Should complexity be the enemy of good?
Is stakeholder capitalism too hard?
Should complexity keep companies from practicing stakeholder capitalism?
Some argue that CEO’s don’t have the training and capacity to focus on Stakeholder Capitalism, as this New York Times op-ed states. The author seems to say, “It’s hard, so we need to just simply focus on shareholders.” Such an argument seems like such a cop-out. Aren’t leaders supposed to manage such complexities? Aren’t leaders supposed to do hard things? Don’t they already? Running businesses requires constant balancing of priorities that aren’t reflected in Milton Friedman’s shareholder-focus world view.
So, another question to ask is if the premise of shareholder-driven business is even accurate.
Are companies really only focusing on one stakeholder, a shareholder, to begin with? At minimum, businesses have to focus on customers. As Peter Drucker advised, “There is only one valid purpose of a corporation: to create a customer.” Even when venture capitalists look to invest behind an entrepreneur, they aren’t only considering the potential return, they often ask the important question of what customer problem their product solves. Steve Denning further writes that our world view has changed today towards one he and others call customer capitalism, that customers are at the center of business today, not firms.
Yet again, is a customer view broad enough?
Even Drucker said that there are other factors to consider and address beyond customers and shareholders, meaning other stakeholders. Bill George, former CEO of Medtronic and senior fellow at Harvard Business School, wrote in an editorial response to the The New York Times regarding the paper’s 50 year review of Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits:”
“What is missing, and widely misunderstood, is how sustainable shareholder value is created. Companies that treat their employees well create a culture dedicated to creating value for their customers. That customer value translates directly into increased revenues and profits, which in turn create greater shareholder value. Balancing their interests naturally requires trade-offs based on thoughtful analysis, which is the role of corporate managers.”
Some also make the mistake of thinking that focusing on broader stakeholder groups means you don’t focus on profits.
To the contrary, as John Mackey, founder of Whole Foods, said in a New York Times interview:
“There is a larger move in our society toward businesses having a higher purpose besides just maximizing profits, and taking other stakeholders into account. That being said, I think there's a fundamental misunderstanding. This is not a win-lose framework. Purpose and profits are not opposites. They’re quite compatible. In fact, having a higher purpose can result in higher profits, and having a stakeholder philosophy doesn’t mean that the investors start making less money. It means that business creates strategies where the customers are getting better prices and higher quality, the employees are getting higher pay and better benefits, suppliers are getting better deals and investors are making higher profits. Profits aren’t evil. Profits are good. Profits are what funds progress in our society. So taking away the profits and redistributing them is win-lose, a zero-sum game.”
Or take this quote from Marc Benioff, CEO of Salesforce, in being criticized for layoffs during the pandemic: “We have to be able to grow and make change, or we cannot achieve our goals, which is to become a larger, much more successful company for our customers, our shareholders and also, yes, our stakeholders,” Mr. Benioff said. (Note: There’s more context needed to understand the decision about the layoffs, which isn’t a focus for me here. His point is that the layoffs are about righting the organization based on focus to allow them to continue to grow and hire elsewhere in the organization, with some employees being hired back into new roles.
There are good examples of companies that have managed with a multi-stakeholder view and done so successfully.
Johnson & Johnson, for example, was very clear about how it was going to make decisions when faced with the Tylenol scare back in 1982. The company’s credo guided its leaders with the primary focus being customers: “We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers, and all others who use our products and services.” It led to the company’s decision to do the right thing and pull product from the shelf despite the $100 million cost. J&J and Tylenol earned a lot of trust in doing so.
Howard Schultz, the Founder and now emeritus chairman of Starbucks, has said about the company: “The ethos fueling such efforts—that companies have a responsibility to enhance the societies in which they flourish—was integral to Starbucks’ ability to employ great people and attract customers, which in turn drove a 21,826% return to shareholders between 1992 and 2018, the year I stepped down as executive chairman.”
Referencing Bill George again, former CEO of Medtronic:
“However, the notion that these two models are opposed is fundamentally flawed. There is no basic conflict between serving your stakeholders and serving your shareholders, who are of course one of your stakeholders…. By continuing to invest in employees and customers in good economic times and bad, companies are able to increase their shareholder value for the long term. That’s why companies like Johnson & Johnson, Walmart, Procter & Gamble, and my former company, Medtronic, have performed so well in the 50 years since Mr. Friedman’s essay was published, whereas those that focused on maximizing short-term shareholder value like Sears and Kodak have withered and are near death.”
One could conclude that companies have been practicing stakeholder capitalism all along.
It’s just a matter of how many of them are truly trying to do good by all stakeholders. And that brings us back to where we started, perhaps some leaders just can’t handle the complexity of what’s required. And such companies, thus, may not deliver long-term shareholder return.
To be sure, running a company with a deliberate focus on considering multiple stakeholders is more complex.
But is complexity alone a reason not to try? Apparently in the past, that was the case. In this article, Steve Denning shares that Stakeholder Capitalism isn’t new and that the reason it was pushed aside to focus solely on shareholders was because it was difficult to manage to multiple stakeholders. I’ve seen in organizations that try to lead by purpose or to consider many stakeholders that there are often few internal guides that help leaders and employees make decisions to balance the complexity of meeting all constituents’ needs.
Most humans can’t handle complexity and nuance.
So leaders would be well served to have a clearer articulation of what it means to run a stakeholder-driven business and to help employees understand how that shows up in decision making and governance. Some employees need help understanding the fundamentals of business, that profits are required to even be in a position to do good. If a business can’t create a product customers will buy, it doesn’t have a business. If a business can’t create those products in a profitable, sustainable manner, it can’t hire employees. These fundamental understanding explained to an employee base would have helped such companies as Everlane and Airbnb that were called to the mat during the pandemic for laying off workers and being viewed as insincere in their cultural claims of being driven by good or being family-oriented.
Let’s remember, companies are for profit, not not-for-profit. But that doesn’t mean they should be driven by a sole doctrine of profit at all costs and “greed is good.”
As many of these business leaders who have done it successfully suggest, managing to all stakeholders is what keeps companies healthy and thriving for the long-term. Stakeholder capitalism seems to be a legitimate and perhaps the right path. Instead of saying it’s just too complex, leaders need to embrace its complexity, while providing the tools to help their organizations make decisions that balance the needs of all stakeholders.
Let me know what you think about this. I’d love to hear! Share here.
Or, if you have worked at a company where you had a good model for making these decisions, I’d love to speak with you and hear what worked.
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