How to Make Stakeholder Capitalism Work

Hans Taparia headshot
By Hans Taparia
In recent years, corporate America has waged a public-relations crusade to uphold its image among cynical consumers, angry environmentalists, and grandstanding politicians. Companies claim that they can steward nature, show compassion to workers, improve the well-being of their customers, and sustain the communities they operate within. 

But to serve the interests of all these stakeholders, much of corporate America would have to abandon the very business models that drive so much of their profits. For some companies, such a step would call their very existence into question. If Facebook and YouTube, for instance, were to change their algorithms so that misinformation and hateful content—clickbait that garners high engagement but often harms its users—were removed or demoted, advertising revenues would drop.

Top business schools and promoters of “conscious capitalism” claim that serving the interests of all stakeholders is good for business and will generate better returns over the long run. This claim makes intuitive sense. A business that doesn’t serve the interests of its customers, suppliers, employees, or community is likely to be a business in decline, stakeholder theorist Edward Freeman has argued. But what happens if that business wields such concentrated market power that those very customers, suppliers, and employees have limited options to buy, sell, or work? Users of social media, for example, are restricted to one or two platforms to stay connected to their wider communities. Commodity farmers and textile manufacturers often have access to no more than one buyer for their goods. Underskilled workers often find opportunity only within a narrow band of industries and employers. Economists describe these situations as market failures. Such concentrated corporate power constricts the choices of other stakeholders and enables corporations to ignore or even harm them while generating outsize profits.

Read the full Stanford Social Innovation Review article.

Hans Taparia is a Clinical Associate Professor of Business and Society.