A Test of Stakeholder Capitalism

ABSTRACT

Stakeholder capitalism dominates the public debate about the future of the corporation. Business leaders and policymakers are calling for companies to abandon their stern adherence to profit maximization and consider a broader set of stakeholder interests, on issues ranging from workplace equity to climate change. Critics worry that managers can easily manipulate such lofty rhetoric to promote their own agendas and weaken constraints on their conduct that are typically benchmarked exclusively against financial performance. We argue instead that companies turn to stakeholders in order to derive information about the implications of their choices over a wider array of social issues that are outside the regular scope of corporate monitoring systems. The arrival of COVID-19 in early 2020 provides a unique setting that allows us to test how companies understand and utilize stakeholder governance in practice. Forced to adjust swiftly to a new reality, companies might choose to economize and redirect resources away from peripheral stakeholder programs, as critics predict. Alternatively, COVID-19 could help underscore how closely companies depend on their stakeholders, such as their employees, their communities, and their governments, leading to greater efforts to address these broader needs. To explore how companies viewed stakeholders under mounting pressure brought about by COVID-19, we conducted interviews with CEOs, general counsel, and other top executives from large, well-known publicly traded companies with an established stakeholder governance presence. Our sample includes companies from various industries, including some that fared particularly well during COVID-19 such as technology, and others whose businesses were hit hard, such as travel and hospitality. Our findings suggest that companies turned to stakeholders during the pandemic with increasing frequency and asked for input on issues that are central to their business. Companies relied on stakeholder communications with employees to negotiate the remote working environment and arrange for continuous operation and reopenings. Through stakeholder governance, companies better understood the needs of consumers in financial difficulty, and the concerns of local authorities regarding unnecessary and dangerous population movements, springing into action to support them. But stakeholders were not always successful in persuading managers and directors to follow their suggestions, particularly when stakeholders were themselves divided or where managers faced other critical hardships concurrently. Stakeholder governance emerges from our interviews as a systematic framework that companies are developing in order to obtain information about the social impact of their practices. In the past, companies communicated with their stakeholders about specific issues as the need arose. Today, stakeholder governance seeks to proactively cover the company's social profile as comprehensively as possible, collecting information in a regular and standardized manner. To achieve this goal, stakeholder governance has established an institutional footprint within many corporations through specialized executive teams, direct oversight by the board, and external monitoring by investors and specialized professionals. This systematic framework, which has been overlooked by the corporate purpose debate, can help alleviate concerns about accountability and offers a blueprint for dealing with future global challenges.