• Michael Huskey

Why Stakeholder Capitalism Is More Than Just Corporate Do-Goodism

What other trick do these companies have up their sleeve?

"Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders," according to Investopedia. The term stakeholder in this sense includes all the employees, customers, local communities, and now is beginning to encapsulate the world as companies become multi-national.

The concept has been trotted out as a counter to the notion that Milton Friedman championed in the 1970s called Shareholder Capitalism. At its simplest explanation, shareholder capitalism says that a corporation's number one responsibility is to maximize profits for people who own shares in the company (the owners).

Most people's understanding of shareholder capitalism ends here. A system where companies’ sole focus is profits can easily lead to the resentment of corporate greed. In an effort for companies to save face, they have begun to champion the term Stakeholder Capitalism.

I think the only significant difference between Shareholder and Stakeholder Capitalism is strictly in the semantics. The most successful companies are always thinking long-term, which usually means helping the communities they operate in to score some PR & branding wins.

An area where companies have been pushing out media regarding Stakeholder Capitalism tends to be in the environmental realm. Many companies are now making it public their aim to be carbon neutral. Some people may think this means they are taking a political stance. I think it is just a strategic branding decision. A company can secure a PR win and potentially get a tax write-off to lower its energy bill in the future. For a long-term focused company, that is common sense, not altruistic.

Another area some companies are trying to show they have a heart is with employee wages. Companies like Amazon lead the way in raising the minimum wage to $15 per hour for all their hourly employees. Their effort has lead to increased wages in almost every sector.

Both of the above things sound good on paper, right? Companies are putting more emphasis on making sure they are not polluting the air we breathe. I can get on board with that. Companies are increasing their employee pay without significantly raising prices. I can get on board with that too.

So what is the catch?

The central part of Stakeholder Capitalism that most people don't realize is that through corporate do-goodism, they are essentially making it impossible for smaller companies to compete.

Let's take a look at the two examples I mentioned above environment and wages.

Helping save the environment has always been a recipe for good PR, so why is it bad that companies are advertising they are doing this? There is a growing push for carbon labels, but why? It is a way for big companies to make you feel better about buying from them instead of your local mom and pop shop, which may not be as carbon-conscious.

Some would say the smaller company should just pass on this cost to their customer, and people would gladly pay. It is much easier for companies with more scale to pass costs of going green onto customers than small businesses.

Think of Starbucks and their push for paper straws. A large company can easily spread that cost onto its customers without drastically changing the price. But for a small company with less scale, this couple cents or dollars every transaction can be the difference between staying in business or going belly up.

Where Stakeholder Capitalism has the most significant ability to destroy competition is in the area of wages. On paper, it sounds reasonable that a company increases its employees' salaries; it makes us feel better about shopping there. Thinking the employees are getting a larger share of the companies’ revenue.

The bad part is it makes it that much harder for small businesses to hire people. A business's largest expense is its labor, and when you are starting a business, every dollar is precious. When a big company like Amazon doubles the labor cost, it can nearly bankrupt those small businesses that now have to increase their wages to retain employees.

The only reason I mention the other side of Stakeholder Capitalism is to uncover that there is still some Shareholder Capitalism at play. It is just being packaged in a more palatable way. These large corporations are still chasing the almighty dollar; they are just willing to delay when they can cash in.

A moral calling is not what is solely drive corporations to consider all their stakeholders, but also the company's long-term interests. But just because you aren't being motivated by selflessness doesn't make the outcome bad either.

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