Stakeholder Capitalism is not new: but is this management theory (popular in the 1950s and 1960s) poised to make a comeback as the world seeks to recover from the Covid-19 crisis?
What is Stakeholder Capitalism?
Investopedia refers to it as “a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders and local communities. Under this system, a company's purpose is to create long-term value and not to maximize profits and enhance shareholder value at the cost of other stakeholder groups.”
Business leaders globally are taking notice. In response to growing concern about the climate crisis and increasing social challenges (such as inequality), the World Economic Forum (WEF) in Davos in January this year, updated its Davos Manifesto for the first time since 1973 to more clearly state that businesses must serve not only their shareholders, but all their stakeholders. This is embodied in the Davos Manifesto’s opening statement that "The purpose of a company is to engage all its stakeholders in shared and sustained value creation" and it makes it clear (amongst other things) that companies should act as stewards of the environment, have zero tolerance for corruption, respect human rights and pay their fair share of taxes.
Components for change
Whilst supporters of Stakeholder Capitalism believe that serving the interests of all stakeholders in society, as opposed to only shareholders, is vital for the long term economic success of businesses, it seems that many organisations may only pay lip service to the concept. Proponents of Stakeholder Capitalism argue that changes to law are key to ensuring that businesses properly embrace the concept and introduce it into their decision making processes.
It may therefore come as a surprise to many to learn that the concept of taking stakeholders’ interests into account in board decisions has been codified in UK companies’ legislation since October 2007, when the relevant provisions of the Companies Act 2006 (CA 2006) came into force.
The CA 2006 sought to codify directors’ general duties in statute for the first time. One of those general duties is the duty to act in good faith to promote the success of the company for the benefit of its members as a whole (section 172 CA 2006).
Under section 172(1) CA 2006, a director is required, when acting in the way he/she considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole, to have regard to the following six, non-exhaustive, statutory factors:
- the likely consequences of any decision in the long-term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
Whilst many of these factors embody the concepts of Stakeholder Capitalism, the impact of section 172 CA 2006 has probably not been as significant as the draughtsmen might have anticipated.
Very quickly (within it seemed a matter of weeks), in favour of more succinct drafting, standard practice changed from setting out each of the six statutory factors in full in draft board minutes prepared for clients, to including a much shorter statement that the directors have acted in a way that they consider, “in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, having regard (amongst other matters) to the factors set out in section 172 CA 2006.” Directors may not therefore be giving full consideration to such factors.
The “New New Normal”?
Much has changed since the start of the year. The Covid-19 crisis and lockdown has given many people and businesses a chance to take time to reflect and it seems that Stakeholder Capitalism is gaining further traction as organisations make plans for recovery and their long term future. In fact, some economists have pointed towards Stakeholder Capitalism being a fundamental tenet of worldwide social and economic recovery. Klaus Schwab, the Founder and Executive Chairman of WEF, wrote in June 2020 that, “To achieve a better outcome, the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions. Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a “Great Reset” of capitalism.”
In UK companies’ legislation there is already a statutory obligation to take account of factors which are fundamental to the theories of Stakeholder Capitalism. Is now the time to again set out the section 172 CA 2006 factors in full in board minutes, giving companies’ directors the opportunity to properly consider, and record the anticipated impact on, stakeholder interests when making significant decisions for their businesses?