Podcast Summary: Is Business Broken?
Episode: Shareholder Primacy vs. Stakeholderism: 5 Years Later (Pt 2)
Release Date: October 24, 2024

Introduction

In the second installment of the panel discussion titled "Shareholder Primacy vs. Stakeholderism: 5 Years Later," hosted by Kurt Nickish from the Questrom School of Business, the conversation delves deeper into the ongoing debate surrounding the role of businesses in society. Building on the first part of the discussion, this episode features distinguished guests: Lynn Payne (Harvard Business School Professor), Om Prakash Bhatt (Former Chair and CEO of the State Bank of India), Anthony Allitt (Former Chair and CEO of Silgan Holdings), and James Orlikoff (President of Orlikoff and Associates, Inc.). The panel explores the progress, challenges, and future directions of stakeholder capitalism five years after the Business Roundtable's pledge to redefine corporate purpose.

Current State of Stakeholder Capitalism

The episode kicks off with Kurt Nickish revisiting the central question: "What's stopping stakeholder capitalism from gaining more momentum?" He points out that despite widespread use of stakeholder language, significant structural changes like bylaw amendments have been minimal.

Lynn Payne on Stakeholder Management vs. Governance

Lynn Payne responds by acknowledging that stakeholder considerations have indeed seeped into management practices. She notes, "I have seen examples of companies starting to be more systematic in how they think about their stakeholders to really do an analysis" (00:05). However, she emphasizes that this incorporation remains a management tool rather than a foundational governance theory. Payne contrasts this with the shareholder value movement, highlighting its clarity and robust theoretical underpinnings, which included agency theory and strategic performance measures. She argues that stakeholder capitalism suffers from a lack of similar clarity and organization, impeding its broader adoption.

Misconceptions About Stakeholder Capitalism

Kurt Nickish probes Payne further, asking about the biggest misconceptions surrounding stakeholder capitalism.

• Critics' Perspective: Payne asserts that critics often view stakeholder capitalism as a distraction from shareholder value, fearing that focusing on stakeholders might dilute shareholder returns. She counters this by suggesting that stakeholder interests are interdependent with shareholder interests, asserting, "if you want to maximize value for your shareholders, you better understand your stakeholders and how they're going to react" (04:39).

• Advocates' Perspective: Conversely, Payne warns advocates against the simplistic belief that stakeholder capitalism can inherently solve complex societal issues like environmental degradation and income inequality. She points out, "it's much more difficult than stakeholder advocates acknowledge to actually align everybody's interests over the long term" (04:39).

Anthony Allitt on Measurability and Public Perception

Anthony Allitt builds on Payne's insights by discussing the challenges in measuring stakeholder value. He notes the inherent negativity associated with stakeholder issues, such as corporate malfeasance and environmental problems, contrasting it with the positive and easily measurable aspects of shareholder value like capital returns. Allitt remarks, "The shareholder value Movement is easily measurable... the stakeholder stuff tends to be born from horror stories" (05:55). He further touches upon how negative events often drive the stakeholder agenda, thereby associating it with notions of greed in corporate behavior.

Impact of Regulatory Changes: Sarbanes-Oxley Act

The conversation shifts to the impact of regulatory frameworks like the Sarbanes-Oxley Act. Allitt explains that this act institutionalized the separation of management from governance, ensuring board independence to foster objective oversight. He contrasts this with the Business Roundtable's efforts, suggesting that stakeholder capitalism has not permeated corporate consciousness to the same extent as Sarbanes-Oxley did. "I don't see the business Roundtable percolating into the consciousness the same way that Sarbanes Oxley did" (07:09).

Challenges Highlighted by Om Prakash Bhatt

Om Prakash Bhatt raises concerns about the feasibility of stakeholder capitalism, particularly regarding measurability and balancing competing interests. He highlights the difficulty in harmonizing diverse stakeholder demands, such as balancing supplier costs with customer interests, and managing internal conflicts among employees. Bhatt states, "You’ve got suppliers who want to get paid more and give you a lot less. That’s not really in your customer's interest" (08:47).

Additionally, Bhatt addresses the politicization of business, pointing out that companies are increasingly expected to take stances on political issues, which can distract from their primary business objectives. He cites Disney as an example where political demands have influenced corporate decision-making. Bhatt emphasizes the complexity of managing political expectations without clear guidelines, stating, "There are some really difficult trade-offs that you have to make from time to time" (09:09).

