To Make Stakeholder Capitalism Work, It Must Resonate with Investors

January 19, 2021
LRN Corporation

Over the past few years, and especially during the COVID-19 pandemic, the idea of stakeholder capitalism–where companies are aligned to serve interests of all their stakeholders, including employees, customers, suppliers, shareholders, local communities and society at large–has been top of mind for many people in the business world.

To help companies drive long-term value creation and sustainable growth through stakeholder capitalism, the World Economic Forum published a report with practical guidance on steps corporate leaders can take to build an effective stakeholder governance framework.

Companies need to start by addressing two challenges: Measuring and reporting stakeholder practices on a consistent basis, and embedding stakeholder governance in corporate decision-making, according to the WEF.

Since there is no one-size-fits-all approach to effective stakeholder governance, firms need to work toward sustainable goals guided by their own values. As such, the report’s recommendations cover a range of areas for focus, including purpose; strategy; culture and values; fiduciary duties; board composition; stakeholder engagement ESG KPIs; and transparency.

The most successful stakeholder-oriented companies are those that are proactive in engaging their investor base, WEF said. Boards at these companies know which issues are financially material to investors, and they are transparent in how they report and supervise those issues.

Similarly, these boards are forward-thinking, and are "intentional about skill sets, incentives and reporting they use to engage with investors on stakeholder-relevant issues."

In that context, the WEF puts forth the following potential success factors for effective stakeholder-oriented governance:

  • Board composition: Companies need to continue to embrace the need for diversity of skillset, gender, race, age, and physical abilities;
  • Incentives: A board that properly reflects a company’s stakeholders will be able to implement KPIs and other incentives that track stakeholder impact while holding management accountable; and
  • ESG KPIs: Measuring ESG KPIs across a company is a holistic approach to assessing the board’s, management’s and workforce’s contribution to the company. Many companies are looking at climate and science-based targets, and the decarbonization of their supply chains.

Given recent global events, it comes as no surprise many corporate leaders are trying to bring a new focus to the purpose of business. The U.S. Business Roundtable redefined its statement on the purpose of a corporation to promote "an economy that serves all Americans," and investment firms such as Vanguard and Blackrock are publicly endorsing sustainability. At the same time, social movements such as Black Lives Matter reinvigorated the call to address inequalities in society.

While the WEF notes that the pandemic, climate and inequality challenges of the past 18 months are unprecedented, corporate leaders still can advance solutions by building on decades of stakeholder theory, and by utilizing emerging governance and ESG tools.

About the Author

LRN Corporation

Ethics and compliance leader providing tools, education, and advisory services for global companies to inspire principled performance. LRN’s overall approach recognizes the inherent limitations of rules and regulations in influencing behaviors. In our view, focusing on actions that help build and maintain a values-based culture will mean more compliance and reduced costs as a result of tangible and sustainable behavioral change.

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