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Feb 27, 2023

Putting stakeholder theory into IR practice

Getting to the heart of stakeholder theory and what it means for ESG and investor engagements

Klaus Schwab, who created the World Economic Forum (WEF) and its annual event at Davos, says: ‘The company is not just an economic unit: it’s a social organism, which has to play its role inside society.’ Schwab firmly believes stakeholders are crucial to keeping the economy and our planet healthy. For decades, he has encouraged CEOs to look for ways to support employees and communities and protect the Earth – not just serve shareholders by increasing profit year after year.

This philosophy is not embraced by everyone and, in recent months, there has been a backlash against stakeholder capitalism, which is linked to corporate ESG. In the run-up to this year’s Davos event, journalists questioned Schwab about the uncertain future of stakeholder capitalism. On the other side of the Atlantic, conservative political leaders have attacked Larry Fink, chairman and CEO of BlackRock, who serves on the WEF board and attends Davos, for investing too heavily in ESG stocks. They have threatened to dismiss BlackRock as fund manager of several large public pension plans.

Klaus Schwab - World Economic Forum
Klaus Schwab - World Economic Forum

Yet neither man seems ready to completely back down, and nor do those who joined them at the 2023 Davos event. Indeed, many of the actions that came out of the meeting focus on ESG projects that will need the support of all corporate stakeholders, not just shareholders.

To understand stakeholder capitalism and how it’s become such a buzzword, it’s important to understand stakeholder theory, a philosophy first espoused by business school academics. Let’s take a closer look at this concept, where it came from, what it means and where it might lead us.

What is stakeholder theory?

Stakeholder theory, like stakeholder capitalism, argues that a firm should create value for all stakeholders, not just shareholders. Schwab, an engineer and economist, started talking about his brand of the concept in the 1970s. But the idea took off in a global sense in 1984 when American academic Ed Freeman wrote Strategic management: A stakeholder approach.  

Although stakeholder theory started as a strategizing tool managers could use to ride out turbulent times, it quickly became associated with business ethics and, more specifically, with the realization that managers hold different ethical views about what’s best for people, communities and the environment – views they should not leave at home when they go to work if they want to be successful.

It may seem odd to associate business management so closely with ethics but stakeholder theorists are pragmatic about it. In their opinion, ethics are about how diverse humans can and should live and work together. If you look at stakeholder theory through this lens, it’s clear that ethics must be at the heart of business because without it we can’t build fair and durable relationships. And if we don’t have dependable partners, we most certainly won’t be able to create value for a business and its brand.

Is stakeholder theory at odds with shareholder theory?

Not at all. A strategy that puts stakeholders first offers new possibilities to discover opportunities for value creation and improve the competitiveness of a business. To understand how this works, we need to look at a company’s full value.

Value is more than just financial, and stakeholder interests are often multifaceted. Employees need a good salary and hope for a fulfilling job that makes them proud. Customers want to pay reasonable prices but even more critical for them is that the things they buy help them live the life they want. You get the idea.

Even investors must look beyond the financial value of a company. Of course, they want the highest return possible but the risk they are willing to take depends on the non-financial personal goals they intend to realize with their investments and the specific timeline for these goals. This influences the returns they find acceptable and will impact their investment decisions.

Putting stakeholder theory into IR practice

Companies thrive when they create as much value as possible for all stakeholders involved and when profits are seen as the outcome of the value-creation process. Shareholder value and profit-maximizing views run the risk of ignoring this logic and can be self-defeating. More concretely, one of the risks of an overly financialized view of business is that managers perceive conflicting stakeholder interests as trade-offs rather than as opportunities to find better solutions to create more value for all. To compete, businesses must make a bigger pie, not find ways to share it differently.

Often stakeholder interests can move in the same direction: happy employees make happy customers, for instance, and this increases opportunities to create value for a company. But even in the case of conflicting stakeholder interests – such as when environmental actions threaten to reduce shareholder dividends – trade-offs should be avoided.

The question is how to create more value for everyone involved. CEOs and management teams often develop innovations that boost competitiveness when they focus on everyone involved and not a select few. An excellent example is when Shell figured out that it could sell the CO2 it emits in its installations in Rotterdam to neighboring greenhouse farmers who use it to make their crops grow better.

What does all this mean for IROs?

More and more, investors are asking investor relations professionals to give them detailed reports regarding the ESG actions of the company they represent. Sometimes, investors want proof of a more significant corporate commitment to cleaning the environment or tackling social challenges. Other times, investors lash out at a company for doing too much for a social cause or climate change. Either way, you and your IR colleagues may find yourselves in the hot seat.

If you decide to dig into stakeholder theory, you can respond to negative feedback and even attacks by simply connecting ESG actions to specific stakeholders and how those groups are critical to the long-term financial success of your company. This will help shareholders see that ESG topics that are vital for specific stakeholders are also vital for them.

Alan Jope - Unilever
Alan Jope - Unilever

For example, in 2019, Unilever, a mega-global brand, announced that sub-brands Vaseline and Dove, among other purpose-driven brands held by the company, grew 69 percent faster than non-purpose-driven brands. ‘We believe the evidence is clear and compelling that brands with purpose grow,’ said CEO Alan Jope at the time. ‘In fact, we believe this so strongly we are prepared to commit that in the future, every Unilever brand will be a brand with purpose.’

Whatever your company’s industry, stakeholder theory is a concept that can be used to tackle thorny communication issues. It is a concept everyone can understand and that, in the end, should make sense to most shareholders.

Bastiaan van der Linden is associate professor of CSR at EDHEC Business School and director of the MSc in global and sustainable business

Bastiaan van der Linden

Bastiaan van der Linden is Associate Professor of Corporate Social Responsibility at EDHEC Business School and Director of the MSc in Global and Sustainable Business. Bastiaan has experience in consulting, academic research, and business education...
Bastiaan van der Linden is Associate Professor of Corporate Social Responsibility