May 23, 2024

Stakeholder Capitalism is Alive, Well, and a Huge Source of Competitive Advantage Part 1 (TPL Insights #223)

By Rob Andrews

Recent articles suggest that stakeholder capitalism is in jeopardy due to Jamie Dimon’s reduced vocal advocacy on the subject, implying that stakeholder capitalism only emerged in 2019. This view is not only misleading but overlooks the rich history and robust foundation laid by earlier movements like Conscious Capitalism. The data is irrefutable. Organizations that operate with a balanced stakeholder approach and set of principles that flow from a purpose greater than just making money, make more money and have more fun doing it.

Performance Comparison:

Multiple studies have shown that Firms of Endearment, all of which practice the principles of conscious capitalism, significantly outperform Jim Collins’ Good to Great companies over extended periods. Here’s a closer look at their performance metrics:

Stock Market Performance:

According to Sisodia et al., over a 10-year period, Firms of Endearment companies outperformed the S&P 500 by a factor of 14:1 and Good to Great companies by a factor of 6:1​ (JUST Capital)​. A study by the authors of Firms of Endearment demonstrated that these companies returned 1,681% over 15 years, compared to 331% for the Good to Great companies and 118% for the S&P 500.

Financial Metrics:

Firms of Endearment demonstrate higher financial returns in terms of equity and investment compared to their peers who do not adopt stakeholder-centric models (JUST Capital). These companies also show more resilience during economic downturns and faster recovery times post-recession.

Sustainability and Resilience:

The focus on holistic stakeholder engagement means Firms of Endearment often maintain stronger brand loyalty, employee satisfaction, and community support, which contribute to their long-term success and stability.

Cultural and Ethical Leadership:

The emphasis on conscious leadership and ethical practices in Firms of Endearment fosters a positive corporate culture that can drive sustained innovation and competitive advantage.

The Genesis and Evolution of Conscious Capitalism

Conscious Capitalism, a term popularized by John Mackey, co-founder of Whole Foods Market, and Raj Sisodia, a marketing professor, has been a significant force in redefining the purpose of business since the early 2000s. Their book, “Conscious Capitalism: Liberating the Heroic Spirit of Business,” published in 2013, outlines the principles that businesses should follow to create value for all stakeholders, including employees, customers, suppliers, communities, and the environment, in addition to shareholders.

Unlike the narrower, and far less effective focus on profit maximization that dominated 20th-century business practices, Conscious Capitalism advocates for a holistic approach where businesses operate with a higher purpose. This philosophy stresses ethical leadership, a culture of trust and care, and long-term thinking, aligning more closely with sustainable and socially responsible business practices.

Stakeholder Capitalism: A Broader Movement

Stakeholder capitalism, as popularized by the Business Roundtable’s 2019 statement, where 181 CEOs committed to redefining the purpose of a corporation, builds on the principles of Conscious Capitalism. These CEOs pledged to lead their companies for the benefit of all stakeholders, not just shareholders, aligning closely with the ideals set forth by Mackey and Sisodia.

What is needed is to evolve toward a balanced stakeholder approach — and away from the slash-and-burn capitalism of recent decades. In their pursuit of quarterly profits and high salaries, there has emerged since the 1980s a dysfunctional version of capitalism that does to the economy what clearcutting does to forests — destroys the conditions necessary for long-term success by focusing excessively on short-term profits.

We don’t need to reinvent capitalism. We just need to practice it. Last March, Williams and Khanna spoke of capitalism’s evolving identity and what has happened to many iconic brands that lost their souls. Raj Sisodia, the co-founder of Conscious Capitalism, believes that companies that don’t understand the unstoppable forces that are driving this makeover could have a short life expectancy.

Companies with a Soul

Companies with a soul are high concept companies. High concept means high touch, which means demonstrating the ability to empathize, to understand the subtleties of human interaction, to find joy in oneself and to elicit it in others, and to stretch beyond the numbers, in pursuit of purpose and meaning. Firms of Endearment speaks of affection, love, joy, authenticity, empathy, compassion, terms used routinely by firms who endear themselves to stakeholders by bringing them all into strategic alignment. No stakeholder group benefits at the expense of another, and each prospers as the others do. They meet the needs of all their stakeholders and delight them and engender affection for and loyalty to the company.

The terms share of wallet, share of stomach, share of spend, and others are commonly used today. The firm Sisodia writes about striving for share of heart. Earn a place in the customer’s heart and she/he will gladly offer you a bigger share of the wallet. Do the same for an employee and he will pay you back with a quantum leap in productivity and work quality. Bond with your providers and be rewarded with superior offerings and amazing responsiveness. Give the communities in which you operate a reason to love you and be rewarded with an endless source of loyal customers and employees. Also don’t forget the shareholders. They want good returns, but they also take delight in investing in companies they admire.

I hope you enjoyed this piece on a balanced stakeholder approach as a competitive advantage. The purpose of these blogs is to share what we’re learning about building cultures of peak performance. Please give us a call if you’d like to talk about how we can help your organization.

Warmest Regards,

Rob