Davos 2020 may have been the stage for the Greta V Trump show, but what was missed by most was how Davos 2020 revived an old capitalism debate. Today I will bring to your attention the debate that has defined capitalism and investing for almost 100 years: Shareholder Primacy vs Stakeholder Theory. With the Davos Manifesto 2020 some fear that shareholders are going to suffer, as the pendulum has decisively swung in the direction of stakeholders. Shareholders are rightly asking “Has Davos killed Shareholder Value”?
Debate of the century – Shareholder vs Stakeholder
A 1930s debate between two Law professors Adolf Berle (Columbia Law School) and E. Merrick Dodd (Harvard Law School) shaped the way we look at companies, their directors, their managers and their purpose. This debate also defined our expectations as shareholders. These two intellectual giants considered the following question and spent their careers defending their respective stance:
“For Whom Are Corporate Managers (Directors) The Trustees?”
God
Shareholders
Stakeholders
Governments
Which of the above answers do you relate to?
In law, the answer is the COMPANY itself, but jurists have had to make calls on who is the company for? What did Berle and Dodd have to say? Berle believed in Shareholder Primacy whilst Dodd supported the Stakeholder Theory to a company.
At Davos 2020 - Stakeholders Strike Back
“The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.” Davos Manifesto 2020
This recently updated Davos Manifesto at the World Economic Forum last month can be seen as the beginning of the end of the Berle - Dodd debate, and also shareholder primacy.
What is the Difference Between Shareholder Primacy and Stakeholder Theory?
The fundamental difference between shareholder primacy and stakeholder theory is that, under shareholder primacy, non-shareholder stakeholders can be viewed as “means” to the “end”, which is profits. In other words, employees, suppliers, environment, communities, governments are to be used to achieve that ultimate end. On the other hand, under stakeholder theory, the interests of non-shareholder stakeholders are also viewed as “ends” along with profits.
Critics of shareholder primacy claim that prioritising and maximising profits for shareholders as per Berle is only achieved by ensuring negative externalities are paid for by governments, society and environment. The Davos manifesto does suggest that corporates can no longer outsource these costs. Internalising them will no doubt impact short term profits for shareholders, thus their concern.
Detractors of Dodd’s stakeholder theory see its need to adjudicate between all stakeholders’ interest as being overly cumbersome and confusing to implement. Furthermore, they claim that it creates conflicts and inefficient allocation of financial capital thus making the company financially unsustainable in the long term. The opposite of what is intended. A fair and worthy concern of shareholders.
Does this mean that shareholders will be the losers from here on?
Stakeholder Approach Not a Zero-Sum Game? Stakeholders approach is nothing new and has been alive and waiting to emerge even when shareholder primacy seemed entrenched and irreplaceable. The late 1990s and early 2000s had their share of corporate scandals, with greed and profits at any cost. More recently extreme cases of shareholder primacy have given support for the need to redefine the company and its purpose closer to Dodd’s definition of a company. If we add to the mix, technology, globalisation, digital access for all stakeholders, netizens power and also concerned investors, we have all stakeholders having more say and sway then just shareholders. Shareholders are asking the following question - “will shareholders pay the price?” At Panarchy Partners, we believe that the stakeholder approach is not a zero-sum game; it does not reduce shareholder value. Companies that take the stakeholder approach but with the mindset that each form of capital: Human, Social, Environmental and Financial is an asset, NOT an expense, will be able to deliver appropriate progress and returns on these capitals. Companies can implement stakeholder focused efforts that will show through in improved sales (as seen by brands with purpose at Unilever), higher employee productivity (measured by SAP’s Business Health Culture Index) lower operating costs (3M) and lower interest expenses (Danone), to name a just few shareholder value-creating initiatives. Panvesting Implements The Davos Manifesto for Shareholders? Panvesting aims to remove the above shareholder concerns by identifying companies that optimise profits and maximise value as seen by all stakeholders, including shareholders. The Davos Manifesto is in line with our Panvesting philosophy. In the coming decade and beyond, Panarchy Partners will advocate the spirit of the Davos Manifesto through Panvesting. 100% of our portfolio companies have been engaging stakeholders to help define their purpose. 100% of our portfolio companies have identified material issues that are relevant to their financial well-being. 100% of our portfolio companies have set S.M.A.R.T targets associated with their stakeholders and shareholder’s interests. Finally, through engagement we expect to help our portfolio companies achieve their targets, on all forms of capital. Thanks Davos for adopting Panvesting! Munib