The recent frequency of climate change news dominating the media has resulted in much criticism of capitalism. One of the main criticisms revolves around prioritizing economic growth over the environment and for contributing to climate change and other forms of pollution (i.e. negative externalities not priced in). The history of stakeholder capitalism can be traced back to the early 20th century, with the concept being first suggested by economist John Kenneth Galbraith in the 1950s, a Canadian economist who argued that corporations should be accountable not just to their shareholders, but to all stakeholders, including employees, customers, suppliers, and the community at large. This concept was popularised by management theorist Peter Drucker in the 1970s, and later by R. Edward Freeman in 1984 in the book "Strategic Management: A Stakeholder Approach”. The idea behind stakeholder capitalism is that companies should consider the interests of all stakeholders, not only shareholders, in order to achieve long-term success.
Stakeholder capitalism is much more important in modern times because it can create a more equitable and sustainable economy by prioritizing the interests of all stakeholders. By creating value for a wider range of people and promoting social and environmental sustainability, companies can contribute to a more just and sustainable society. It is generally noted that it is one of the ways in which we can adapt capitalism for the modern age where we are facing the biggest challenges of our lifetime – climate change and biodiversity loss.
These are five ways that stakeholder capitalism can enhance environmental, social, and governance (ESG) and sustainability:
- Encouraging sustainable practices and reducing environmental impact: Stakeholder capitalism can encourage companies to adopt more sustainable practices and reduce their environmental impact by prioritizing the long-term interests of all stakeholders, including future generations and the environment. For example, a study by the Carbon Trust found that companies with a strong focus on sustainability outperformed their peers on environmental, social, and governance (ESG) metrics by 2.5%.
- Improving employee well-being and promoting fair labour practices: Pivoting towards stakeholder capitalism can improve employee well-being and promote fair labour practices by prioritizing the interests of employees. By doing so, companies can improve worker satisfaction, reduce turnover, and increase productivity. A study by the Harvard Business Review (HBR) found that companies with high levels of employee engagement outperformed their peers by 147% in earnings per share. In a world obsessed with efficiency and profits, this is also critical for sustainability.
- Encouraging responsible and transparent governance: This concept can encourage companies to engage in responsible and transparent governance by prioritizing the interests of all stakeholders. By doing so, companies enhance their reputation, attract more responsible investors, and increase trust and confidence among stakeholders. A study by the Harvard Business Review (HBR) found that companies with high levels of corporate social responsibility (CSR) outperformed their peers by 42% in return on assets. This effectively overturns perception that sustainable finance/investment is not profitable.
- Supporting local communities and promoting economic development: To support local communities and promote economic development by prioritising the interests of local communities. By doing so, companies can create jobs, promote social and economic inclusion, and support local economic development. A study by the World Bank found that companies with a strong focus on local community development outperformed their peers by 20% in return on equity. This development multiplier should not be overlooked.
- Encouraging long-term thinking and responsible decision-making: Stakeholder capitalism can encourage companies in ASEAN and beyond to consider the long-term impacts of their actions on all stakeholders by prioritizing the long-term interests of all stakeholders. Companies can make more responsible and sustainable decisions and create long-term value for all stakeholders. A study by the MIT Sloan Management Review found that companies with a strong focus on long-term value creation outperformed their peers by 66% in market capitalization. This statistic is important to encourage long-term, impact investing but also raise the question of long-term leadership in corporations.
Some key leaders in ASEAN have expressed support for stakeholder capitalism. For example, President of the Philippines, Rodrigo Duterte, said "Stakeholder capitalism ensures that the benefits of economic growth are shared by all stakeholders and not just shareholders." In the same spirit, the Prime Minister of Singapore, Lee Hsien Loong, has stated that "Stakeholder capitalism is crucial for Singapore's long-term economic growth."
While the drivers can be seen as main advantages of stakeholder capitalism, there are also some known disadvantages/criticisms of stakeholder capitalism. I would include some personal justification of how they can be nullified or overcome. They include:
- Potential for reduced profitability in the short-term: Companies that prioritize the interests of all stakeholders may face short-term trade-offs in terms of profitability. Corporations will see that pivoting towards sustainability/circularity will provide additional security for resources and future cost savings to ensure long-term profitability with better environmental protection.
- Increased regulatory burdens and compliance costs: Corporations may face increased regulatory burdens and compliance costs as they attempt to prioritize the interests of all stakeholders. The burden can be eliminated/reduced by collaboration within regional bodies such as ASEAN to create a common taxonomy in sustainable finance and other regulatory framework sharing.
