What Is ‘Stakeholderism?’ Here’s a Quick Guide.

One of the most frustrating aspects of the debate over ESG–which stands for environmental, social, and governance investing–is that the term has no set definition.

Although the term “ESG” has general outlines and a basic connotation, the particulars are ephemeral. It can mean one thing one day to one investor, company, or ratings agency, and something completely different the next day or to the next individual or organization.

For example, the European Securities and Markets Authority (ESMA) recently released a list of more than 100 companies that applied under the EU’s new regulatory framework to be considered ESG ratings agencies.

Each of these ratings services has its own proprietary assessment variables and formulas and, as a result, its own proprietary definition of ESG–meaning that the term has more than 100 technically different meanings, even among those who are closest to the process and most heavily involved in its harmonization.

It’s been more than three years since BlackRock CEO Larry Fink told the Aspen Ideas Festival that he quit using the term “ESG,” yet his firm’s iShares family of ETFs is still by far the most dominant ESG firm in the world, managing roughly a third of global ESG investments.

ESG means nothing … and everything. It means whatever the user of the term wants it to mean at any given moment.

TRENDING ARTICLES

opinion

Victor Davis Hanson: Canadians Feel Real Pain in Stage 4 of Trade War

Victor Davis Hanson

news

Georgia Park No Longer Named After Famous ‘Father of American Music’

Rebecca Buis

NO TYPE SET

Victor Davis Hanson: When Will the Iranian People Overthrow the Regime?

Victor Davis Hanson

Fortunately, not every term in this policy and investment realm is so nebulous.

Lately, as ESG has fallen out of favor, there has been a resurgence in the use of other terms that are presumed to have similar but not exactly the same meanings. One such term – perhaps the most prominent – is “stakeholderism,” or as it’s often stylized, “stakeholder capitalism.”

By contrast to ESG, stakeholderism has a clear and well-established definition. Granted, it’s a definition that has evolved over the last few decades, but it’s now firmly set, and users of the term should be fully aware of this.

Some observers credit the coinage and essential definition of the term “stakeholderism” to Klaus Schwab. The most prominent of these observers is, of course, Klaus Schwab. Various academic stakeholder theorists and practitioners have noted that Schwab’s claim is mostly self-interested myth-building, not merely ignored by rigorous analysis, but actively rejected by those who know the field best.

In truth, the story of stakeholderism began in 1962, when a man named Robert Stewart, a former corporate planner for Lockheed, put together a team of researchers at the Stanford Research Institute (SRI) in Menlo Park, California.

The program Stewart created–known as the Theory of Practice and Planning (TAPP) program–combined the differing perspectives of the best and the brightest from the worlds of engineering and business planning to analyze and address what was called “the planning paradox.”

In brief, this paradox posits that planning is critical to business success but is hardly sufficient. Rigid adherence to previously constructed plans often caused businesses to miss opportunities and to make poor decisions.

Among other things, the TAPP team developed common basic business planning techniques like SWOT analysis (analysis of the strengths, weaknesses, opportunities, and threats of any given decision) and coined the term “stakeholder” planning. As I note in my book, “The Dictatorship of Woke Capital”:

The idea was to chart the course of the company, to plan strategically by analyz­ing input on strengths, weaknesses, opportunities, and threats from a variety of “stakeholder” groups, each of which would have a different interest in the company—shareholders, customers, employees, manag­ers, unions, and so on. A logical and natural extension of the idea of strategic planning, stakeholder analysis was intended to force managers and executives to see how their decisions affected different groups and how best to handle an array of often conflicting and competing interests. The idea—which seems entirely commonsensical in retrospect—was that it would be difficult, if not impossible, to plan effectively for the future without knowing what customers, employees, and others might need and want in the future.

The most important takeaway here is that when it was introduced, stakeholder analysis was purely an analytical tool. It was an instrument by which business managers could better evaluate and understand their organization and its position in the marketplace.

After the stakeholder idea was introduced to businesses by SRI–which was, after all, a business-consulting organization–it became embedded in American business practice and progressed through a handful of iterations, each slightly different than the one that came before it.

The first of these is what is known today as the “descriptive” model of stakeholder analysis–mostly because it was a purely descriptive or empirical analysis: observers identified the key players–the “stakeholders”–in a given corporation’s behavior and outcomes, including executives, managers, the corpora­tion itself, customers, employees, board, and so on.

The second iteration was slightly more complex. Called the “instrumental” model of stakeholder analysis, it involved taking the data gathered in the empirical/descriptive stakeholder process and using them to determine whether the organization was meeting the needs and utilizing the strengths of its various stakeholder groups to produce the best outcomes.

For example, does a business’s pay and benefits structure encourage employees to work harder and more efficiently? Does its executive compensation plan incentivize or disincentivize good behaviors among executives and employees alike? Do its environmental and labor records appeal to customers, or do they harm its reputation?

The final iteration–known as the normative model of stakeholder analysis–is most closely associated with a man named R. Edward Freeman, who started to develop his theory while working at the Wharton Applied Research Center, which was part of the Wharton Business School at the University of Pennsylvania.

Freeman went on to formalize his model in his classic book, “Strategic Management: A Stakeholder Approach,” published in 1984.

In brief, Freeman argued that ethical and social issues are all part of a strategic plan to please stake­holders and manage a company most effectively. In retrospect, even this seems commonsensical, but at the time, it was radical.

More to the point, when he made this case, Freeman also encouraged others to incorporate their own moral and ethical concerns into their work, using whatever intellectual framework they felt best fit their case. Or, to put it more bluntly, Freeman identified real and relevant deficiencies in the ethical and moral behavior of American businesses and businessmen and developed a model by which alternative ethical and moral frameworks could be used to address those and other deficiencies.

He made “stakeholderism” a strictly moral rather than strictly practical analytical structure.

Today–more than four decades after Freeman’s pioneering work–“stakeholderism” is defined exclusively by its normative iteration.

The previous models–descriptive and instrumental–are no longer considered stakeholderism at all. They are known as “best practices” or something similar. That’s an important distinction. Words matter. Or as Orwell put it, “the slovenliness of our language makes it easier for us to have foolish thoughts.” When it comes to stakeholderism, we must not have foolish thoughts.

We must have clear and precise thoughts, lest we embrace a model of business behavior that turns the characterization and practice of moral behavior over to corporations or, worse still their largest shareholders.