Why Stakeholder Capitalism Will Fail

By Steve Denning

“We should seize this moment to ensure that stakeholder capitalism remains the new dominant model.” - Klaus Schwab, Founder and Executive Chairman, World Economic Forum

Stakeholder capitalism—the notion that a firm focuses on meeting the needs of all its stakeholders—is now on almost every top executive’s lips. After decades of declaring fealty to the goal of maximizing shareholder value (MSV), which in 2009 Jack Welch called “the dumbest idea in the world”— big business now admits that MSV has failed and claims to be embracing stakeholder capitalism.

The admission comes as we enter a new decade and big business finds itself under attack from all sides: it has been caught single-mindedly shoveling money to its shareholders and its executives at the expense of customers, employees, the environment, and society as a whole. Will this new gambit work?  

Stakeholder Capitalism

Stakeholder capitalism is now everywhere. It’s the theme of the Davos Manifesto 2020 announced last month by Klaus Schwab, Founder and Executive Chairman in preparation for the World Economic Forum, where the world’s top business executives will meet later this month in Davos, Switzerland.

It’s also the new mantra of the Business Round Table as announced in August 2019 and endorsed almost 200 CEOs of the largest corporations. “The statement rejects the whole idea of ‘maximizing’ one value to the exclusion of all the others,” as Steve Pearlstein in the Washington Post notes. “Instead, it acknowledges the need for balance and compromise in serving all of a company’s stakeholders.”

Yet if big business were to implement stakeholder capitalism, it seems likely to fail for the same reason that it failed in the 20th Century. Its fatal flaw was that it offers unviable guidance on what is “true north” for a corporation. When many big firms attempted to implement it for several decades, the perpetual need throughout the organization to keep balancing conflicting claims among stakeholders led not only led to mass confusion and garbage can organizations. It eventually provoked a resort to MSV, the very thing for which big business is now being assailed.

Yet if big business were to implement stakeholder capitalism, it seems likely to fail for the same reason that it failed in the 20th Century. Its fatal flaw was that it offers unviable guidance on what is “true north” for a corporation. When many big firms attempted to implement it for several decades, the perpetual need throughout the organization to keep balancing conflicting claims among stakeholders led not only led to mass confusion and garbage can organizations. It eventually provoked a resort to MSV, the very thing for which big business is now being assailed.

Stakeholder Capitalism As A PR Front

What’s going on here? Cynics have concluded that stakeholder capitalism is nothing more an elaborate public relations stunt espoused by big business to get through the current PR crisis. Business, they say, will go on doing what it has done since time immemorial: making money for itself.

The attraction of stakeholder capitalism as a public stance is that it doesn’t commit big business to do anything in particular. Firms can go on privately shoveling money to their shareholders and executives, while maintaining a public front of exquisite social sensitivity and exemplary altruism.

Yet there is at least one grain of truth in stakeholder capitalism. Big business must ultimately pay attention to all the stakeholders, including shareholders. If big business consistently shortchanges stakeholders other than shareholders and executives, the stock market may soar in the short term but the decades-long diversion of business income to shareholders has resulted stagnating incomes for most of the population. As inequality increases, populist leaders emerge with the risk that that the political consensus holding capitalism in place will unravel.

The True North Of A Corporation: Creating Customers

In announcing the Davos Manifesto 2020, the chair of the World Economic Form, Klaus Schwab argues that there are only three alternatives: shareholder capitalism, state capitalism and stakeholder capitalism. Both shareholder capitalism and state capitalism are now both political poison. So, Schwab argues, the only alternative is stakeholder capitalism. QED.

In opting for stakeholder capitalism, Schwab missed a better option: customer capitalism. The most successful firms today are those that pursue what Peter Drucker long ago saw to be “true North” for a corporation: “there is only one valid purpose of a corporation: to create a customer”. Generating fresh value for customers is the foundation the basis for generating benefits for all the stakeholders. To be sure, Drucker also saw that there were many other things firms needed to take care of including safety, integrity, legality, sustainability, and inspiring workplaces, but the overriding goal, to which all the forces of a firm must support for the firm to survive, is to create customers.

Why Big Business Is Under Attack

How did the world end up in this mess? Big business is in political hot water because, for the last half century, it has been pursuing MSV, the idea that the sole purpose of a firm is to make money for itself and its shareholders, at the expense of employees and the rest of society.

The origin of MSV is often seen as the New York Times article in September 1970 by the future winner of the Nobel Prize in Economics, Milton Friedman. Any business executives who pursued a goal other than making money were, Friedman said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.”

It made sense to focus on a single goal since mathematically you can only maximize one variable. The trouble was: Friedman chose the wrong single variable—shareholders.

When the firm priorities shareholder value above all, everyone else—customers, eimployess, suppliers, society—tends to get shortchanged. It thus became apparent over several decades what should have been obvious from the start: shareholder capitalism is an unacceptable form of institutionalized selfishness.

