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Stakeholder capitalism – is the Davos Manifesto still relevant post-COVID-19?


Stakeholder capitalism is not a new idea, but it is one with profound resonance in contemporary corporate culture, even before the dramatic changes brought about by COVID-19.

The term "stakeholder capitalism" was a popular management theory as long ago as the 1950s and 60s and was the central theme of the 1973 Davos Manifesto, referring to the principle that businesses should serve the interests of society as a whole rather than just the interests of their shareholders. That definition was updated for this year's Davos meeting to include current concerns such as executive pay, zero tolerance for corruption and respect for human rights. Shareholder primacy, for so long an article of faith, is being challenged by increasingly vocal demands that corporations do more to safeguard the climate, their employees and the wider community.

Investors, lenders, clients, industry bodies and governments (driven, ultimately, by changing consumer attitudes) are using their influence to ensure executives focus not just on the bottom line, but on becoming better corporate citizens. Meanwhile, press and public scrutiny mean that missteps can translate into serious and long-lasting reputational harm, while success stories are amplified. Taken together, these trends have led to a growing emphasis on sustainability in its broadest sense. 

The concept of stakeholder capitalism therefore underpins the ESG agenda and permeates our corporate governance regime. Remember the shareholder v stakeholder controversy over section 172 of the Companies Act 2006? The paucity of cases under s172 suggests that the legislative approach on its own does relatively little to protect stakeholder interests, although combined with the reputational pressure from investors, consumers, the press, pressure groups, NGOs and government, there has been a powerful effect on corporate culture.  As the GC100 guidance on s172 states: "Many of the most admired companies also have a strong sense of social purpose and/or a stewardship approach to their business, their stakeholders and the environment. Markets and events can also intervene to cut across these goals, but reputational risk and damage, whether with specific stakeholders or more widely, often relate to failure by a company to meet standards of behaviour or performance set by law, regulation or commitments formally or informally made to those stakeholders."

The period of recovery from the COVID-19 crisis will be an important test of how deeply embedded stakeholder capitalism has become in corporate culture. Whilst FTSE companies will have received notifications from shareholder bodies in recent weeks indicating a degree of latitude from shareholders around dividend payments, this forbearance may well be short-lived. For example, the recent ISS guidance clearly applies only to the short term and reflects an expectation that funds not paid out to shareholders will be used to support the business and its employees: "Where some of our ISS market-specific policies ordinarily look for dividend payout ratios to be within a certain range (based on earnings for the prior year), this year we will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice. In analyzing such proposals, we will look at whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce".

Assuming the Build Back Better movement gains momentum, however, we expect to see greater focus on the positive returns to be generated by businesses with clear sustainable business goals in order to meet the expectations of shareholders in the difficult months to come, as well as concerns for the wider community, and there is plenty of research demonstrating the strength of companies with high ESG ratings.

Encouragingly, the FT has recently reported that the Covid-19 crisis may not deflect companies and investors from the ESG agenda as much as some may fear. The current crisis has highlighted how quickly and dramatically a systemic risk can impact established business models, giving new urgency to the idea that climate change is the next looming crisis. Also, as we wrote in our article here, people issues (the "S" in ESG) have come to the fore in response to the pandemic, and more recently, the Black Lives Matter movement has also shone the spotlight on social inequality.

We know that many businesses face an immense challenge in getting back on track following the COVID-19 crisis and we are keen to support you at every step.

For further advice and guidance on how businesses can "Build Back Better" by moving towards a more sustainable business model at the same time as meeting the increasingly stringent legal and regulatory obligations designed to promote the stakeholder capitalism agenda, please visit our Sustainable Business hub.

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