A new economic model which includes the SDGs: Stakeholder Capitalism

By Dr Amit Achameesing, Founder of NAB Impact Investing Ltd., Mauritius and SVI Accredited Trainer for the SDG Impact Standards.

The free-market ideology and the insatiable pursuit of self-interest or profits for shareholders known as shareholder capitalism has dominated much of economic thinking and policymaking over the past decades. During the last century, inspired by the theoretical foundations and prescriptions of neoclassical economics, proponents of free market in many countries around the world, engaged into a campaign of promoting aggressive free market policies which would take its toll on their subsequent economic and social progress.

Anyone who has lived in one of the world’s less developed countries, in other words, most of the world’s population has lived through the free market agenda. Free market economics has dominated the decisions of the large international organizations such as the IMF and the World Bank. Thanks to the political and financial clout of these institutions, free market policies made their mark on the world by affecting the lives of hundreds of millions of people in the most far-flung corners of the earth. In over 100 countries, central bank policies, IMF structural adjustment programmes and other reform packages changed many aspects of how societies are organized along the neoclassical lines.

The prescriptions of neoclassical economics like deregulation, liberalization, and other market- oriented structural reforms were meant to bring prosperity to the developing countries. Proponents of free market policies raised hopes that standards of living and the quality of life could be improved all over the world, that poverty and deprivation was going to be a thing of the past. Economists were convinced that, thanks to the advances of economics, an era of stable economic growth and ever-increasing wealth and prosperity had begun and would spread across the world. This is not what happened.

There is very little empirical evidence that poverty, destitution, disease, and economic inequality have been defeated. To the contrary, many studies indicate that inequality has been increasing. The number of people living in urban slums has been rising. Poverty remains an urgent and growing problem. The gap between the well-off and the poor is not closing but widening. Moreover, the unabated and ruthless gains for profits have disrupted the natural course of evolution leading to climate change disasters and destruction of the fauna and flora around the world, affecting societies and businesses in an unprecedented way and on a scale that we have never experienced before.

Today, as the world awakens to the need of addressing the many miseries and challenges of modern civilization embodied in the Sustainable Development Goals (SDGs), there is now an emerging consensus for the adoption of a more human economic paradigm known as stakeholder capitalism. Stakeholder capitalism is a form of capitalism in which companies seek long-term value creation accounting for the needs of all their stakeholders, including their shareholders, customers, suppliers, community, and environment amongst others.

Stakeholder Capitalism is a further evolution of the concept of Shareholder Capitalism. The Friedman doctrine, also called shareholder theory, is a normative theory advanced by economist Milton Friedman which holds that the social responsibility of business is to increase its profits. This shareholder primacy approach views shareholders as the economic engine of the organization and the only group to which the firm is socially responsible. As such, the goal of the firm is to increase its profits and maximize returns to shareholders. It is important to mention that neoclassical and free market economics and shareholder capitalism are all part of the same worldview which is basically the Friedmanite view that companies should focus narrowly on just being profitable and good outcomes will follow.

Therefore, while shareholder Capitalism seeks to maximize “shareholders’ value”, stakeholder capitalism views companies from the perspective of creating “shared value” for all their stakeholders. Stakeholder Capitalism adds a new dimension to the current model of profit measurement, as it encourages companies to strongly engage with all their stakeholders and measure and manage the impact of their operations on the SDGs.

Stakeholder capitalism can take two forms namely, cosmetic stakeholder capitalism and true stakeholder capitalism. Cosmetic stakeholder capitalism is an artificial form of stakeholder capitalism through which companies engage in apparently commendable sustainable business practices when in fact no real and significant impact is achieved. For instance, a company could donate to charity, or their employees could volunteer with a day off free, but that could be just for self-promotion known in the jargon as impact washing. True stakeholder capitalism occurs when more concrete actions to act are intentional and target a set number of SDGs that would genuinely cater for the interests of all the stakeholders of an organization.

