The Rise of Stakeholder Capitalism: How Businesses Can Balance Profit, Purpose, and Corporate Responsibility

For decades, the core purpose of businesses was thought to be singular: maximizing profits for shareholders. This idea shaped corporate strategies, boardroom decisions, and the global economy. However, the tides are shifting as businesses increasingly recognize the importance of serving a wider set of stakeholders—employees, customers, communities, and suppliers. This transformation, filled with highs and lows, offers a roadmap for the future of ethical and sustainable capitalism.

The debate about whom businesses should serve dates back to the early 20th century. In 1914, Henry Ford famously doubled his workers’ wages, which was widely viewed as a visionary move to enable workers to afford the cars they built. Yet, the rationale was pragmatic: higher wages reduced turnover and absenteeism, leading to greater productivity. This was an early example of what economists call the "efficiency wage hypothesis"—higher wages can boost a company’s bottom line.

The 1940s saw corporations like Johnson & Johnson publishing mission statements prioritizing stakeholders. This era of "managerialism" focused on creating shared value for all stakeholders, believing it would also serve shareholder interests.

By the 1980s, however, this stakeholder approach was replaced by a laser focus on shareholder value, popularized by economist Milton Friedman. Friedman argued that the sole responsibility of businesses was to maximize profits while adhering to laws and ethical norms. This perspective gained traction amidst the economic upheavals of the time, reinforced by deregulation, globalization, and the "Greed is Good" mantra of the Reagan and Thatcher eras.

The dominance of shareholder primacy came with significant social and economic costs. Income inequality soared, middle-class wages stagnated, and wealth became concentrated in the hands of a few. The global financial crisis of 2007-2008 exposed the fragility of this model, with corporate bailouts further exacerbating public resentment.

This growing inequality spurred political upheaval. Populist movements channeled public anger toward globalization, immigration, and elites, creating a volatile environment for businesses. Corporate leaders began to realize that ignoring societal discontent could ultimately harm their profits and reputations.

In 2019, the Business Roundtable—a collective of top U.S. CEOs—made a commitment to prioritize stakeholders alongside shareholders. Businesses understood that inclusive growth was essential for long-term profitability and societal stability. CEOs acknowledged that a failure to act could lead to intrusive regulations, higher taxes, and the breakup of large corporations.

Stakeholder capitalism is not without its skeptics. Critics argue that these commitments often lack concrete actions and measurable outcomes. However, the shift toward stakeholder responsibility signals a growing acknowledgment of businesses' broader role in society.

To navigate this evolving landscape, businesses must adopt a balanced and pragmatic approach. Here are seven principles—a corporate Hippocratic Oath—that can guide companies toward ethical and sustainable practices:

• Do No Harm: Avoid harmful practices such as unsafe workplaces, deceptive marketing, or unethical data usage.

• Adhere to Laws and Taxes: Follow regulations, pay taxes, and resist exploiting legal loopholes.

• Minimize Political Interference: Limit lobbying and disclose all political contributions transparently.

• Embrace Science and Truth: Avoid spreading misinformation, especially in areas like climate change and public health.

• Focus on Core Competencies: Stick to what you do best while fostering healthy competition.

• Empower Stakeholders: Include employees, customers, and communities in governance structures. Germany’s co-determination model, which integrates worker representation on corporate boards, is a noteworthy example.

• Address Inequality Internally: Disclose wage gaps and ensure equitable compensation across skill levels and genders.

Balancing Profit and Purpose

The future of business lies in striking a balance between profit and purpose. Companies that authentically embrace stakeholder capitalism stand to gain public trust, customer loyalty, and employee engagement—benefits that ultimately drive sustainable profitability.

As the world faces challenges such as climate change, social inequality, and geopolitical instability, businesses have an opportunity to lead with integrity and innovation. By prioritizing stakeholders alongside shareholders, they can ensure their long-term success while contributing to a more equitable and resilient global economy.

In the words of Adam Smith, often mischaracterized as the patron saint of unbridled capitalism, 

Markets flourish not merely through self-interest but through trust, empathy, and morality.

It’s time for businesses to embody these values and redefine their role in shaping the future.