Yes, this is perhaps not the first time that you have come across this concept, especially after it being the central theme of the World Economic Forum, Davos 2020. Stakeholder Capitalism, if carried out in its true sense can be the boldest form of business practice manifestation. Let’s cut to the chase and define stakeholder capitalism for you. The idea is to take care of all the stakeholders of the business through laying the foundations of long term operations and concentrating more on them as opposed to the obsession of generating short term profits for shareholders. The concept bats for value creation and looks down on the zeal for generating short term profits and deepening executives’ pockets.
In today’s economic paradigm, corporate entities have assumed the roles of the torchbearers but to one’s surprise they fail to do justice to the responsibility. The fruits of economic and financial power are so luring that often the same is traded for the bigger picture. On a closer look, one gets to understand that stakeholder capitalism not only lets an entity lead by example, but also helps airtight the business framework pertaining to its future sustenance. It is needless to mention that the discussion of the concept at such a grand level talks volumes of its gravitas and especially in the current scheme of things.
|Shareholder spend a shorter period of time with companies|
Who are the stakeholders?
A fairly important question because it sets the tone for the capitalism nomenclature to hold its ground. The determination of the stakeholders is of utmost importance for any corporate house. Are the shareholders the stakeholders? Are the ones who have financial interest, the only stakeholders?
Well, ladies and gentlemen the answer to those questions is no. The understanding that shareholders, suppliers, customers and employees are the only stakeholders of a business entity is highly skewed because it is conservative. Arguably, the ones who share indirect interest with the firm should also be a part of the stakeholders group. The degree of criticality can be decided upon but their acknowledgement is essential. The pro concept section believes that the likes of non-employee workers and environment also form a part of the stakeholders and must be given their due credit. The reasoning behind the same originates from the idea of accountability. When a business operates and carries out its day-to-day activities, it does so with the help of society’s resources and thereby it is an inherent responsibility on the part of a business house to consider environment as a stakeholder.
|Various stakeholders understanding|
What is its purpose of stakeholder capitalism?
The purpose of stakeholder capitalism is to nurture businesses which can align themselves with the societal orientation, coupled with having a long term vision. A long term vision gives way for value creation and helps the entity to stay true to its purpose. A well laid out contrast is pointed out by Klaus Schwab wherein he says that 96% of free cash flow was spent by US’s biggest airline companies against buying back shares in the last 10 years. This activity boosted short-term profitability for sure, but they were left with almost no reserves and found themselves expecting government support when the sector was hit by the Covid saga. Short-sightedness is an obsession if clung onto can create problems for businesses. The capitalism model begs corporates to have a ‘balanced business model’ which sufficiently casts a positive effect on its finances and the society.
How does it help in times of crises?
The one thing that companies often misconstrue is that there has to be a trade-off between being ‘shareholder centric’ and ‘stakeholder centric’, except that is not the case. The skill lies in balancing the tasks accordingly. The current coronavirus pandemic has given us a lot of insight to various business practices, some humane some desperate. On the one hand we see Cognizant to pay 25% extra in basic wages to two-thirds of its workforce as a mark of gratitude and on the other we see Softbank backed, Oyo hotels and rooms on an aggressive spree of employee layoff to meet the profitability targets.
The pandemic turns out to be a great eye opener for all, as it provides a level playing field for each and every company, irrespective of its size and market capitalization. The businesses which had spent their money in a diversifiable manner and in business growth verticals and not just CEO pockets pre-pandemic have the cushion in these testing times to act and save their businesses.
When has it happened before?
- In 2010, Uniliver committed to achieve zero net deforestation in 10 years, having found that 15% of global carbon dioxide emissions are due to deforestation. The company has always been a major propagator for essential societal issues.
- In 2015, Apple Inc. decided to dedicate a fund of USD 848 million in purchasing carbon free electricity from developer First Solar over 25 years. The plant would generate 280 megawatts of electricity, having the capability to provide power to approximately 60,000 California households along with provision of renewable energy for all the campuses of the company. The sum and substance of their efforts can be crystallized, when they released a statement in their 2015 Environmental Responsibility Report, ‘We don’t want to debate climate change. We want to stop it.’
- In 2020, the visionaries of Microsoft Corporation decided to become carbon negative by 2030 and remove all carbon footprints that the company has ever produced since its inception, by 2050. They adequately recognize the vast implications of carbon emissions on global environment and wish to undertake the change and lead by example, also setting s stronger foothold for the corporation in the days to come.
Well, in hindsight when one looks at these initiatives it goes on to establish the fact that more than anything else these companies undertake them in order to take care of their ‘stakeholders’. This is no rocket science for any individual to gauge the pocket pinch a company has to bear in order to carry out operations of such magnitude. More than anything else, it is the vision of such business entities that help make this world a better place to live in. Such activities invariably help build a company a social capital for themselves, which proves to be a valuable possession in the long run.
My take on of stakeholder capitalism:
My understanding of the concept connotes that stakeholder capitalism is a propagator of cohesiveness in terms of business operations and environment and strives for a stronger image for such entities. The current crisis at hand accentuates the importance of the concerned idea and stresses the importance of value creation. The pandemic has compelled corporate entities to push the restart button and shape things once again and the ones who had short term joy in their minds would have to face the heat of this restart.
I feel that Stakeholder Capitalism also brings the factor of accountability on the table which shall be an integral part of business operations and in some way or the other is losing its shine. The cohesive setting would naturally enhance accountability, allowing business houses to cater to all forms of interest. All in all, besides the cosmetic lip service, the companies who truly employed the stakeholder capitalism will have the power to rise up when the dust settles and will retrospectively be glad of the fact that they had the ability to look beyond their CEO’s paycheck and shareholders’ pockets.
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