One might think that the intellectual nonsense of MSV would have been quickly recognized as absurd. In fact, it was denounced at the time by Professor Joseph L. Bower of Harvard Business School as “pernicious nonsense.”

But “pernicious nonsense” when written by the leader of the Chicago school of economics and a front-runner for the Nobel Prize in Economics that was to come in 1976, turned into the new gospel truth of business. MSV steadily gained momentum towards the end of the 20th Century and became the gospel of business for the first two decades of the 20th Century.

While MSV delivered a gargantuan transfer of assets to the existing owners of shares, it didn’t deliver for the rest of society. The best analysts could see that MSV was a toxic mix of soaring short-term corporate profits, astronomic executive pay, along with stagnant median incomes, growing inequality, periodic massive financial crashes, declining corporate life expectancy, slowing productivity, declining rates of return on assets and overall, a widening distrust in business.

In the last few years, awareness of these issues has spread from technical specialists to the political sphere. Since 2015, Democratic Senators, including Minority Leader Chuck Scumer and Senator Tammy Baldwin have been pushing the Securities & Exchange Commission to do something about MSV.

In 2019, Republicans joined in. In May 2019, the Republican-led Senate Committee on Small Business and Entrepreneurship, faulted CEOs for focusing too much on the next quarter and not enough on the next generation. “many business leaders to care more about returns for shareholders than the people who work for them.”

The Origins—and Return—Of Stakeholder Capitalism

As the critique of big business enters the political sphere, corporate leaders are now grasping for alternatives to MSV. The notion that firms are “serving the needs of all the stakeholders” has come to be seen as a safe haven for firms under attack.

Stakeholder capitalism is not a new idea. It was launched by the 1932 management classic, The Modern Corporation, and Private Property by Adolf A. Berle and Gardiner C. Means. The idea was that public firms should have professional managers who would balance the claims of different stakeholders, taking into account public policy. For the next 40 years, it was the general approach of big business in the U.S.

What stakeholder capitalism overlooked was that big firms are comprise coalitions of participants and groupings whose goals may and often do conflict. Any goals and policies that the leadership may formally espouse are constrained by past behavior, decisions, policies, values, attitudes, rivalries, and differing objectives of individuals and different divisions and subsets of the organization, as well as differing interpretations as to how long and how strongly any new goals and strategies will be retained. External forces like the stock market, the shareholders, regulators, politicians, and the press also bear down on the firm. Actual decisions are compromises among these different and often conflicting elements.

“Stakeholder capitalism” with its call to balance the claims of different stakeholders in any particular decision was a call to allow innumerable decisions in this morass of differing viewpoints, values, attitudes and ambitions, to be made by different people at different levels o the organization. In the absence of clear prioritization among different stakeholders, the result was what management theorists called "garbage can organizations." These were organizations that couldn't make up their minds. Goals wandered in and out meetings and decisions happened randomly, depending on who was present. The organization often had no explicit preferences or guidelines. It frequently operated on the basis of inconsistent and ill-defined preferences, goals, and identities.

When the top management itself is unclear as to its priorities among the different stakeholders, then the risk of confusion increases exponentially.

The Emergence of Dilbert-Style Managers

Inside the corporation, in the absence of clear preferences or guidelines among stakeholders, managers themselves could become unclear in their own minds which priorities they were or should be pursuing. One result was the Dilbert-style manager.

The skill set and the attitudes of the Dilbertian manager were identified in a famous HBR article in 1977: Abraham Zaleznik’s “Managers and Leaders Are They Different?”  Harvard Business Review. 1977, 82 (1), p74-81. The article has been republished a number of times by HBR.


In the article, Zaleznik deftly describes the attitudes of the Dilbertian manager.

- First, the manager focuses attention on procedure and not on substance. 

The manager focuses attention on how the decisions are made, not what decisions to make. That’s because the manager is typically working in a bureaucratic setting where the goals of the organization are neither clear nor perceived as worthwhile. In the place of goals that provide meaning at work and in work, there is a hierarchical structure, precise role definitions, and elaborate rules and procedures, which often conflict: managers have no way of knowing what is the right answer. The only safe place is to focus on process.

 - Second, the manager communicates to subordinates indirectly by “signals”, rather than clearly stating a position. The traditional rule-driven bureaucracy requires both managers and workers to leave their personal views and attitudes behind in the entry lobby, before they enter the workplace. In this world, the managers’ personal views are irrelevant. The only safe way to communicate is to make use of the rules and deploy indirect “signals”, which obscure who wins and who loses. The manager can hide behind process: “It is not what I believe that matters: It is what the system requires.”

- Third, the manager plays for time. With conflicting rules and procedures, and conflicts about priorities between different senior managers, managers have no way of knowing what the right answer is. The idea of using their own judgment is at odds with the idea that they left their own views in the entrance lobby. Hence playing for time and waiting for the dust to settle are ways of always being on the winning side. These CYA routines are played out, up and down the hierarchy.

