The unfortunate rise of ‘stakeholder capitalism’

The bitterness that has infected the US presidential race has not declined since the Democratic party swapped Joe Biden for Kamala Harris. Polarisation runs deep in the US, as it does in a number of other western societies.

While the polarisation is not as prominent in Australia, there are contentious issues on which we remain deeply divided, as we saw in last year’s Indigenous Voice referendum.

While this is not the first time polarisation has riven western societies, the ubiquitous presence of social media has turned some topics from niche political issues into matters of obsession for a broader cross-section of Americans, Brits and Australians.

Many prominent business figures see greater public engagement with social causes — together with a changing perception of the role of business in society and the growth of Environmental Social and Government (ESG) reporting frameworks — and believe they too must now take a role in leading the debate.

Certainly, a number of Australian corporates and business leaders took a public stand on the Voice; donating millions of dollars of shareholders’ money, making statements urging a ‘Yes’ vote, or even playing messages of support in their stores.

However recent polling conducted by the Centre for Independent Studies should encourage those business figures to reconsider their engagement with contentious corporate activism.

The report, one of the first to survey the perceptions and opinions of shareholders and employees as well as customers, outlines two issues that should prompt this reflection.

First, the awareness of, and support for, corporate activism initiatives is far below the level that decision makers might expect. Second, the perceptions of the role of business have not in fact changed nearly as much as some elite circles may think.

It is somewhat ironic that many corporate activism initiatives purport to raise awareness of certain issues or moral failings in society. Ironic because, even among those most engaged with these companies (their shareholders and employees) less than 15% of people surveyed follow these initiatives closely.

In fact, around 60% to 65% of shareholders and employees reported not following the social activism of companies at all. More than 80% of customers also report that they don’t follow the activism of corporates where they shop, or only do so occasionally.

This may seem to contradict the earlier observations regarding social media bringing these issues into everyone’s homes but there are two key areas of difference.

First, many people who are passionate about an issue do not actually care about what corporate Australia thinks on the issue — especially when the contributions have been repeatedly washed through a HR-approved speech mangler.

Second, the views and preoccupations of those on social media often do not correlate with the views of the broader public.

Indeed, it is striking how little the positions taken by the companies align with the personal views of their shareholders and employees. More than 65% of shareholders and almost 60% of employees state the positions taken by companies never or infrequently align with their own. Less than 10% report they are always aligned with the company position.

What this likely suggests is that corporate activism, far from being inspired from the grass roots, is in fact being driven by a relatively small cohort of social warriors.

This small group of engaged activists have a disproportionate influence on the behaviour of corporate decision makers.

It seems likely these activists come from a class of people who are overly represented among key stakeholders around businesses and the social circles of senior management. This includes institutional shareholders (like industry super), human resources departments and major consulting and professional services firms.

The visibility of these stakeholders, combined with the increasing insulation of major business figures from ordinary Australians, likely creates the false impression of a broad base of support for corporate activism when in fact the opposite is true.

The downsides of this kind of activism in a polarised environment are clear. Businesses have lost sales and customers because of the stands taken on social issues. Indeed, the survey shows people are more than twice as likely to stop patronising a business they disagree with than start buying from one they do.

However, the disregard of potential lost sales due to activism signals the deeper issue at play here. In large part, this is a dispute about whether businesses should continue to primarily focus on shareholder profits, or service a broader stakeholder group.

The rise of ‘stakeholder capitalism’ has undeniably changed the rhetoric of major business figures — away from advocating for deregulation and lower taxes and towards social causes.

This is wrong in principle: there are no good reasons why corporate leaders should be using their shareholders’ money as a platform to promote their personal beliefs.

Moreover, it is contrary to the preferences of many of the actual stakeholders, albeit typically those (such as the employees) who are ignored by ‘stakeholder’ activists.

Almost 75% of employees and customers — those who should be the most prominent ‘stakeholders’ — believe businesses should solely focus on providing goods and services to customers, instead of engaging in activism.

Of course, it is increasingly clear that stakeholder capitalism is actually a misnomer. Advocates really only want to prioritise the views of stakeholders who agree with the activists on social and political issues. It is much closer to crony capitalism than traditional shareholder capitalism.

It is not clear why business leaders are getting caught up in the fights over contentious social issues, or at least there is no single clear reason. Some are doubtless doing it for cynical reasons, believing it a path to higher profits.

For others, it is to curry favour with government or influential groups, or because they fear a backlash if they don’t get involved. No doubt some are passionate true believers.

Regardless, there is now clear evidence that corporate activism is not the benign or broad-based movement it purports to be.

Simon Cowan is Research Director at the Centre for Independent Studies and co-author of the recent CIS publication Business Means Business. Why Corporate should avoid social activism.