- Potential for decreased competitiveness in the global market: Organisations that prioritize the interests of all stakeholders may face increased competition from companies that prioritize shareholder interests. This is a mindset change that needs to occur when corporations view the environment and society with greater reverence that is reflected by changing investment and consumption behaviours.
- Potential for increased conflict between stakeholders: Companies may face increased conflict between different stakeholders as they attempt to balance competing interests. This is a direct result of the increased complexity of stakeholder management that will occur with or without stakeholder capitalism.
- Complexity in balancing the interests of different stakeholders: Enterprises may face challenges in balancing the interests of different stakeholders in a way that is fair and sustainable. A positive approach towards complexity will create deeper engagements and this cannot be avoided as challenges in sustainability are always multifaceted.
Another movement that has gained momentum over the years is the concept of degrowth. Stakeholder capitalism is similar to degrowth in that both prioritize sustainability and social equity over economic growth. However, stakeholder capitalism is focused on creating a more sustainable and equitable economy within the current growth-oriented system, while degrowth calls for a reduction/alignment in overall economic activity in order to achieve sustainability and social equity.
Drivers of stakeholder capitalism in ASEAN include growing awareness of social and environmental issues, pressure from stakeholders such as customers and employees for companies to adopt more sustainable practices, and increasing competition for socially responsible investments. Also, the increasing focus on responsible investing and ESG by investors is a key driver for stakeholder capitalism in ASEAN.
Some leading companies of stakeholder capitalism in ASEAN include:
- DBS Bank: DBS Bank is a leading financial institution in ASEAN and has a strong focus on sustainable banking. The bank has set several sustainability targets, DBS has concluded over 100 sustainable financing deals worth over SG$17b in 2018. The bank has also raised its sustainable finance target to SG$50b by 2024 (from an earlier target of S$20b).
- Ayala Corporation: Ayala Corporation is one of the largest diversified conglomerates in the Philippines, and has a strong focus on sustainability and stakeholder capitalism. The company has set several sustainability targets, such as achieving net zero greenhouse gas emissions by 2050. Ayala also has a strong focus on promoting social inclusion and has launched a range of social impact projects to support marginalized communities in the Philippines.
- CIMB Group: CIMB Group is one of the leading financial institutions in ASEAN and has a strong focus on sustainable banking. CIMB doubled its sustainable finance target to RM60b by 2024 (after achieving RM30b two years ahead of schedule in 2022) in line with its ambition to be an ASEAN sustainable leader.
In terms of the impact on sustainability, stakeholder capitalism can lead to a reduction in environmental impacts and a more sustainable use of resources. By prioritizing the long-term interests of all stakeholders, companies are more likely to consider the environmental and social impacts of their actions, leading to more sustainable business practices. Additionally, by promoting fair labour practices and supporting local communities, stakeholder capitalism can contribute to greater social sustainability and economic development in ASEAN.
It is important to note that stakeholder capitalism is not seen as a precursor to degrowth, as it is a way of achieving sustainable growth within the current economic system. It is a way of organizing economic activities to make them more inclusive, equitable, and sustainable by considering the interests of all stakeholders. However, it's not the only solution to achieve a sustainable future and other policies may have to be implemented as well. I believe the concept of degrowth can happen in the near future as consumers rationalise their demand to be more in-line with the environment’s regenerative capabilities. Increased knowledge of circularity and biodiversity is critical to pivoting consumer behaviour towards more informed choices.
The future of stakeholder capitalism in ASEAN is likely to see an increased focus on sustainability and ESG. As investors become more aware of the need for sustainable and socially responsible investing, companies in ASEAN will be under pressure to adopt stakeholder capitalism as a way of demonstrating their commitment to sustainability. Additionally, as consumers become more aware of social and environmental issues and demand more sustainable products and services, companies will have an increasing financial incentive to adopt stakeholder capitalism. When companies adopt stakeholder capitalism, it has the potential to drive long-term economic growth that is inclusive, sustainable, and equitable for all stakeholders.
Whether stakeholder capitalism is a “solution” is irrelevant in my opinion, but the realisation that corporations need to have a radical mindset change is critical. We are in need of a reexamination of our value chains and our processes to create better alignment towards our economic processes so that we can continue our activities with minimal disruptions to the regenerative properties of our environment.
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