Is Your Business Ready For Stakeholder Capitalism?

As many businesses continue to adapt to the impacts of the coronavirus by requiring employees and customers to wear masks, social distance, or even remain closed, there is another, less visible business trend on the rise—stakeholder management. While we can’t see stakeholder management the same way we can see the masks on peoples faces, it is, nonetheless, a growing part of the fabric of our economy and one that offers the promise of positive, lasting change.

Over the past several months, the coronavirus and the resurgent racial justice movement have spotlighted inequalities perpetuated by our economy and society. Many of these inequalities are tied to the economic belief that a company’s only responsibility is to maximize profits for shareholders. But this notion has come under increased scrutiny by consumers, workers and members of the public at large.

Among the businesses addressing societal and environmental issues through effective stakeholder management are Certified B Corporations. Some notable examples include direct brand activism, such as Ben & Jerry’s calls to eradicate White Supremacy, and others involve mission-aligned philanthropic efforts, like Allbirds donating more than $500,000 worth of shoes to health care workers. And while these efforts relate to recent events and public efforts, most of the work of stakeholder governance happens inside a business—through its policies, practices, and inclusive consideration of multiple perspectives and impacts in the decision-making process. Although they vary in the goods and services they provide, B Corps are all for-profit companies that have had their social and environmental impacts verified by a third party—the nonprofit B Lab.

Stakeholder capitalism requires a fundamental change within a corporation’s governance and operations DNA, which goes beyond public statements and charitable donations. Unless done authentically, modern “call out” culture will penalize impact-washing efforts. To ensure your business is ready for this change and gets it right, read examples and research from B Corps who have been operating with stakeholder governance models for more than a decade. Get started with the ideas presented below, based on research and interviews with various company leaders in the B Corp community.

Stakeholder Management: What is it and why is it important?

Stakeholders are the people, organizations, the natural environment and the broader communities that influence or are affected by a business and its operations. A stakeholder approach to strategic management views the long-term success of a company as a function of its relationships with its stakeholders, including employees, consumers, governments, investors, suppliers, and communities. In this view, the ultimate purpose of the firm is to create and deliver welfare or value to all of its stakeholders, and the achievement of this purpose depends on the cooperation and support of these stakeholders, who also supply critical resources to the firm.

Typically, individual stakeholders may obtain three types of benefits from companies: functional, psychosocial, and “desirable end-states,” based on individuals’ values. Functional benefits refer to tangible benefits that individuals gain from a company’s policies or activities. Psychosocial benefits occur as the result of functional benefits and/or the stakeholder’s perceptions of and involvement in the firm’s activities. When these benefits coincide, employees achieve desirable end-states, in which they feel their work at the company is upholding their beliefs and values.

A company benefits if its relationships are built on trust and commitment. Employees that are committed to their places of work will more fully devote themselves to their job. Consumers who trust that a company is operating ethically will reward that company with repeat business and by recommending it to others.

How the B Corp Movement Enables Stakeholder Management

Two fundamental innovations from the B Corp movement – the benefit corporation (a new legal business classification) and the B Impact Assessment (BIA) – can help firms adopt stakeholder governance in a substantive and accountable way.

Benefit Corporations

The benefit corporation is a new corporate form that recognizes a company’s commitment to creating a material, positive impact on society and the environment, in addition to being financially profitable. Registered benefit corporation governance not only permits and requires entrepreneurs to take additional stakeholders’ interests in addition to shareholders’ interests into account, but also offers protection to founders concerned that taking in outside capital could lead their companies to “drift” away from their social missions.

B Corps register as benefit corporations if that corporate structure is available where they are incorporated. This includes well-known companies like Kickstarter, King Arthur Flour, Laureate Education, Patagonia, and Plum Organics. Overall, more than 10,000 U.S. companies have already incorporated as benefit corporations.

B Impact Assessment

In order to achieve certification, B Corps have to take the B Impact Assessment (BIA) developed by the nonprofit B Lab to measure the social and environmental impact of their entire operations across five categories: governance, workers, community, environment and consumers. To qualify as a B Corp, a company must achieve a verified minimum score of 80 points and share its B Impact Reports to the public. The BIA is free and tailored to company size, industry, and geography so every company can use it. Companies can use the BIA to assess and manage their operations as they pertain to specific stakeholders.

The Growing Movement

As more companies integrate stakeholder management into their operations, in part by pursuing B Corp certification, pressure will no doubt continue to build for the companies that are trying to fight the changing tide.

To continue learning more, see the report on additional examples of B Corps putting stakeholder governance in action, in particular how companies can productively engage with each of the five primary stakeholders — employees, consumers, communities, suppliers, and investors — and further, how B Corps manage to create value for that stakeholder and correspondingly benefit from serving that stakeholder. It is important to note that these strategies can apply to all companies.