“Stakeholder capitalism” is unlikely to work but investors should be picking up the responsibility of working for stakeholder interests, according to a new report.

The product of collaboration between London Business School (LBS) and the Investor Forum, a club where institutional investors co-ordinate their engagement efforts, the report concludes that stakeholderism would likely produce higher costs for investors and fail to produce improvement for stakeholders. But they insist shareholders must increase their efforts to promote the interests of stakeholders.

“The finding does not let investors off the hook,” the report says. “The investor community simply cannot afford to be complacent.”

The report comes about following years of argument between those standing by the shareholder value model of governance and those arguing companies must end their preoccupation with shareholders and instead adopt “stakeholder” (employees, customers, suppliers and society) value as the guiding purpose for companies. The pandemic has fuelled interest in stakeholder governance and the 2020 World Economic Forum meeting in Davos was even dedicated to the topic.

But this latest report argues stakeholder governance (assumed to be ownership by stakeholders) won’t fly. One reason is that ownership by diverse stakeholder groups is unlikely to succeed because they create too many conflicting interests. Another is that shareholder-owned companies raise capital more easily.

Further reasons include shareholders more effectively hold management to account, while stakeholder companies are more suited to “status quo” management and are less dynamic. Stakeholder-focused companies may also become involved in politics and risk losing legitimacy, the report says.

‘Integrate stakeholder interests’

But if a shareholder model is better, the authors argue, that does not mean investors should ignore the interests of other stakeholders. “Our view, then, is that we need to make the shareholder value system work better rather than discard it,” the report says.

To do that, the report argues that investors should integrate stakeholder interests into their engagement plans based on a three-point framework: judging whether stakeholder interests are “material”; knowing whether investor action has a “realistic prospect” of achieving change; and assessing whether investors are better placed than any one else to campaign.

The authors also argue for doing away with the old “financial” sense of materiality to include non-financial objectives. Underlying all of this, the authors say, is a desire to see underlying governance debate move away from one about “different models” to one about the “practical action investors can take to create a sustainable shareholder value model”.

They add: “Investors do need to do more.” And: “In many cases investment processes remains too divorced from the stakeholder context within which business operates today.”

The report certainly takes the shareholder versus stakeholder debate on a step, though campaigners for stakeholderism might well be nervous that relying on shareholders to represent their concerns is how the debate emerged in the first place.

Stakeholder capitalism remains a high-profile and contentious issue. In early January, the Trades Union Congress, the body representing UK unions, called for company law to be redrafted to remove what it sees as requirements to prioritise shareholders. Frances O’Grady, TUC general secretary, said: “We can restore fairness by reforming company law so that directors have duties beyond short-term profits for shareholders.”

This new report says investors are thinking long-term despite  accusations of damaging short-termism.

Stakeholder capitalism and investors

Others have weighed in on the issue. Just last week Larry Fink, chief executive of BlackRock, defended “stakeholder capitalism” against right-wing detractors in his annual letter to CEOs, saying it is “not woke”. However, Fink, as the world’s most high-profile fund manager, almost certainly sees stakeholder capitalism as a process in which boards, prodded by investors, take account of stakeholder interests—much the same as the Investor Forum and LBS.

Others have made explicit their belief that the investor, or shareholder, is the answer to big problems. One piece of research concludes that it remains the best way to achieve ESG aims and objectives.

This report is an interesting addition to the debate. It centres on investors taking responsibility for stakeholder issues, a redrawing of stewardship responsibilities. Perhaps the bigger issue though is how boards and executives respond and the way business models will adapt. Regardless, stakeholder interests appear to be here to stay as a headline governance concern.