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  • Writer's pictureTimothy Henry

Episode #4: Stakeholders (Part 1)

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Stakeholder and Conscious Capitalism: stakeholders matter now more than ever, listen as Timothy and Raj discuss importance and relevance of the second pillar of Conscious Capitalism.



Friedman, M. (1970). The Social Responsibility Of Business Is To Increase Its Profits. (opens PDF in a separate page. Originally published in the New York Times.

Mackey, J., Sisodia, R. (2014). Conscious Capitalism: Liberating the Heroic Spirit of Business. Harvard Business Review Press.

Sisodia, R., Henry, T., Eckschmidt, T. (2018). Conscious Capitalism Field Guide. Harvard Business Review Press.


Episode Transcript:

Timothy: Welcome everyone to Episode Number Four of the Conscious Capitalists, with myself, Timothy Henry, and my partner in crime here, Raj. Hi Raj.

Raj: Hi Timothy. Good to see you again.

Timothy: Good to see you again. I guess today we’ll go and start to maybe talk a little bit more about the second pillar of conscious capitalism, what we’ve called stakeholder orientation or stakeholder integration into how you think about and run your business. When I bring that up, what are your first thoughts about that?

Raj: Well, you know, it’s something that seems obvious today to us, how can you run a business without taking into consideration the well-being of everybody the business touches? After all, we’re all interconnected and interdependent through that business. But for a very long time we have seen portions of that systems a means and others as an end, the end being of course making money and creating shareholder value, and seeing employees and customers and everything else really as inputs into that and that has led to a lot of negative consequences for the well-being of those stakeholders because we have used them, in a way. So, this is about serving them as deeply as possible, each of them, and through that interconnection and their well-being that results from their being served well, seeing extraordinary levels of value being created for everybody from that system. The means and ends, we’ve confused the means and ends part of this. Everybody is a means, and everybody is an end in that system.

Timothy: Well, I guess it sort of goes back to sort of taking a systems view of how the business is operating versus a more mechanical view. So when you take a more systems view and you sort of say, hey listen, we want to be thriving in a healthy ecosystem, so to speak, in which we’re creating, in a healthy ecosystem, more value for everybody versus the opposite would be to be the part of the center of the ecosystem that’s sucking the life out of everybody else and eventually we call that cancer and it kills the system.

Raj: That’s right. So yeah, just kind of chew them up and spit them out. If employees leave at the rate of 150% a year, as we’ve seen in some industries, in retail for example, we figure there’s an endless supply, we’ll just keep replacing them, as opposed to saying why are people leaving? So, when you keep them in that way, then you get different answers and of course ultimately all of these things result in superior business performance, right? When you think about things realistically and how they are interconnected and when you serve rather than exploit all the additional entities connected to the business. That’s a different mindset.

Timothy: Yeah. Well, I think that there’s an organization called Just Capital, that’s for people that want to go reference it. They’ve just come out with a wonderful chart. They’ve been charting stakeholder performance and ranking companies based on their approach to stakeholders and their most recent analysis is fascinating because it shows the companies they’re tracking that are in the top quartile of stakeholder orientation outperformed the bottom quartile by 30% in terms of their profitability and business returns. So ultimately, it’s a bit of a conundrum or paradox, in a sense, because here you are saying that the shareholder is not the primary focus but we’re trying to create value across all the stakeholders and in the end the shareholder benefits as a result of that.

Raj: It is a paradox because the data shows that since around 1970 when shareholder value maximization became the dogma, unquestioned dogma in a way in business schools and elsewhere, and Milton Friedman wrote his famous essay then. If you look at the return on assets of American companies since that time, they have steadily declined. So shareholder value clearly has failed even on its own narrow terms, that it’s going to result in making more money, doesn’t, because you are aligning the forces of value creation and any system is only as strong as its weakest link and there were a lot of weak links in a system which is where you have systematic tradeoffs in favor of one part of that system, you end up using and abusing others and ultimately that comes back to hurt you, right? I mean there’s all kinds of feedback loops in operations. There’s word of mouth that’s out there. There’s media, and in today’s interconnected world, it is all the more so and it happens very quickly. There is no place to hide and you’re almost open transparency. And that’s a good thing. Companies that are operating in the right way and treating everybody well see the benefits of that. They reap the rewards of that. That’s the kind of world we want to live in, with justice and rewards for the good guys.

