3 Ways Stakeholder Capitalism Delivers Excellence

Those who believe capitalism has grown too “woke” now have an investment fund just for them. Called Strive, it’s intended to back companies that focus exclusively on profits, not social or political issues. Vivek Ramaswamy, the fund’s founder and an avowed opponent of stakeholder capitalism, argues that businesses should leave politics to the politicians and focus instead on achieving commercial success–what he calls “excellence capitalism.”

Ramaswamy is hardly alone on the political right in worrying that business leaders are veering too far beyond their traditional ken of profit-making. As one commentator recently argued, the notion that businesses should pursue a “social purpose” is “the most dangerous business idea of ​​the moment,” a misguided effort on the part of some academic cabal to “reprogram corporations to solve social problems that governments and voluntary organizations have proved incapable of solving.”

I once doubted stakeholder capitalism. Like many others, I viewed the demands of employees, groups, and other contributors as a risk leaders needed to “manage” by doing the minimum necessary. Leaders’ focus, I presumed, had to be delivering shareholder value by focusing on their customers.

But after performing extensive field work at firms that embrace a multi-stakeholder view holder while also driving financial results, my perspective shifted. I found that leaders who run businesses with shareholders front and center don’t always do very well, while many of those with broader orientations seem to outperform. Striving to understand these results, I uncovered three logical flaws latent in the notion that companies should focus primarily on generating profits for shareholders.

First, proponents of so-called excellence capitalism err by focusing excessively on the end goal of commercial success. Excellence in their view means outsized financial performance, and it’s the primary consideration worth attending to. But as most managers will tell you, great businesses usually don’t succeed by focusing on the goals they wish to achieve. Rather, they focus on the means to achieve those goals.

To thrive, businesses must address the needs of customers. They can’t do that unless they can count on motivated employees to serve customers. Companies also require the cooperation of suppliers and local communities to operate effectively, which means attending to their needs as well.

Focusing myopically on profits cuts companies off at the knees. As leaders ignore the fundamentals of running a great business, their firms quickly lose the support of other important players. Legendary General Electric CEO Jack Welch famously called shareholder value maximization “the world’s dumbest idea” for precisely this reason.

Proponents of “excellence capitalism” also err because they Focus narrowly on a short-term time horizon. Excellence in their eyes requires an obsession with short-term results, even at the expense of long-term success. But no great business was ever built as a disconnected series of short-term results. Rather, leaders begin with a long-term agenda, which they then translate into a series of short-term objectives. These objectives aren’t an end in and of themselves. They’re markers along the path to achieving long-term goals. Once you open your eyes to a long-term future, you also begin to see how an array of stakeholders contribute to your success.

Proponents of “excellence capitalism” make a third mistake: they presume an excessively sharp separation between business and society. In their view, business’s job is to generate economic value, while it’s up to government to tackle social problems. That sounds nice, but the realities of business today are far messier. All business activities–from procurement to production, distribution to sales–are deeply embedded in local communities, impacting a range of people and social issues. It used to be socially accessible for companies to negatively impact society so long as they remained within legal bounds. Then social expectations changed–firms had to avoid such negative externalities. Today even that’s not enough; society expects firms to provide positive benefits, in addition to avoiding harms.

Surveys show that large percentages of consumers prefer to do business with firms that help make the world a better place, or at the very least don’t degrade it. Employees, too, seek to work for companies whose purpose includes but also transcend-making. Any number of leaders I speak with confirm that with the market for talent extraordinarily tight, pursuing a higher purpose or mission helps their companies compete for the very best.

Although some might wish to dismiss stakeholders’ concerns as “woke,” managers recognize that reputational costs have a significant commercial impact. To run successful businesses, they must understand the enterprise as a social actor, not simply an economic one. That necessarily leads them back toward a multi-stakeholder approach.

Stakeholder capitalism doesn’t make for easy sound bytes, but it delivers better results in both financial and social terms than so-called excellence capitalism. Numerous empirical studies have revealed strong links between a multi-stakeholder orientation and innovation, financial returns, growth, and other dimensions of business performance. Conversely, one wonders precisely which companies Ramaswamy envisions including in his portfolio. Are there really any top-performing firms out there that operate with such strict deference to shareholders’ interests? And would anyone with half a soul and an eye for profits wish to invest in them? The pursuit of “excellence” is a sure pathway to medicine.

Ultimately, stakeholder capitalism is capitalism. It’s capitalism for the real world.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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