The discussions on stakeholder capitalism versus the currently dominant model of shareholder value maximization can be summed up simply. We all agree. The primary goal of corporations can no longer be just to maximize its profits.
Stakeholder capitalism gained new prominence last year when the CEOs of more than 180 major companies, members of The Business Roundtable (BRT), raised expectations by issuing a statement of corporate purpose and commitment. While BRT CEO Josh Bolten claims that CEOs are living up to their commitments, many remain deeply skeptical that any meaningful progress has or will be made. A recent Ford Foundation study showed that the movement in face of the Covid-19 pandemic has failed to deliver fundamental shifts.
A recent ranking by Just Capital, though, celebrated the progress made, ranking Google as a leader in “stakeholder capitalism” even while the Justice Department and 11 U.S. States filed an antitrust lawsuit against its parent, Alphabet, for maintaining monopoly power through exclusionary practices that are harmful to competition and stakeholders.
Amid such cynicism, and given the backdrop of a pandemic, economic crisis and national reckoning on racial justice, it’s imperative for CEOs to make concrete steps toward transforming the way they do business — and fast.
The problem is nobody has offered a framework or model of a company that serves “all stakeholders.” I propose a model in my book: The Interaction Field: The Revolutionary New Way to Create Shared Value for Businesses, Customers and Society (Sept 2020).
I propose that companies must take advantage of the hyperconnectivity that exists today between everything – consumers, people, things, information, companies and all stakeholders including suppliers, software developers, regulators and even competitors.
Companies that merely operate value chains need to augment them by creating systems of interactions among stakeholders – platforms, digital ecosystems, networks, etc. – so as to create shared value for all stakeholders through clearly defined interactions, architecture and governance rules of how value is created, captured and shared.
There are four steps to make this happen: framing, creating, building and sharing.
• The model for stakeholder capitalism begins with the proper framing.
A business is typically thought of along industry, sector or category lines, such as the automotive business or the hotel business. John Deere used to say they were in the business of manufacturing agricultural equipment. But must frame their business in terms of how they create shared value by solving challenging problems for customers, industry or society. Today, John Deere defines its mission in terms of serving those close to the land. It focuses on farm productivity, kilos of cereal per hectare and profitability per acre of a farm. The framing can also include reduction in fossil fuel consumption, minimizing scarce resource depletion like water, or minimizing food waste. It changes the typical business mindset of revenues, market share and sales growth.
Proper framing of the company requires leaders to define all the interdependencies within a system, and how various components affect each other in various ways. For example, what will an increase in pesticides do to farm productivity and how does it affect the nutritional value of the soil over time?
• This is the process of defining the interactions and data exchanges, architecture, and the governance rules that enable collaboration, participation and engagement among stakeholders.
The process leads to what I call a digital interaction field that defines how all stakeholders create value. Let’s explain this at a real field, the agricultural field. At the core are the interactions between John Deere and the farmers powered by a digital network that enables them to share data like soil conditions and farm operations data. A host of technologies – including weather monitoring sensors, telemetry, AI and machine learning – collect, aggregate, analyze field data and share them with farmers. This enables farmers to monitor crops in real-time, improve yield, reduce farming costs, identify water irrigation issues, and reduce water use and other resources.
The more frequent these interactions and the richer the data exchanges with many farmers, the higher the potential impact on farm productivity. I call this the nucleus of an interaction field.
A second layer of creating value comes from the ecosystem. These are the interactions between the nucleus and others such as seed or crop manufacturers or fertilizer companies, software developers, technology suppliers and other stakeholders that directly affect farm productivity.
The system works when there is an open architecture where data are shared so that these ecosystem partners can apply their expertise, knowledge and experience to benefit farmers. This requires careful design of rules and policies of sharing of knowledge and data.
The third layer, called market makers, consists of entities that exert influence on value creation in the interaction field. This could be interactions with government agencies such as the USDA, academic research centers or even competing tractor companies such as New Holland or Kubota who could share standards that reduce the costs of deploying and operating technologies. Collaborations with the USDA can inform policy decisions to improve healthy food production or set objectives that eventually affect farmers through regulations and subsidies.
When the interactions and architecture of the digital interaction field is well designed across the three layers – nucleus, ecosystem, and market makers – it creates a system that enables shared value creation.
• This requires developing a system that draws in all stakeholders, creating a gravitational pull toward shared value creation.
If John Deere were a traditional company, it would use the data to help farmers and further its business objectives of selling tractors and other agricultural equipment. But John Deere isn’t a typical company. It has realized that it can create far more value by creating and orchestrating an open system that attracts and encourages many other participants to learn from the data exchanges, and contribute to farm productivity. This creates new competitive advantage. The more interactions among all participants, the higher is the value creation of the overall system through new sources of competitive advantage known as the network effects, learning and viral effects.
The more farmers participate, and the more other stakeholders are participate, the more valuable is the system. This is known as the network effect. All stakeholders in the system benefit.
• This requires deciding what value creation should be shared out with other stakeholders.
It isn’t easy to build such a system of shared value creation. Returning to the John Deere example, if the data shows that a field can be managed with less fertilizer, this might save farmers money and protect the environment, but it would harm fertilizer companies.
The good news is that systems can be designed to address these negative impacts through market growth. That is, while there might be less fertilizer usage on a single farm, the overall fertilizer market can grow. In some cases, new pricing or new business models such as subscription models can improve the business because of cost savings.
My research shows that these kinds of systems, which I call interaction fields, are just beginning to emerge and are present in a variety of industries including industrial metals, e-commerce, automobiles, health insurance, appliances, and more. A health-care provider can engage its interaction field to eradicate a specific disease or condition, which it cannot do alone. This is stakeholder capitalism at its best.
If you are a CEO that wants to serve all stakeholders, interaction field companies provide a much-needed model for making that a reality.