Timothy: Yeah, and I think that part of it is like we’ve already described, it’s the system thinking rather than this linear inputs and outputs, but it’s also about having a long-term relational point of view versus a short-term transactional, and I think that’s also been really critical. I remember having this session with John Mackey at one point and he said, it’s sort of like being in a good marriage. Right? If one partner is always winning at the detriment of the other, that’s not the basis for a long-term relationship. So when you’re thinking about your stakeholders, when you’re thinking about the long-term relational connection that you have with them, that’s where the value gets created, that’s where the innovation occurs, that’s where the resilience lies, and that’s very different than what happens when you have a very short-term and very transactional point of view, because then there is no loyalty over the long run, there is no psychological safety that allows people to have the room to go and innovate and do things differently. So, I think that’s the other piece that’s really critical.

Raj: And I think with that relational mindset comes an attitude of caring. You may only care about their well-being, not even just to the extent that it helps you as a business, but you’re here to serve. In a way, there’s a servant/leadership mentality behind the stakeholder mindset because we are here to serve and create value for all of our stakeholders, which means we need to understand them deeply and care about them so that we can then serve them at a deeper level. I’m reminded of that Spice Girls song, tell me what you want and tell me what you really really want.

Timothy: Well, I think that’s incredibly important because I think that as people start to think about, well, what does a stakeholder approach mean for my business? I think that it begins with a couple of critical points. First of all, can you identify who your stakeholders really are? And in our book, we talk about the difference between primary stakeholders and secondary stakeholders. So, the first issue is can you identify them, and very particularly identify them. And I think generally we’ve said there are customers, there are employees, they are our suppliers, there’s the communities that we work in, there’s the silent stakeholder, the environment, and then there are the shareholders, and generally, those are your primary stakeholders. Would you agree with that?

Raj: Yeah, I agree with that. However, there is one blind spot that I realize that we have as individuals and as companies, which is that we are our own most important stakeholders, as individuals. So, if you ask people to list their stakeholders in their personal lives they will say, you know, the family and the children and the parents. What about you? If you don’t take care of yourself, how can you actually serve those other ones. So we have a primary duty to ourselves, right? And I think we forget that, and companies forget that. We have talked about all those other stakeholders, but if you look at the company itself and how strong is it and how resilient it is and how much are we actually investing in the long-term health of the company, you see that actually we haven’t been doing that, especially the last 12 years or so, the data that I’ve seen on share buybacks and dividends. I think it was about 93% of profits went to share buybacks and dividends and the historical data says that companies are investing about 50% less compared to historic norms on capital equipment, on R&D, in general just upgrading and refreshing their own internal capacities and investing in people and all the rest of it. Right? So, we are sort of milking that whole system for the benefit of just the shareholders, so that’s a reflection of that shareholder-centric mindset, but in the process we’re also forgetting to invest in the company itself. I think starting with you, yourself, as a stakeholder, because the company is the one that has to make those decisions about how do we treat all the other stakeholders. Don’t forget about yourselves when you’re thinking about stakeholders.

Timothy: Well, I think it’s fascinating, this tension that’s evolved around…on the one hand you have the activist investors that are putting enormous short-term pressure on companies to perform in the short-term, and yet increasingly we have this recognition that the way to create long-term value is to have this relational stakeholder system dynamic point of view, that that’s the way you create sustainable competitive advantage and sustainable long-term value, and yet, at the same time, we’ve got this pressure coming from the investors and some analysts on Wall Street, which lead to things like increasingly borrowing money to pay dividends and the shift in investment to share buybacks. So it’s an interesting time where we’ve got this battle going on, in some sense, for the soul of business.

Raj: Yeah, and I think it’s a transitional time because we’re kind of stuck between paradigms right now. It’s like you’re a trapeze artist and you kind of let go of that one but the other one hasn’t yet arrived. You’re kind of in the middle of it there, so we’re still kind of paying homage to the old approach and in a way that would be the rise of activist investors in the last few years. I mean that has kind of risen to a level beyond historic norms, but I do think there’s a fundamental shift that is underway, even in the world of investing, with companies like Blackrock and State Street and Vanguard all talking about the need for holistic, long-term, purposeful, and aligned with society types of decision making, and then of course we do have the formation of the long-term stock exchange, which has been moving along actually. It got approved by the SEC and the idea there is that the voting power of investors would depend on how long you hold your shares. If you just bought them yesterday as activist investors, in the very short-term they buy a bunch of shares and then they issue proxies and they put pressure on management to change the direction of the company. They would be disempowered under that, and true investors would be in power, as they should be. True investors who actually want to see this company succeed and see its vision realized, its purpose achieved, and they know that that takes time. Anything meaningful takes time, and so the longer you hold your shares, the more say you have in the direction of that company. So I think that is, from a stakeholder mindset, those are investors as stakeholders as opposed to investors as speculators. And we don’t really owe any loyalty to speculators. In fact, we should disregard them, and we should definitely have a closed stakeholder relationship with true investors.

