Stakeholder capitalism: What it is, what it isn't, and a new model for measuring stakeholder trade‐offs

• Published date: 01 March 2023
• Author: Gregory W. Brown,Gerald D. Cohen
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/jacf.12552

DOI: 10.1111/jacf.12552

ORIGINAL ARTICLE

Stakeholder capitalism: What it is, what it isn’t, and a new model for

measuring stakeholder trade-offs

Gregory W. Brown Gerald D. Cohen

Kenan Institute of Private Enterprise, Universityof North Carolina at Chapel Hill, Chapel Hill, North Carolina, USA

Correspondence

Gregory W.Brown, University of North Carolina at Chapel Hill, Chapel Hill, NC, USA.

Email: Gregory_Brown@kenan-flagler.unc.edu

Throughout 2022, the Kenan Institute at UNC-Chapel Hill

explored how ESG factors enter into and play a role in the deci-

sions of corporate managers and investors. We have framed this

analysis within the broader notion of “stakeholder capitalism,” a

model in which business decisions reflect explicit consideration of

their expected impact on a broader set of corporate stakeholders.

Before exploring stakeholder capitalism, it is important to dis-

cuss the traditional best-practice model: shareholder primacy. The

beauty of shareholder capitalism is that, under the right set of con-

ditions, it produces the optimal amount of goods and services at

the lowest cost and with the least waste. However,it is by no means

a perfect model because it does not account for harm to common

or “public” goods, such as the effects of pollution on clean air

and water, or what economists call “negative externalities.” But in

theory at least, all parties—workers, managers, shareholders, con-

sumers, and regulators—under shareholder maximization know

what companies are up to: they are in the business of maximiz-

ing their long-run stream (or net present value) of profits. With

this common understanding as a basis, policymakers, investors,

and consumers can create structures and incentives to shift toward

outcomes that solve for negative externalities, such as minimizing

pollution or misinformation.

THE TEXTBOOK MODEL OF SHAREHOLDER

PRIMACY

In the textbook model of shareholder capitalism, companies aim

to maximize (the net present value of) their expected stream of

long-run profits by producing the highest output at the lowest

cost. All of management’s decisions are based on that principle:

hire the workers with the right skills or train existing workers;

invest in plant, equipment, software, and research and develop-

ment; and produce a good or service (predominantly services these

days) that customers want to buy. Demand and supply respond

to changes in prices and tastes—such as customers wanting more

organic food or electric cars—because companies are chasing those

profits. Workers are motivated by pay, bonuses, and, in some

cases, ownership stakes to produce the quality of products the firm

chooses to sell, whether it’s cheap, low-quality offerings like no-

frills air travel or, at the other end of the spectrum, luxury resort

accommodations. Companies choose the mix of inputs based on

cost-benefit analyses and make long-term investments in capital

and labor to keep generating profits. Nothing is wasted because

waste eats into profits.

THE REALITY OF SHAREHOLDER

CAPITALISM

In the ideal setting noted above, shareholder capitalism produces

an efficient allocation of resources. The presence of competitive

markets with widely available information means that consumers

know the quality of the good or service they are buying. Likewise,

management is in sync with shareholders. Perhaps most impor-

tant, governments adjust for externalities and create a regulatory

environment that ensures competitive markets and the free flow

of information.

But such an ideal world is not, of course, the one we live in, and

market failures occur.In some ways, the U.S. of 1970—when Mil-

ton Friedman wrote his famous op-ed “The Social Responsibility

of Business Is to Increase Its Profits,” which both proponents and

opponents of the shareholder model continue to lean on—may

have been closer to this textbook model. Consider, for example,

the meaningful decline in competition during the last 15 years

(as illustrated in Figure 1), as well as research suggesting that this

trend goes back much farther.1The increased firm concentration

we see today tends to be accompanied by higher prices, lower

output, less dynamism, and fewer startups.2

1See Shapiro, C. 2019. “Protecting competition in the American economy: Merger control,

tech titans, labor markets.” The Journal of Economic Perspectives33(3): 69–93. https://doi.org/

10.1257/jep.33.3.69

2See Shambaugh, J., R. Nunn, A. Breitwieser, and P. Liu. 2018. “The State of Com-

petition and Dynamism: Facts about Concentration, Start-Ups, and Related Policies. The

Hamilton Project.” https://www.hamiltonproject.org/papers/the_state_of_competition_and_

dynamism_facts_about_concentration_start_

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