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Bill George

Harvard Business School Professor, former Medtronic CEO

Stakeholder Capitalism Is Here To Stay

If there is any positive consequence resulting from the COVID-19 pandemic, it’s the acceleration of the shift to stakeholder capitalism away from its singular emphasis on shareholders.

Ever since Noble Prize-winning economist Milton Friedman declared in 1970 that the social responsibility of business is to increase its profits, a debate has raged between advocates of shareholder primacy and stakeholder capitalism. During the past two decades it appeared shareholder advocates had the upper hand, but now the economic harm caused by the COVID-19 pandemic has shifted the pendulum toward the multi-stakeholder model, as the importance of employees and customers are brought into sharp relief.

Four decades later, Harvard University Professor Michael Porter, writing in Harvard Business Review’s January 2011 issue, provided the vehicle for integrating stakeholders in his article with Mark Kramer, “Creating Shared Value.” By addressing societal needs, companies can expand their markets in ways that benefit society and shareholders simultaneously while creating value for their customers, employees, their communities, and ultimately their investors.

In 2019 the Business Roundtable (BRT), composed of America’s leading companies, rewrote its purpose statement around meeting the needs of all stakeholders, dropping its prior purpose of shareholder primacy. BRT leaders – JPMorgan Chase’s Jamie Dimon, Walmart’s Doug McMillon and Johnson & Johnson’s Alex Gorsky –  recognized companies’ obligations to all stakeholders in adopting BRT’s new purpose: “We commit to delivering value to our customers … investing in our employees … dealing fairly and ethically with our suppliers … supporting the communities in which we work … [and] generating long-term value for shareholders.”

The recent Fortune survey of Fortune 500 CEOs clearly showed how their concerns have shifted in this era of COVID-19. Asked about their greatest risks, 97% cited employee safety, 73% noted the impact on their customers, 64% worried about demand returning, 38% were concerned about adequate safety nets for employees and 38% worried about disruption to supply chains. Notably missing from this list are near-term earnings and stock prices.

To thrive competitively and financially in 2021 and beyond, CEOs are adopting creative strategies with new business models to meet their customers’ rapidly changing needs, as the COVID-19 crisis enables them to accelerate three years of changes into the next three months. Nowhere is this more apparent than in digital transformation as the primary way companies engage with customers and operate their businesses. Those on the leading edge of digital like Amazon, Walmart, and Microsoft are thriving while companies that lagged like J.C. Penney, Sears, and AMC Theaters struggle to survive.

Here’s how the COVID-19 pandemic is impacting each stakeholder group:

Employees. The coronavirus crisis has reinforced the importance of employees working on the front lines of health care, retail, food and medical equipment and delivery services, many of whom are risking their lives to serve others. Employee safety has become paramount and the gating factor to reopening their workplaces. Walmart’s McMillon recognized the importance of front-line workers in combatting COVID-19 when he announced $550 million in bonuses on March 19 for full-time and part-time hourly employees. Shortly thereafter, Target CEO Brian Cornell provided $300 million in special payments to its workers. Many employers have settled on a minimum of $15.00/hour, as Amazon did for its 575,000 employees, while providing health care, sick leave and retirement.

As companies restart, they will be restructuring their organizations to reduce middle managers, travel budgets, and consultants, while simultaneously upgrading training, compensation, and benefits for front-line employees. As routine jobs are automated, there will be fewer but better trained workers. Meanwhile, many employees working from home are finding they can be more productive working on their own schedules and avoiding long commutes. The CEO of one Indian software company noted productivity had gone up without commuting time and said that his company would shift to using shared office space. Another executive proposed the office would become “a collaboration hub” to explore new ideas and work on collaborative projects.

Customers. When companies reopen, will they be greeted by customers ready to purchase their products and services? The devastating impact of unemployment, furloughs and pay cuts has reinforced the need for savings and cash reserves and reducing discretionary spending. Instead of buying new homes and automobiles, many consumers are opting to keep their vehicles longer and live in rental apartments. Health and safety concerns further accelerate the shift to shopping online, at store pickup, and home delivery of everything from groceries to personal computers. By the time a COVID-19 vaccine is widely available, these new habits will become routine consumer behavior, unlikely to revert. Companies that meet these new demands in an efficient, safe manner will be the winners. Service concepts will change as well, with service delivered remotely using electronic tools and teleservice. CEO Corie Barry has reengineered Best Buy’s online and its in-store experience with private appointments and remote service.

Suppliers. Supply chain shortages of critical parts during the pandemic have hampered manufacturing of critical products like masks and pharmaceuticals, as long supply lines to India and China proved difficult. These problems will cause companies to rebalance supply chains in multiple geographies, even at higher costs, and establish preferred supplier agreements rather than choosing only the lowest cost suppliers.

Communities. The COVID-19 pandemic has restored the importance of one’s local community, but also has stripped employees of in-person communities at work, leading to creating communities online, including virtual social gatherings. Many companies are taking on community service projects to help those harmed by COVID-19. Target is donating N95 respirator masks to medical centers short of vitally needed supplies and providing a SAFE Retail Toolkit to help retailers reopen safely.

Shareholders. Companies that adapt rapidly to the “new normal” economy will be the winners in the marketplace, enabling them to create greater value for investors. Paradoxically, the greatest shareholder value creators are not those that obsess over maximizing shareholder value. Rather, they are companies like Microsoft, Johnson & Johnson, Amazon, Walmart, Apple, Medtronic and Google that focus on long-term strategies to create superior value for their customers with highly motivated, well-compensated employees.

The COVID-19 pandemic has caused CEOs to recognize that stakeholder capitalism is the only way to create sustainable shareholder value, adapting their business models to meet customers’ emerging needs, inspire employees, partner with suppliers, and build communities.

Bill George is senior fellow at Harvard Business School, former chair and CEO of Medtronic and author of Discover Your True North.