A Report on Stakeholder Capitalism: Global Momentum in the Drive for Systemic Economic Change

September 18, 2020

Stakeholder Governance has Gained Wide Validation — It’s Time to Make the Shift From Shareholder Primacy

In 1970, American economist Milton Friedman published what is often referred to as the seminal and definitive essay where he declared the purpose of business and its role in society as limited exclusively to increasing earnings for directors, investors, and especially, for public companies, shareholders. This maxim is termed shareholder primacy. For the past 50 years, businesses have been bound to maximize profits, meaning business directors at these companies are not incentivized or allowed — at risk of legal action in some instances — to make decisions that take into account the environment, the financial well-being of employees, or the health of the communities they operate in unless that choice is the most profitable choice.

A growing movement of people, including business leaders, distinguished academic researchers, policymakers, lawyers and more, recognizes this system cannot continue its never-ending need for growth and survive into the long term. These movement leaders also recognize that our growing global inequities are exacerbated by the current systemic commitment to shareholder primacy. A new economy is being built, one where businesses prioritize and consider their impact on all the stakeholders — including communities, workers, customers, and the environment.

As leaders move toward stakeholder capitalism, the community of Certified B Corporations has received attention as a model for its reliance on an independent assessment and adoption of a stakeholder governance framework for businesses that allows considerations beyond shareholders.

B Corps Are a Model for the Shift to Stakeholder Capitalism

The B Impact Assessment is used by B Corps to measure and manage impact on their stakeholders as rigorously as they measure and manage their profits, and the benefit corporation governance structure builds a stakeholder framework into the businesses’ operating DNA. By relying on a third-party reviewed assessment, B Corps access a database of best practices, set a baseline to work from, establish goals to work toward, and benchmark their progress year over year. The independent review and the legal governance structure set B Corps apart, and these features have gained widespread recognition from respected voices as well as traction in the marketplace.

“Now, in 2020, with stark predictions of a drop in the U.S. GDP and a dark outlook for small brick-and-mortar retailers across the country, a business approach that includes consideration of all stakeholders alongside profits is more important than ever. But many businesses have a poor understanding and limited history of incorporating stakeholders in their practices. … The B Corp movement provides a new model of businesses that can be accountable and transparent to their stakeholders and uphold high standards for measuring and managing their stakeholder impacts. Such standards are what separates true stakeholder governance from the corporate social responsibility (CSR) initiatives found in many companies, most of which are not an integrated component to the business core.” — Christopher Marquis, Cornell Samuel C. Johnson Professor in Sustainable Global Enterprise and author of Better Business: How the B Corp Movement Is Remaking Capitalism

The stakeholder governance structure that B Corps have adopted and worked to pass throughout the U.S. and around the world was born out of a realization that corporate law simply did not allow for companies to be held accountable for considering the interests of their stakeholders. The realization that corporate law impeded companies like B Corps from having a purpose to create value for all stakeholders, not just shareholders, led B Lab to a highly successful policy initiative to create the benefit corporation statutes. In the last decade, B Lab has succeeded in supporting bipartisan enactment of these statutes in 38 U.S. states and in four other countries. The state of Delaware, the home of U.S. corporate law, recognized the normalization of benefit corporation governance when its governor signed legislation on July 16, 2020, removing the final barriers left to converting from a conventional corporation to a benefit corporation.

This model has proven market potential and uptake, with several highly successful benefit corporation and B Corp IPOs, including Laureate Education and Lemonade, along with the express interest of investors, including BlackRock, in stakeholder governance models as a way to mitigate risk.

For business leaders and investors to best understand what stakeholder governance means and the ways it is already changing our economic systems, B Lab has compiled a new report, “Stakeholder Capitalism: The System Change Our Economy Needs.” This report presents stakeholder governance in action through examples from the community of B Corps along with the outside, validating proof points of this model as a way to build back better.

A Call for Further Action on Systemic Economic Change

The increasing success and traction of stakeholder capitalism still faces large policy and systemic impediments to widespread adoption. The behavior change and culture shift being driven by the B Corp movement will require broader uptake — from consumers, policymakers, and more — to reach the systemic change needed to achieve a just and sustainable economy. B Lab, the community of B Corps, and a host of partners are taking up the broader conversation to address policy change alongside consumer-awareness campaigns to continue the drive toward transparent, authentic stakeholder capitalism. To truly achieve different outcomes, the rules of the game must be changed. In addition to the stakeholder capitalism guide, here are more resources to become an effective changemaker:

 

 

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