Stakeholder Capitalism: From Balance Sheet to Value Sheet

Beatriz Pessoa de Araujo is a partner at Baker McKenzie and Adam Robbins is Head, Future of Investing Initiatives at the World Economic Forum. This post is based on their recent Baker McKenzie/World Economic Forum memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The gradual pace of social progress is occasionally punctuated by periods of rapid change. We are undoubtedly in the midst of one of these shifts, as pandemic, climate risks, and economic and racial inequality test society’s resilience, and rapidly force new ways of operating.

These rapid shifts are increasingly presenting leaders with some of the most severe business, economic and social challenges in decades, forcing them to reassess business practices and indeed the very purpose of the corporations they serve. Stakeholder capitalism has made headlines over the past 18 months as the World Economic Forum, the Business Roundtable and society have called on corporate leaders to include the voice of stakeholders in their decision making. Yet stakeholder theories are not a novel idea and have in fact emerged over the past decades. They are making headlines now as a reaction to the perceived shortcomings arising from a narrow focus on short-term shareholder profit maximisation, an approach that began to take hold at the end of the 20th century, principally from the Chicago school of economic thought in the 1970s.

The current pandemic, climate, and inequality crises have hastened the implementation of stakeholder oriented business practices, but they build the multi-decade evolution of stakeholder theory. The following are examples of some of the seminal theories that inspired the proliferation of stakeholder and sustainability-focused concepts found in modern business management, investment, accounting and corporate reporting.

  • In 1932 Merrick Dodd [1] noted that public opinion, which ultimately shapes law, was of the view that a company was an economic institution, which has a social service as well as a profit-making function.
  • In the 1973 Davos Manifesto, [2] Professor Klaus Schwab set out a code of ethics for business leaders: “The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.
  • In 1984 Edward Freeman published a book “Strategic Management: A Stakeholder Approach” [3] in which he set out a management theory that academics often refer to as “stakeholder theory”, contending that successful management teams and companies must satisfy a range of stakeholders, not just shareholders.
  • In 1997, John Elkington [4] contended that a company’s success is dependent on its ability to satisfy the “triple bottom line”: profitability, environmental quality, and social justice offering. More recently, he notes that it needs to operate on the lines of responsibility, resilience and regeneration.
  • The World Economic Forum’s 2020 Davos Manifesto, [5] states: “The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.”

The establishment of stakeholder theory in academia and management theory over the past several decades has enabled the rapid incorporation of stakeholder capitalism into business practice, as a productive response to the global economic, health, and social challenges of the past 18 months.

  • Corporate leadership is seeking to refocus the purpose of business. For example, the US Business Roundtable changed its statement on the purpose of a corporation in August 2019 to commit to promote “an Economy that serves all Americans” [6].
  • The world’s largest investors, including Blackrock, State Street and Vanguard, have begun publicly to endorse the importance of sustainability. Climate Action 100+, an investor-led initiative launched at the end of 2017 to ensure the world’s 167 largest corporate greenhouse gas emitters take necessary action on climate change. [7]
  • Social movements to rethink capitalism have also grown. Greta Thunberg inspired global climate strikes, becoming the Time 2019 Person of the Year and making the Forbes list of the World’s 100 Most Powerful Women. [8]
  • Similarly, the Black Lives Matter movement renewed focus on profound inequalities in society, adding to public demand for a fairer society. The New York Times suggested that, according to academics and crowd-counting experts, the movement was the largest in US history. [9]

Critical Questions for Stakeholder Capitalism

The work supported by the Forum has always sought to promote the adoption of stakeholder capitalism by business and to encourage long-term decision-making, as can be seen from its 1973 Davos Manifesto mentioned earlier. This emphasis on the part of the Forum was given another push at the 2016 Annual Meeting where a large proportion of the International Business Council (IBC) signed up to the Compact for Responsive and Responsible Leadership, [10] which sought to provide a roadmap for sustainable long-term growth and opportunity. The Forum then looked at the root causes for short termism and shared their conclusions in a White Paper, The Modern Dilemma: Balancing Short- and Long-Term Business Pressures. [11] One of the conclusions reached was that corporate governance was entering the era of stakeholder capitalism, and that improved governance frameworks and stakeholder engagement are key to corporate success in this new era.

During 2020 the Forum has worked to create tools to support companies’ efforts to drive long-term value creation and sustainable growth, namely, the challenge of measuring and reporting stakeholder practices on a consistent basis on the one hand and the imperative to embed stakeholder governance in corporate decision making on the other. Shareholders, investors, corporates and other stakeholders alike (including NGOs, society and regulators) have been vocal over the need for convergence of ESG reporting standards and for practical guidance on embedding stakeholders in business strategy.

The Forum has responded to this with recommendations embodied in two White Papers. The first, published in September 2020, Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, [12] proposes a set of stakeholder capitalism metrics (using existing standards already followed by a number of companies) which a growing number of companies have indicated since they will strive to adopt. The second, published in January 2021, The Future of the Corporation Moving from Balance Sheet to Value Sheet, [13] provides practical guidance on steps boards, chairs and the executive can take as regards creating an effective stakeholder governance framework. These recommendations look at purpose, strategy, fiduciary duties, board composition and effectiveness, stakeholder engagement, engagement with shareholders/investors, incentives, ESG KPIs and transparency and reporting.

The pandemic, climate, and inequality challenges of the past 18 month are unprecedented. But by building on decades of stakeholder theory, and utilizing emerging governance and ESG tools, corporate leaders can provide solutions to these challenges


1Merrick Dodd, E., “For Whom Are Corporate Managers Trustees?”, 1932, Harvard Law Review(go back)

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3Freeman, E., Strategic Management: A Stakeholder Approach, 1984, Cambridge University Press(go back)

4Wiley, J., Cannibals with Forks: The Triple Bottom Line of 21st Century Business, 1997, New Society Publishers(go back)

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