The article’s central claim is that multistakeholder capitalism has not been properly understood because it involves a different kind of arithmetic. It views business as a dynamic system rather than a mechanism for allocating capital to its most productive use.
The distinction is between compensatory and combinatorial math. Under the first, strong financial results offset a toxic culture or poor environmental performance. Under the second, the health of every stakeholder counts, because all are treated as essential to the sustainability of the system.
Key findings
- The two systems imply opposite strategies. In a compensatory system the best move is to back your winners. In a combinatorial system it is to raise the tide for all boats, because total performance is constrained by the weakest performance.
- Stakeholders are not extra terms in a regression. They are interdependent members of an ecosystem, and where a zero in a linear model simply removes a factor, a zero in a system means the system loses its integrity.
- Research with more than three hundred companies across five continents found that few overlook investors and customers, but only one in six actively considers all five stakeholder groups.
- The financial evidence cited is external. A three-decade analysis published in 2012 found that businesses ranked among the best to work for outperformed peers by an average of three percent annually, nearly a hundred and fifty percent cumulatively, after controlling for industry and other factors.
- A meta-analysis of a thousand research papers by New York University’s Center for Sustainable Business found a positive correlation between stakeholder performance beyond customers and investors and financial performance and stock returns in the majority of studies.
What shareholder capitalism made inevitable
The defining feature of shareholder capitalism is that one stakeholder is elevated above all others. The authors argue that once total shareholder returns become the ultimate measure of performance, it is inevitable that companies will skimp on their responsibilities as employers, innovators, partners, taxpayers and local citizens.
The worked historical example is General Electric under Jack Welch, described as pursuing Milton Friedman’s doctrine to the point of systematically underinvesting in people, innovation, brands and environmental stewardship, and creating the conditions for decline at GE and, through his proteges, at Boeing and Kraft Heinz.
The current moment is read through two labor phenomena and one investment trend. The Great Resignation and quiet quitting are described as manifestations of the long-term consequences of treating employees indifferently, and environmental, social and governance efforts as giving a voice to stakeholders whose interests were previously overlooked.
The combinatorial system
The authors position the shift as replacing a linear, mechanical concept of business with a dynamic, biological one, and argue that the managerial implications have not been appreciated.
The analogy offered is brand coherence. Just as consumers assess a brand’s integrity across researching, testing, purchasing and using it, the requirement for coherence extends across everything a company does. Companies are no longer assessed solely on the desirability of their products, but also on their performance as employers, partners, taxpayers and environmental stewards.
This is described as going beyond the risk mitigation stance of environmental, social and governance work. Where that identifies vulnerabilities in an existing business model, a combinatorial approach strategically reevaluates the business model itself.
Companies already doing it
The suggested starting point is to identify aspects of the business that damage corporate reputation even before they cost sales. Amazon is cited as revisiting customer centricity as its sole obsession after realizing customers were troubled by reports of working conditions, adding two leadership principles in July 2021, one on employees and one on social responsibility.
Tesco, publicly criticized in 2015 for its treatment of suppliers, is cited for supplier satisfaction scores reaching all-time highs five years later, even as the pandemic strained supply chain relationships globally.
Siemens, described as the world’s largest industrial manufacturer and historically a major carbon emitter, is cited for cutting its footprint through distributed energy systems at production facilities, low-emission vehicles, and more renewable natural gas and wind power.
The gap between saying and doing
The research asked whether strategy development explicitly considers five types of stakeholder: employees, customers, investors, partners, and communities. Most companies cover investors and customers, and only one in six covers all five.
The diagnosis is that this is a relic of a system that treated anyone not giving the organization money, as investor or paying customer, solely as a cost. That mechanistic view is what leaves companies vulnerable to misdiagnosing their next best moves.
The prescribed first step is to understand not only the individual interests of stakeholders but the ways those interests can be integrated, which the authors describe as the foundation for strategies that increase a company’s fit to purpose and deepen its relative advantage.
The closing argument is about contagion. There may be no operational connection between how a company treats each stakeholder, but there is a human systems linkage, and a fast news cycle with ubiquitous social media makes poor behavior in one area spill into reputation everywhere.
Scope and limitations
The survey behind the one in six finding covers more than three hundred companies and is the authors’ own. The financial evidence is drawn from outside studies rather than generated here, and the company examples are illustrative rather than a sample.
Source
This page summarises The New Math of Multistakeholderism, by Jonathan Knowles, B. Tom Hunsaker, 2022.