Timothy: Rather than the casino capitalists that are one step up from, in a sense, gambling. Now, having said that, I think there’s another element which is also in play here, which is the impact investing movement, where people are now talking very seriously about several trillions of dollars being in the ESG investment world, and in many ways, ESG, which stands for Environment, Social, and Governance, is very tightly aligned to the idea of stakeholders and in fact in the environment side you have your environment, in the social you typically have people, your communities, you’ve got looking at your supply chains and those kinds of things, and what the impact is on the areas that you work in. So I think that it’s, again, another trend that we’re seeing is people now starting to say we’ve got to be more specific in how we report on this idea of stakeholder capitalism, vis-à-vis ESG, and I think…you and I were both talking earlier about Davos and the announcement that Davos last year of that the era of stakeholder capitalism is approaching, and the commitment by 120 CEOs to work with the Big Four accounting firms over this next year, reporting back in February on their ideas of the 22 metrics that they would propose that would be the placeholders for good ESG reporting with another 33 that are going to be optional or supplemental. So I think that pressure that’s coming from investors who are increasingly saying how you make your profit matters is also very much in line with this push towards a stakeholder orientation. So again, it’s an interesting tension between these short-term activists, these others who are going, no, actually long-term value creation really…you need to be looking at these other things, both from an opportunity point of view, but also from a risk point of view. You don’t want to end up with stranded assets because you were on the wrong side of the environmental sustainability movement.

Raj: It’s a good blend of external forces pushing us and then internal motivations driving us in that same direction. I think it needs to be a combination and ideally the intrinsic motivation is the strongest because the power of voluntary action and voluntary exchange is much greater than mandated things. Then we look for ways to groom them and they look to, you know, a trend in green washing and purpose washing and all the rest of it, but I think the intrinsic motivation also is important, so it’s the inside out and the outside in, the push and the pull, which is going to move us faster in this direction, and then having the metrics and having the accounting firms be able to standardize across that so public companies can actually report on that and then investors can compare these and select them and invest accordingly. I think that these are great indicators. I just feel like we’re in the middle of this massive transition moment, kind of a slow-motion Berlin Wall moment that’s happening over a number of years to know that we will transition to this new mindset and it will become the default.

Timothy: Well, I like the word you just used, mindset, because I think that’s maybe where we should go next is to talk a little bit about the stakeholder mindset because while there is this outside pressure, the intrinsic motivation really is based around how do you develop a stakeholder mindset inside the business and what does that look like. I think, as we mentioned earlier, the first part is can we identify who our stakeholders are? Do we know who they are? And as you, with your Spice Girl song analogy pointed out, do we really understand their needs? And I don’t just mean superficially, but can we engage with them to really understand what they’re needing? And I think about things like what Whole Foods was doing with their Future Search process, where every three to five years they were pulling together various stakeholders for a week. You participated in one of those. And how did you feel about that? Did you feel that stakeholders really had a chance to voice their thoughts and views as to where the strategy of the business was going?

Raj: Absolutely. By the way, when you mentioned the Spice Girls, another thought came to me. I’ve been using the acronyms spice and “spicee” to represent Stakeholders, Partners, Investors, Customers, Employees, and the Environment, the SPICEE so there’s a connection there. But yeah, I think the Future Search and the Appreciative Inquiry methodologies are broth great ways to get the whole system in the room and then to create the future together, dream the future procreated with them, and you have buy in from day one. You don’t come up with a strategy and then you go and sell it. We’re already preapproved.

Timothy: You co-created it with your stakeholders so they have a stake in it because you’ve done it with them, and they understand how their needs are represented and the value that they can help cocreate with you.