Diverse Shareholder Expectations

Lynn Payne adds another layer by discussing the diversity within shareholder interests. She muses whether focusing solely on shareholders might mitigate some challenges, as shareholders themselves are increasingly active and expect more from corporate governance. Payne questions if the stakeholder approach is drawing businesses into political arenas more than shareholder demands, noting, "shareholders are the only ones who vote...they have to be on board with this plan" (10:21).

James Orlikoff on Global Progress and Corporate Leadership

James Orlikoff offers a more optimistic perspective, highlighting significant strides made globally in embracing stakeholder principles. He mentions the rise of B Corporations, Unilever's sustainable living plan, and corporate discussions around living wages in India. Orlikoff emphasizes the potential of corporate leaders to address multifaceted challenges like climate change and geopolitical tensions more effectively than transient political structures. He asserts, "business corporates are really very powerful... they're good guys, they are great guys" (12:10).

Orlikoff also introduces the concept of a corporate tipping point, drawing parallels to the societal shift against smoking. He envisions a future where widespread corporate alignment on stakeholder issues could lead to a collective paradigm shift. Conversely, he warns of a pessimistic future marked by geopolitical conflicts and societal polarization, stating, "historians then will look back at this time and say this was the time of the third World War" (19:35).

Strategies for Moving Forward

As the discussion progresses towards actionable insights, Lynn Payne emphasizes the necessity for firms to clearly define their stakeholder strategies. She categorizes stakeholder capitalism into four distinct interpretations:

1. Instrumental Stakeholderism: Focusing on stakeholders to maximize shareholder value.
2. Classic Stakeholderism: Fulfilling ethical and legal obligations to stakeholders.
3. Beneficial Stakeholderism: Actively improving the welfare of all stakeholders.
4. Structural Stakeholderism: Granting stakeholders actual power within corporate governance structures.

Payne urges companies to assess who their stakeholders are, define their obligations, and engage with shareholders to align these strategies with their expectations. She notes, "if you could carve out a little time, get clarity on this, and think about what we do owe our stakeholders, including society" (20:22).

Om Prakash Bhatt reinforces the importance of long-term focus and societal collaboration, suggesting the creation of markets like environmental trade credits to harness business efficacy for societal good. He advises, "create markets that do... they're good for society" (20:22).

Conclusion and Future Outlook

The panel closes on a note of cautious optimism. Despite the challenges and varying perspectives, there is a shared belief in the potential for stakeholder capitalism to evolve and become more integrated into corporate governance. The guests advocate for continued dialogue, strategic clarity, and collaborative efforts between businesses and society to navigate the complexities of modern capitalism.

Kurt Nickish wraps up the episode by acknowledging the depth of the discussion and teasing the next episode's focus on misinformation and social media regulation, promising further exploration of business and market challenges.

Notable Quotes

• Lynn Payne:
  "Shareholder value was very clear. There was an underlying theory, agency theory, that explained. 1, 2, 3, 4, 5." (00:05)
  "if you want to maximize value for your shareholders, you better understand your stakeholders" (04:39)
  "We have to find ways to encourage that because I think... corporates can do things." (12:10)

• Anthony Allitt:
  "The shareholder value Movement is easily measurable... the stakeholder stuff tends to be born from horror stories" (05:55)
  "I hope that the independence of governance and management continues." (15:31)

• Om Prakash Bhatt:
  "You’ve got suppliers who want to get paid a lot more and give you a lot less. That’s not really in your customer's interest." (08:47)
  "create markets that do... they're good for society" (20:22)

• James Orlikoff:
  "There has been some progress, we've gone back, we've found new problems." (12:10)
  "It is creeping change. I personally am not happy about it, but I feel that it is possible that a tipping point will come" (19:35)

Final Thoughts

This episode of Is Business Broken? offers a comprehensive examination of the state of stakeholder capitalism five years after the Business Roundtable's pledge. The panelists provide a balanced mix of optimism and realism, acknowledging the strides made while candidly addressing the formidable obstacles that remain. The discussion underscores the need for clear strategic definitions, robust engagement with shareholders, and innovative solutions to harmonize diverse stakeholder interests. As businesses navigate this evolving landscape, the insights shared by Payne, Bhatt, Allitt, and Orlikoff serve as valuable guidance for aligning corporate actions with societal needs.