initiative.

These developments have highlighted the importance of the duty of ‘care’, which obliges boards to consider how company activities will likely impact financial risk as it pertains to customers, employees, partners, suppliers, communities, shareholders, and long-term profitability. In this way, among other responsibilities, boards are expected to consider how stakeholders are impacted by relevant decisions, promote and safeguard stakeholder interests and oversee stakeholder engagement framework to ensure that stakeholders are identified and understood throughout the whole company.

In order to avoid the mistakes of the 20th century it is important to empower boards and management with the tools to consider potentially competing stakeholder interests in a balanced and proportionate way. Stakeholder maps and stakeholder engagement assessment matrices have proven to be successful tools to identify company stakeholders and track the level and effectiveness of engagement over time. On the qualitative side, including key stakeholders in board performance reviews to enable their feedback — through surveys and interviews for instance — allows regular reflection on the appropriateness of existing tools and methods. Further, boards may seek to understand stakeholder experiences and perspectives by looking at their interactions with the organisation, such as customer complaints handling or new employee onboarding. Walking through examples in the boardroom or inviting representatives to discuss their own experiences with the board can be powerful.

As boards evolve and engagement practices are refined it will be important for directors and those who support them to share experiences and learn from what has worked elsewhere.

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James Beasley, Senior Director at Nasdaq Governance Solutions, discusses this subject in more detail in the latest episode of the Engage Governance podcast ‘Stakeholder capitalism and engagement’.

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