Raj: And interestingly, some of these big ideas for Whole Foods have come from stakeholders. They haven’t come from executives or board members or others. They’ve come from customers, they’ve come from employees, in some cases even activists in the space. So they would consider activists as sort of a kind of category of stakeholders as well. I’m not talking about activist investors, but I’m talking about social activists, well-being of animals for example and so forth. So, there’s a great deal to be said and then it bonds everybody together, creates this connective tissue across stakeholders. Yeah, you happen to be wearing a hat of a customer but potentially you could be an employee and certainly you could be an investor and if you really became an entrepreneur, you could be a supplier to that company, et cetera. So, the rules may change, but your orientation and linkage to the company are strong when you are included, part of the family in a way, so there’s kind of a family mindset here. We replace their role, but we are all in this tougher and the phrase that I like now is everybody matters, and everybody needs to win. So, all the stakeholders matter, their well-being inherently matters, not just because it’s going to help us make more money, but because it’s the right thing for them, we believe, and everybody needs to win. Otherwise, any system is only as strong as their weakest link and there are lots of weak links in most systems so we have to…just like our bodies, if we don’t pay attention, an infection in my pinky finger can ultimately bring down the whole thing.

Timothy: Yeah. Well, I think it’s…you brought up the appreciative inquiry. I remember when we interviewed Chuck Fowler, the former CEO of Fairmont Santrol, the mining company, he was very big on bringing together the stakeholders and going through an appreciative inquiry process and out of that came a lot of great ideas that have helped them become…I always get this wrong, but they take out more carbon than they put in to the environment now, having followed his process for the last 20 years, they are actually sequestering more carbon than they’re actually releasing and making a positive return on their sustainability investments. So it’s really interesting that when you start to think about this from a stakeholder point of view and you look at the environment that way, you can have, one, a real impact, but two, also earn a decent economic return. I remember two other things that he said that was really important about some of the things that came out of this stakeholder approach for them was, one, when they go in and they’re bidding for new mining rights in new communities, they’re always the favored partner for the local community in the kind of mining they do because they’re not afraid to reference past communities they’ve worked with and have people go back and interview them and, in fact, have those communities come and present to the new communities and say, hey, listen, working with these guys has been great. They’ve created jobs, they’ve treated us well, they’ve treated our environment well, they’ve left things, they’ve created parks and forests in the areas when they’re finished with their mining. So that became a real positive for them from a strategic point of view when they’re looking at growth opportunities in new markets. They have a competitive edge going into those markets and some of the small things they do, it’s like I remember they basically allow every employee to have 40 hours of paid volunteer time in their local community. So it becomes another example of sort of a win/win. You’ve got a week, 40 hours, to go do volunteer work in your local community. You feel good as an employee having this opportunity to contribute to the community you’re in, and the community benefits from the fact that you’re helping to sustain the places in which you work.

Raj: You can extend that thinking also. There’s a company called FIFCO and I think we have them featured in our field guide as well in addition to Fairmont, and what FIFCO has done in Costa Rica over there also gone from negative to neutral to positive on carbon, water, and on solid waste. They are planning to get to positive on all of them. Some of them they’re already getting there. And part of the way that they’ve done that is that they have given their own employees time to go out there and clean up some of the waste and do all of those kinds of things, but in recent years, they’ve extended that and they are now inviting customers to join those efforts, and their board members, and their suppliers, and then just citizens. So they have all of their stakeholders now as volunteers. Most companies stop at employees because you can kind of control your employees. You know what to do with them. But they have broadened it and opened it up and now there’s like 1 million hours’ worth of volunteering that goes into those mediation efforts. I’m also reminded of a steel company in Korea that I worked with called POSCO, the most admired metals company in the world at the time, and I went to their primary manufacturing plant in Pohang, which was a remote region of Korea, and I was struck from the fact that there are 2 million trees within the boundaries of that steel plant and that the air quality and the water quality of the ocean that is nearby is actually better today than it was 25 years ago when they started. So here is normally a polluting type of a business that comes there and because they partnered with the community and they treated the environment and everything else as a stakeholder, they created positive value for those stakeholders. So you get rid of the idea of tradeoffs across stakeholders when you adopt a true stakeholder mindset. If you don’t have that, then you’re constantly every day trading off. I’m going to feed Peter to pay Paul, whatever, or rob Peter to pay Paul, I guess, there’s no free lunch. But you can satisfy all of them and you can break those tradeoffs and part of the way you do that is by involving all of them in the process of coming up with ideas and ways to do things. So you kind of force across all of your stakeholders, which is what I love about these processes like appreciative inquiry. It’s like dreaming together. We say the expression goes the world is as you dream it. Everything you see around you was inside, everything behind me in this room, it’s like somebody’s had before it became part of this room.

Timothy: Yeah. No, no…

Raj: And therefore, if you dream a collective dream, then we can manifest that collective dream, but you get everybody’s…it’s not about one person, you know, sort of long range or going off and dreaming something, but we dream it together and then we manifest it and then it simultaneously…there are no tradeoffs inside of that because everything is simultaneously done for it.


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