What is stakeholder theory and what does it mean for capital markets and investments‪?‬ Finance & Fury Podcast

Welcome to Finance and Fury. What is stakeholder theory and what does it mean for capital markets and investments? World Economic Forum annual agenda occurred a few weeks ago. One year ago, the World Economic Forum launched a new ‘Davos Manifesto’ in support of stakeholder capitalism – this year – stakeholder capitalism, or stakeholder theory was at the forefront of many of the agenda’s
What is stakeholder theory – like many things, the definition has changed over time –
Originally - Stakeholder Theory is a concept from R. Edward Freeman (American Philosopher and Professor) when he introduced it in 1984 – it was a theory of organisational management and business ethics – aimed to address morals and values in managing an organisation - The theory argues that a firm should create value for all stakeholders, not just shareholders Since the 1980s - there has been a massive rise in the theory – as well as an expansion on what is defined within the term value and who is considered a stakeholder From R. Edward Freeman - “The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.” The issue with this is the concept of providing value without resorting to tradeoffs – is this actually possible? Individuals and companies have to make decisions every day – with every decision there is an opportunity cost – and likely a tradeoff Today - Stakeholder theory is closer to a version of corporate social justice – or in other words, the concept of equity in the world and a merging of company’s responsibility for communities (who are technically non-stake holders) To explain this further – Equity (in the non-financial sense) is about outcomes – the fairness of an outcome - is not equality of opportunity – but equality of outcomes unlike equality of opportunity – equity actually requires the different treatment of individuals and different distribution of resources to get to an equitable outcome – if you have $10,000 in shares but your friend doesn’t, that isn’t equitable, you should technically both have $5,000 – if you earn $100,000 but your neighbour only earns $50,000 – that isn’t equitable This is one of the big changes in stakeholder theory – that is the growing support in calls for equity – Under this theory business firms should entertain all kinds of noneconomic goals and outcomes. No longer may owners simply concern themselves with profit or loss, but instead must consider the broader societal implications of everything their business does. Social media has really helped to accelerate this – when looking at the online presence of massive companies – it is all about cultivating an image of social responsibility – PR teams working around the clock to support any cause that is in vogue – Whether corporate leaders concern themselves with social justice out of genuine desire or merely to avoid backlash is an open question – to find an answer it helps to look at what a company does versus what picture they have on Under the original conception of stakeholder theory - businesses have four primary elements when it comes to stakeholders - namely owners, managers, employees (or suppliers), and customers All four have skin in the game – they either have invested money in the company, are employed by the company, require the company to buy their goods/services or in turn, buy this companies goods and services – at every stage each of these elements has their own money or income is involved in the decision-making process – Each of these individuals are making tradeoffs – making decisions based around what they believe will provide them the greatest value Owners/Investors – tradeoff in that they could have invested money elsewhere – but do s