Thomas Clergeot, ESSEC Business School Alumnus and Compliance Officer at BNP Paribas Asset Management Belgium, puts shareholder and stakeholder capitalism under the lens and calls for a change in how we perceive price and profits.

Trust and Loyalty: Keys to the success of stakeholder capitalism by Thomas Clergeot.

 “There is one and only one social responsibility of business — to increase its profits.” Capitalism as we know it today was largely conceived and built around this quote and its subsequent philosophy.

Milton Friedman firmly believed that the only purpose of the capitalist system is to generate wealth for the investor. Any consideration which did not ultimately increase profits was considered by the economist to be a threat or a means to divert financial resources from the investor. This shareholder-centric vision of things purposely sidelined other stakeholders, as Friedman considered investors to be the primary stakeholders. The Brooklyn native forged the thinking of the business world for decades, convincing us that shareholders and managers’ interests are in competition with other stakeholders. This inherent sense of competition became the norm in business conduct, placed at odds with ethics and morality in business relationships.

The emergence of Stakeholder Capitalism

However, with Corporate Social Responsibility (CSR) increasingly used by companies as a moral value, ethics has finally made its way into business relationships as a commitment to consumers and society or even within products. Times have changed, and so have the place of stakeholders within the company. Friedman’s shareholder capitalism is progressively giving way to a new type of capitalism, stakeholder capitalism. At a recent roundtable discussion, Marc Benioff, Chairman and co-CEO of Salesforce, described it best: “Capitalism, as we know it, is dead. We’re going to see a new kind of capitalism—and it won’t be the Milton Friedman capitalism, that is just about making money. The new capitalism is that businesses are here to serve their shareholders, but also their stakeholders — employees, customers, public schools, homeless and the planet.”

With this new way of doing business, companies have shifted their priorities; their highest priorities are no longer maximizing profits and enhancing shareholder value at the expense of other stakeholders, as they did in the past. Rather, the objective is to create long-term value through sustainable relationships.

Given this paradigm shift that has transformed modern business, the outstanding question is whether stakeholder groups with inherently opposing interests, which have been taught to compete against each other for decades, such as customers and investors, can build sustainable relationships from which they can both prosper. In other words, can stakeholder capitalism allow for profits to coexist with affordable, ethical and high-quality products?

Affordability, but at what cost?

In order to answer this question, we must first determine what constitutes an affordable price. Should an affordable price be considered as the lowest price a consumer can find on the relevant market or should it be considered as the fair price, which takes into account the moral and internal value of the good and its costs of production? In the past, affordability was associated with low prices. Partly because of the lack of information that consumers received on goods being sold at the time, customers were generally not willing to pay more.

Transparency, particularly around how a good is produced, not only allows a company to justify prices efficiently, but it also contributes to building trust with consumers. As a previous study shows, consumers actually care more about getting “fair and honest” prices than about getting the lowest price. It has also been shown that the cost-cutting leading to low prices can actually erode the value customers see in a product and cause sales to decline. This is why providing sufficient and relevant information is of crucial importance, especially if the company is committed to a CSR approach and is producing goods ethically.

In this case, when products have both meaning and qualities of use, the company benefits from an added value and evidence shows that customers are willing to pay premiums. This also creates an opportunity to build trust between the company and consumers, which is fundamental in a system such as stakeholder capitalism. In turn, trust through transparency can bring about customer loyalty and, as mentioned in a paper from 2016, loyal customers are demonstrably more likely to accept an increase in price. Thus, as a result of a trend toward increasing transparency among businesses in recent years, and especially among CSR-committed companies, the notion of affordability has noticeably evolved over time. In that respect, an affordable price nowadays is certainly higher than twenty or thirty years ago, and trust and loyalty have undoubtedly had roles to play in this shift, and still have.

Should companies maximize their profits?

After reviewing the notion of affordability from a consumer point of view, the other side of the dilemma concerns investors and their desire to maximize profits. If shareholders were only driven by self-interest and short-term returns, building sustainable relationships through stakeholder capitalism would be difficult to achieve. Although CSR can be costly and has not been proven to have a direct impact on short-term financial performance, some compelling arguments plead the case for CSR within companies and for a change towards the notion of sustainable profits.

Nowadays, not engaging in CSR and willingly maximizing profits at all costs, regardless of consequences for stakeholders, poses significant risks for a company. As an example, not respecting human rights in the production chain will undeniably have a negative impact on profits from a short-term perspective but also, and more severely, will negatively impact the company’s reputation and undermine customers’ trust and loyalty. Therefore, it can be hypothesized that in the long term, companies that neglect CSR and focus only on financial performance are doomed to disappear and to be abandoned by consumers.

This hypothesis is already taking shape as Laurence D. Fink, CEO of BlackRock, committed to no longer invest in companies which do not disclose a plan for how their business model will be compatible with a net-zero economy. As stated by the BlackRock chief in a letter to world’s CEO, as of now climate change will be “a defining factor in companies’ long-term prospects”. Therefore, companies that prioritize a socially and environmentally responsible path over maximizing profits will have a growing competitive advantage in the long term.

The importance of consumer loyalty and trust cannot be overstated here, because, alongside profit, they constitute a significant advantage for the survival of a company in the long term. Indeed, customer fidelity represents nowadays an undeniably strong asset in an economy where brands and products are often interchangeable. However, maintaining customer loyalty over time through a sustainable relationship can only be achieved thanks to CSR and establishing trust between stakeholders. By building a loyal customer base through the years, CSR-committed companies can become what every short-term investor would want, a financially solid company with a competitive advantage in the market.

In the end, finding an acceptable compromise between customer and investors’ interests is absolutely attainable, but not through the outdated model of shareholder capitalism. Although stakeholder capitalism requires changes in the way we perceive price and profits, it also represents a unique opportunity to break out from a structure which has been one-sided for too long. Of course, these changes will not come overnight; it will take significant efforts to build sustainable relationships, adapt business models, build transparency, and affirm the value of sustainable profits over short-term financial returns. However, trust and loyalty represent to that end the levers that can be strategically wielded to achieve the right balance.

References

• Edward Freeman.
• Crawford, Fred and Ryan Mathews, The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything, New York: Crown Business, 2001.
• Lois A. Mohr and Deborah J. Webb, The Effects of Corporate Social Responsibility and Price on Consumer Responses, The Journal of Consumer Affairs, Vol. 39, No. 1, 2005.
• Kum Fai Yuen, Vinh V. Thai and Yiik Diew Wong, Are customers willing to pay for corporate social responsibility? A study of individual-specific mediators, Total Quality Management, Vol. 27, No. 8, 912–926, 2016. Andrew Ross Sorkin, BlackRock Chief Pushes a Big New Climate Goal for the Corporate World, The New York Times, January 26, 2021

Useful links:

• Link up with Thomas Clergeot on LinkedIn
• Read a related article: Prof. Ed Freeman on From the power of ‘And’ to the New Normal
• Discover ESSEC Business School.

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