These Dilbertian practices enable a middle level manager to survive. Scott Adams has made a fortune by depicting how these practices play out on a daily basis in large organizations around the world, while frustrating both employees and customers.

The further result has been the disparagement of management itself, with calls for “leaders, not managers.” The problem is not so much managers, but rather the organizational settings in which managers find themselves. When top management fails to prioritize among competing stakeholders, how can managers at lower levels accomplish that.

The Triumph Of Customer Capitalism

Drucker presented his radical idea without any hard evidence. That’s because, in 1954, there was practically none. Large firms primarily focused on delivering value to customers? It was a stretch to accept that a firm like General Motors (GM) was in business for anything other than to make money itself. GM didn’t totally ignore the customer, and sometimes even recited phrases like “Our Customer Is Number One.” But when push came to shove, the customer only figured in their thinking to the extent that it fitted the internal preoccupations and plans of the firm itself. The commitment to serve the customer was a very qualified commitment and subject to the firm’s goal of making money for itself.

Then a funny thing happened. Customers struck back. In the 21st century, power in the marketplace shifted from seller to buyer. Through the Internet, globalization, and deregulation, customers suddenly had choices, reliable information about those choices and an ability to communicate with other customers. The firm-centric marketplace turned into a customer-driven marketplace. In this new world, firms that were primarily focused on delivering continuous new value for customers began making huge amounts of money. Those that weren’t, struggled.

By 2019, the evidence is in. For those with eyes to see, customer capitalism is well underway. Firms that focus on continuous innovation for customers and are organized to be nimble, adaptable, and able to adjust on the fly to meet the shifting whims of a marketplace driven by end-users are flourishing and have become the largest firms in the world. By contrast, firms focused on shareholder value and being run in the manner of the lumbering industrial giants of the 20th century, are struggling.

By contrast, when a firm prioritizes creating new value for customers, everyone else tends to benefit. His book, The Practice of Management, argued that the whole world was mistaken in thinking that the purpose of a firm is to make money for itself. Only one. Making money is the result, not the goal of a corporation. Businessmen aren’t necessarily selfish when they are creating value for their customers. The true wisdom behind Drucker’s thinking is that firms that created great workplaces that in turn delight their customers are not only likely to flourish themselves: their activities also tend to benefit society. Those that don’t tend not to survive.

Note that Drucker never said that the customers were the sole purpose of a corporation. The firm also were accountable to provide great workplaces and live up to their responsibilities to their partners and the community. If they did all those things, along with prioritizing the customer’s needs, then shareholder value and economic prosperity would follow as a matter of course.

The question is whether we really want to return to the murky world of mid-20th Century multi-stakeholder capitalism where no one knows what the purpose of the firm really is. The alternative is to advance to 21st Century capitalism where firms are primarily focused on continuous innovation for customers while also taking into account the interests of other stakeholders and the community.

Bureaucracies, the executives who run them, and the business schools that teach them, are much more comfortable solving complicated problems than resolving complex questions. Dealing with complexity means grappling with uncertainty and the need to be adaptive and agile and learn by doing. The discomfort in dealing with complexity is likely a key reason why executives keep failing Curt’s test.

As Hunter points out:

“Value is in the mind of the customer - it’s an experienced benefit, a feeling, an emotion. That’s why it’s called subjective. If value is in the customer’s mind, then firms can’t “create value” (business school lingo) and there is no such thing as “shareholder value”. Firms can create customers, and they do so by facilitating the customer’s value experience. The N in Curt’s NABC lies entirely in the customer domain.”

How can executives “command and control” something that lies entirely in the customer domain? The answer is that they can’t. They would have to stop trying to “command and control” the world and instead discover how to run their organizations in an agile adaptive fashion.

These are harsh and difficult lessons, foreshadowed back in 1954 by Peter Drucker, but ones that the entire economy is now having to learn. As Kodak, Blockbuster, and Nokia discovered, the message is simple: change or die.

The New Pernicious Nonsense: Multiple Top Priorities

One can hope that this new “pernicious nonsense” will not dominate the business thinking for another 50 years. The record of the last 50 years is not reassuring.

After all, both forms of "pernicious nonsense" have the same goal: to enable the pursuit of unconstrained institutional selfishness. The former version did so explicitly by asserting that selfishness was virtuous. Now that this gambit has collapsed, the new "pernicious nonsense" does so by stealth in providing a cover for the firm's selfishness and presenting the firm as really rather "cuddly". As the cover obscures what the firm is really giving priority to, the firm can go on doing whatever they were doing before.

As Jean-Baptiste Alphonse Karr warned us back in 1849 “plus ça change, plus c'est la même chose.”

Getting beyond these public relations games will mean nothing less than reimagining capitalism, leadership, management., and how the economy needs to be run for broad-based prosperity.

Copyright Stephen Denning 2022: This article was published first in Forbes.com and are re-published here, with permission, all rights reserved.

Why Stakeholder Capitalism Will Fail
Steve Denning April 28, 2022
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