The stakeholder model of corporate governance
Many people view corporations as elusive, all-powerful entities. However, stakeholders — people with an interest in a company — have more power than they think, especially under the stakeholder model of corporate governance.
A model of corporate governance defines the role companies play in society. Models tend to evolve, but the stakeholder theory of corporate governance has taken root among corporate leaders in some arenas. However, not all board directors are on board, and there are even stark differences in how men and women view the stakeholder theory. Here, we’ll give you all the information you need to determine whether the stakeholder model is suitable for your organization, including:
- What the stakeholder model of corporate governance is
- The difference between the shareholder and stakeholder models
- The fundamental principles of the stakeholder theory
- Expected benefits and potential constraints of adopting a stakeholder model
- How decision-making happens within a stakeholder model
What is the stakeholder model of corporate governance?
The stakeholder theory of corporate governance focuses on corporate activity’s effect on all its stakeholders rather than focusing only on shareholders. With the stakeholder theory, corporations are accountable to myriad groups and must try to mitigate or reduce conflicts between them. The theory also incorporates the interests of any third parties that are in some way dependent on the corporation.
Stakeholders that fall under this theory may be:
- Internal stakeholders, such as corporate directors, managers and employees.
- External stakeholders, including creditors, vendors, auditors, customers, the community and government agencies.
While stakeholders are not directly involved in the governance process, stakeholders influence how the company operates. All stakeholders engage with the corporation to some degree, expecting that the corporation will deliver on some level, whether that is a paycheck, dividends, a bonus, additional orders, tax revenue or a job.
Shareholder vs stakeholder model of corporate governance
The shareholder and stakeholder models approach corporate governance differently. While the shareholder model prioritizes the interest of shareholders — those who own company shares — the stakeholder model takes a broader view and accounts for how business activities impact multiple groups of people.
A board operating under the shareholder model will take steps to maximize the value of the company’s shares, while a board accountable to stakeholders must balance financial performance with other interests, like corporate social responsibility (CSR) and environmental, social and governance (ESG).
What are the principles of the stakeholder theory?
Several guiding principles underpin a stakeholder governance model, each holding boards accountable for the corporation’s effect beyond its finances. Some common principles are:
- Multiple stakeholders: The idea that a company has various stakeholders shapes the model. Boards must consider anyone who is or can be affected by the company.
- Sustainability: Many companies have justified the means (unethical or damaging business practices) with the ends (financial success). The stakeholder model instead emphasizes a company’s long-term sustainability in terms of the environment and the well-being of the company, its employees and its broader ecosystem.
- Ethics: Boards following the stakeholder model must strive to be ethical. Prioritizing ethics ensures decisions are fair to all parties and upholds the integrity of the board and the company.
- Strategy: The corporate strategy must also reflect all stakeholders’ interests, including aligning business activities with stakeholders’ values and expectations, which can help the organization achieve long-term success.
Benefits of a stakeholder model
The stakeholder model of corporate governance model has numerous benefits, but most revolve around the company’s long-term success. Other benefits of adopting a stakeholder orientation include:
- Improved reputation: Companies can boost their reputation by actively engaging with diverse stakeholders. Consumers are four to six times more likely to buy from a company with a strong reputation, so demonstrating positive and ethical corporate behavior is an essential way the stakeholder model can help companies thrive.
- Better risk management: The stakeholder model encourages an enterprise-wide view of risks by incorporating various ESG issues. As a result, directors under this model are well-positioned to identify and mitigate risks proactively.
- Increased employee productivity: Employees are stakeholders, which means this model can help them feel valued. That often translates to job satisfaction, loyalty and productivity — all characteristics that strengthen a company’s bottom line.
- Access to capital: Investment firms like BlackRock now heavily weigh ESG considerations when making investment decisions. Leveraging the stakeholder model affirms a company’s commitment to ethical operations, which can strengthen investor confidence.
- Long-term value: The stakeholder model creates value in the long term by meeting the needs of many stakeholders. Corporations that do are resilient and build a strong reputation over time, creating more value for stakeholders and shareholders alike.
Constraints on the stakeholder value model of corporate governance
As beneficial as the stakeholder model can be, it also comes with several challenges. Understanding what they are can help companies decide whether to move forward with adoption. Many corporations that leverage the stakeholder model of corporate governance incorporate:
- Conflicting interests: Diverse stakeholders might have mutually exclusive needs. For example, offering a comprehensive benefits package could detract from shareholders’ expected returns. Establishing best practices that balance competing interests can be incredibly challenging, especially in the early stages of adoption.
- Measurement: Financial metrics are clear and relatively easy to measure. But how do you measure the satisfaction of a variety of stakeholders? Measuring social and environmental impacts can add another layer of complexity, especially for organizations that lack a centralized governance platform.
- External pressure: Directors may feel pressure to meet short-term financial goals incompatible with a stakeholder model. Withstanding that pressure and staying the course can be trying for even the most seasoned board directors.
- Costs: Transitioning to a stakeholder model of corporate governance can represent a significant upfront cost. Expenses can include the capacity to manage the governance model and implement initiatives to overhaul sustainability or implement new labor practices.
- Communication: Organizations that want to engage all stakeholders effectively must invest significant time and resources. It’s also time-consuming to maintain any channels of communication you create.
Board directors' view of the stakeholder theory of corporate governance over the years
Many board directors still aren’t sold on the notion of the stakeholder theory as good governance. Over 200 chief executives discussed the issue at a Business Roundtable in 2019. The discussions produced a shift in how CEOs define the purpose of corporations: to serve the interests of employees, customers, suppliers and the communities in which they work. That statement encapsulates the shareholder model. The group also noted that:
- Many business leaders from some of the largest corporations in the United States said at the Roundtable that they agreed with the stakeholder model of governance.
- Board directors were more mixed, and only 58% of board directors felt that companies should consider stakeholders rather than shareholders.
- Most board directors agree that corporations have a social purpose.
- Most directors also believe that having a social purpose and company profitability aren’t necessarily mutually exclusive.
While board directors and executives have somewhat opposing views, males and females aren’t yet on the same page either.
Gender differences in the Stakeholder theory of corporate governance
The 2019 PwC Corporate Directors Survey found that women board directors tend to favor the stakeholder model of governance, with 71% on board as compared with only 54% of male directors favoring the stakeholder model. Though the landscape has evolved since then, the gender divide on stakeholder interests remains.
PwC conducted that same survey in 2023 and found that 67% of women directors see ESG issues as related to corporate strategy, compared to 51% of their male counterparts. That gap holds in how men and women directors view the relationship between ESG and financial performance, with 61% and 35%, respectively, believing that ESG has a financial impact.
Other notable statistics showed:
- 100% of female directors believe gender diversity is an important attribute of modern boards, but only 73% of male directors agreed.
- The percentage of men who think board diversity enhances performance was a record-low 76%, down from 85%.
- Male directors were twice as likely as female directors to believe shareholder engagement is perfunctory.
It will be interesting to see how the corporate governance model evolves in the coming years and how it shapes companies and their boards as women become more of a staple in boardrooms and as stakeholders become a more critical component in the business world.
Master the different board governance models
The stakeholder model of corporate governance is a robust governance model that has only gained momentum in recent years. While its unique balance of financial performance and ESG has proven a potent formula, it’s not the only model of corporate governance boards can adopt.
In fact, with the right directors and an effective governance platform, organizations can effectively care for their shareholders and boost their performance using several different governance models. Dive into the five most common models — and a few more worth considering — to get better informed about the best model for your business.
