The majority of businesses place profit above all else and must do so to meet the demands of their shareholders. Stakeholder governance is an important component of a new economic system that places value not just on all shareholders, but on all stakeholders, such as people and the planet.
The movement toward stakeholder governance is about creating systems change. B Lab U.S. & Canada has been focused on creating pathways to stakeholder governance for 15 years to ensure companies can maintain their mission and continue to have a positive impact on society, no matter who the CEO, the members in the boardroom, or the investors are.
What Is Stakeholder Governance?
Stakeholder governance is a change to a company’s legal DNA, by amending its articles, charter, and/or governance documents. Adopting stakeholder governance allows a company to focus on a new purpose beyond just profit creation. The company can also focus on creating positive social and environmental impact. It also changes the fiduciary obligations. Directors and companies are legally accountable to this broader purpose and to their consideration of stakeholders.
In short, stakeholder governance allows companies to treat the interests of anyone who is impacted by the company’s conduct equally with the interests of shareholders. Stakeholders’ interests can include climate change, human rights, the well-being of people and the planet, profit, and more.
While the core components of stakeholder governance are crucial to changing the underlying decision-making paradigm present in a company, there are other voluntary changes to governance, company practices, regulations, or laws that will support a company fully living to the legal requirement’s intention. These could include creating a stakeholder advisory board of directors, tying executive compensation to stakeholder impact, implementing stakeholder engagement practices, or making changes to board member composition or committee structure.
The Purpose Behind Stakeholder Governance
Stakeholder governance intends to ensure the commitment to social and environmental positive impact can persist beyond leadership change. There is a massive disconnect between the needs of people and our planet and the behavior of businesses and the rules that govern them. This disconnect has led to growing inequality and exclusion, declining dignity for the working and middle classes, and an existential ecological crisis.
Stakeholder governance enables companies to commit to and be held accountable for integrating stakeholder impact into their decision-making process, and balancing profit and purpose.
>> Our vision is that one day all companies compete not only to be the best in the world but the best for the world. We want to transform the global economy to benefit all people, communities, and the planet. Download our Board Playbook to learn more about the case and process for adopting benefit governance as a requirement for B Corp Certification.
Stakeholder Governance vs. Shareholder Governance
While stakeholder governance makes all stakeholders (including shareholders) equal in the decision-making process first, shareholder governance, in turn, puts the shareholders first. Shareholder primacy is a core tenant of corporate law in many different jurisdictions worldwide. It stipulates that a company must focus on creating value for shareholders hence putting profit above all else.
Some argue corporations under shareholder primacy can incorporate environmental, social, and governance (ESG) policies and other sustainability initiatives. In many cases this is true, except when a company wants to make a trade-off between shareholder value and stakeholder impact or when your company hits a rough patch.
Under shareholder primacy, the business has to have a shareholder value justification for its commitment to stakeholders. There’s a fiduciary duty to shareholders. Under stakeholder governance, you are allowed to prioritize different stakeholders equally with with shareholders. You’re not required to consider one over the other, and you’re allowed to make trade-offs.
Advantages of Stakeholder Governance
The stakeholder governance business model comes with several advantages over the alternative, including the following:
- Mission Protection: Stakeholder primacy builds that legal commitment to stakeholders into your company’s DNA, allowing it to survive things like ownership changes, changes in leadership, capital raises, etc.
- Attraction and Retention of Talent: Investors want to invest in companies that have committed truthfully to sustainability and are about more than just greenwashing. Being a benefit corporation or a Certified B Corporation and setting this stakeholder governance framework in place helps reassure investors that you’re truly committed to valuing all people and the planet.
- Building Trust: Stakeholder governance not only builds company trust with stakeholders over time, but it also builds trust in the communities and industries you serve and impact.
>> Benefit corporation status allows corporations to opt out of shareholder primacy and opt-into stakeholder governance. Learn more about benefit corporation status on our website.
Examples of Stakeholder Governance
Here are two great examples of companies showing the massive value creation of what stakeholder capitalism can really do.
Patagonia, a Certified B Corporation and benefit corporation outdoor clothing and gear company, made headlines in 2022 when its founder, Yvon Chouinard, and his family announced that 100% of the company’s voting stock would be transferred to the Patagonia Purpose Trust and 100% of their non-voting stock would be transferred to the Holdfast Collective. He created both entities to protect the company during massive changes.
Patagonia’s stakeholder philosophy identifies the planet as the company’s penultimate stakeholder. Because of this, Yvon believed all the dividends and benefits must accrue to the planet as the main stakeholder and beneficiary, which is exactly what he did with this restructuring.
This shows the ultimate power of stakeholder capitalism over shareholder capitalism. It represents a deeper shift that supports sustained success for not only business owners but society as a whole.
Allbirds, a Certified B Corporation, benefit corporation, and footwear and apparel company, is among fellow businesses that consider the Earth as a stakeholder and factor their impact on the planet into their policies and practices as well as their mission and values. For Allbirds, stakeholder governance is not a standalone pillar but a mechanism that provides concrete structure to its mission, vision, and values. A few standout examples of this include:
- Management and employees at or above the director level at Allbirds have bonuses linked to sustainability outcomes, including specific metrics related to carbon reduction targets.
- Allbirds regularly requires that ESG issues are represented at the highest level of corporate decision-making. The sustainability, nomination, and governance committee of their board of directors oversees ESG matters.
- In 2021, Allbirds formally established a Sustainability Advisory Committee composed of external and independent third-party ESG experts.
While many businesses see the tension between profit and purpose, Allbirds sees an opportunity, and they can achieve this opportunity by leaning into the stakeholder governance framework.
Promoting Stakeholder Governance
The reason B Lab has focused so intensely on stakeholder governance was to ensure companies could maintain their mission and continue to have a positive impact on society, no matter who the CEO, board members, or investors were.
Systems change requires us to change the rules of the game. We must pass laws in more jurisdictions to create this systems change and promote the stakeholder governance model. There are still states and provinces that haven’t passed benefit corporation status. And we need to think about the other actors in the regulatory system who are still operating under a shareholder primacy mindset, including investors.
Corporations should make business decisions by looking at broader stakeholders instead of just the business roundtable. It’s time to change the rules.
Stakeholder Governance Resources
- The Board Playbook: Discover how to partner with us to drive a stakeholder economy or how to support our partner strategies.
- Can We Restore Trust in Capitalism with Benefit Governance?
- How Patagonia and Allbirds Set the Pace on Their Journey as Sustainable Leaders
- Stakeholder Economy: Learn all the ins and outs of what a stakeholder economy means.
Sign Up for our B The Change Newsletter
Read stories on the B Corp Movement and people using business as a force for good. The B The Change Newsletter is sent weekly on Fridays.