How should organizations resolve the inherent conflicting interests of modern capitalism? Senior Editor Alan Morantz interviews Prof. Bertrand Malsch, Smith School of Business, Queen’s University Canada.

Stakeholderism Needs a Reality Check by Alan Morantz. First published on Smith Business Insight. With kind acknowledgements.

The drumbeat of stakeholder capitalism is growing louder. A series of seemingly irresolvable crises has exposed the shortcomings of the present economic system in which shareholders hold a privileged position. In its place, a growing number of business leaders and commentators are calling for commercial interests to be re-oriented toward stakeholders.

Under stakeholder capitalism, organizations create long-term value by taking into account the needs of all their stakeholders, among them employees, customers, suppliers, local and global communities, lenders and shareholders. It works well as a slogan, says Bertrand Malsch, the PWC/Tom O’Neill Professor of Accounting at Smith School of Business. But in practice, it has the potential to tie corporate board directors in knots trying to please everyone.

In this conversation with Smith Business Insight senior editor Alan Morantz, Malsch discusses how an idealized version of stakeholderism can set people up for disappointment, and what board directors can do to manage the inherent conflicts of interest in today’s economy.

The great thinkers of Davos say corporations should serve the interests of all their stakeholders, not just shareholders. Business Roundtable CEOs say stakeholder capitalism is the only way to address our challenges holistically. Marc Benioff, CEO of Salesforce, says capitalism as we know it is dead. Are you buying what they are selling?

The quick response is no, I’m not buying it. The key problem is that there isn’t just one stakeholder. There are many stakeholders who have conflicting interests, and sometimes these interests are not reconcilable. Which begs the question: What happens when different stakeholders have conflicting interests in the same business? And no one has a magical solution.

You can claim that all stakeholders should be treated equally, but that’s a bit delusional. The distribution of power is not equitable, so you don’t — and can’t — treat your stakeholders the same way. Treatment reflects the distribution of power, and even if you wanted to treat everyone well, what do you do when they have conflicting interests?

The Canada Business Corporations Act was updated a few years ago to recognize stakeholder interests, but obviously it can’t offer any guidance when interests are not aligned. If you’re on the board of a public corporation, what are you supposed to do?

You have to be honest and not make claims you can’t meet. So if you can’t satisfy all your stakeholders’ interests, you have to acknowledge that and be transparent about the process you go through to prioritize your stakeholders, recognizing that you may have to make trade-offs that are not necessarily win-win.

The issue for me is not that you need to decide which stakeholders to support over others. The issue is that you need to explain how you make these decisions and then be held accountable for the outcomes. Are we happy with the end result depending on the goal, which could be profitability or social justice or being a good corporate citizen?

Another way to look at this is through the notion of public interest, which is very strong in the professions like accounting. When you start thinking about this, you realize there are a lot of publics that have a lot of different interests. So the public interest as such does not really exist. You have different publics with different interests that conflict. So we have to be realistic.

The hope, then, is that corporate transparency with stakeholders will lead to positive outcomes, which may or may not be true.

If you have a very broad understanding of the firm, everyone that is impacted by the firm’s activities, even indirectly, is a stakeholder. So if you outsource production to China or Bangladesh and the employees of your supplier are not well treated, this should be your problem. Then it becomes a question of reporting, hoping that transparency will somehow create pressure for corporations to change their practices and make sure that they’re treating impacted people well.

But the consumer is not always a great judge. Look at the commercial success of a company like Shein. This is a very controversial company because they’re able to produce a lot of clothing at unbeatable prices, but we know that behind them are a lot of questionable business practices. It’s public knowledge but they’re still very successful.

Useful links:

• Link up with Prof. Bertrand Malsch and Alan Morantz on LinkedIn
• Read a related article: The Purpose Ecosystem: When private actors and stakeholders help companies reach the SDGs
• Browse thought leadership at Smith Business Insight
• Discover Smith School of Business and apply for the school’s latest online learning innovation: The Certificate in Professional Impact Analysis (CPIA) Program

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