Germany has long practiced a form of true stakeholder capitalism through its “co- determination” system, where workers have representation on company boards. This system allows employees to have a say in major corporate decisions, ensuring that their interests are considered alongside those of shareholders. This model has contributed to the stability and long-term success of many German companies. It has been credited with fostering a strong industrial base, low unemployment rates, and a more equitable distribution of wealth.

In Japan, the concept of stakeholder capitalism is embodied in the Keiretsu system, where large business networks are interlinked with mutual shareholding and close ties between companies, banks, and suppliers. The emphasis is on long-term relationships and the well- being of all participants, not just shareholders. This system has led to strong loyalty and cooperation among companies and stakeholders, contributing to Japan’s rapid post-war economic growth. Nordic countries like Sweden and Denmark incorporate stakeholder- oriented practices in their corporate governance models, focusing on social welfare, employee rights, and environmental sustainability. These countries consistently rank high in global indexes for economic stability, social equality, and environmental sustainability. The strong emphasis on balancing stakeholder interests has contributed to their reputation for high quality of life and robust economies.

Today, the work of SDG Impact, a global UNDP initiative, provides a major platform in executing the stakeholder capitalism model. SDG impact provides three key instruments for the private sector around the world to embed impact into their decisions while also attracting private capital flows into SDG investment opportunities. The first instrument, SDG Impact Management, provides private entreprises with impact management education and impact measurement and management (IMM) best practices that encourage firms to embed sustainability and impact into their organizational systems. It includes the UNDP SDG Impact Standards and the UNDP SDG Impact Assurance Scheme. The SDG Impact Standards are management standards designed to guide businesses and investors to embed sustainability and the SDGs at the core of their internal management and decision-making practices. The SDG Impact Assurance Scheme is designed to provide assurance that the organization has the policies and processes in place to achieve the objective of the Standards.

The second instrument, SDG Impact Intelligence, produces data and insights needed for increasing financial flows to investment opportunity areas related to the SDGs, namely through a market intelligence tool known as the SDG Investor Map. The third instrument, SDG Impact Facilitation includes capacity building of high impact prospects, matchmaking, and collaboration to realize SDG investment opportunities. The SDG Impact Intelligence and Facilitation initiatives work with investors to encourage capital allocation that supports sustainable development, emphasizing the importance of long-term value creation for all stakeholders, including society and the environment.

Therefore, the UNDP's SDG Impact initiative plays a significant role in advancing stakeholder capitalism globally, particularly through its focus on aligning private sector activities and investments with the Sustainable Development Goals (SDGs). The UNDP's efforts have contributed to raising awareness and increasing the adoption of stakeholder capitalism, especially in developing countries where sustainable development is critical. By offering practical tools and frameworks, the SDG Impact initiative is helping to embed stakeholder capitalism principles into the organizational systems and decision-making practices and investment decisions of companies worldwide.

The shift from shareholder capitalism to stakeholder capitalism should not be viewed as a trade-off between financial and social returns, but instead should be seen as a strategy for maintaining and improving financial success. Even in cases where profits suffer, that situation should not last for too long! Sustainability is today a major business disruptor, just as other macro trends have been in the past namely, automation and the industrial revolution, technological advances such as computing and the social media and the digital revolution with big data and AI. Sustainability today provides companies with the opportunity to enhance their reputation and the value of their brand, opens new business and investment opportunities, drive innovation and design of effective products & services, manage risk more effectively, improve resilience, improve system value that underpins future business performance, and attract and retain employees, investors, and consumers.

Ultimately, what matters to corporations is their bottom line and the only thing that can affect it is customer’s knowledge and behaviour. In that respect, for true stakeholder capitalism to gain strong traction, there should be popular movements, culture change, awareness raising and committed academics and politicians amongst others who walk the talk. We remain convinced that a new age of stakeholder capitalism has dawned, and it is only a matter of time before policymakers and business leaders around the world embrace this new paradigm that will ultimately shape capitalism and give it a human face.

If you enjoyed this blog you can find out more about the SDG Impact work here and learn about the Train the Trainer Program SVI are running with the UNDP here.