[Viewpoint] Shareholder Capitalism and Stakeholder Capitalism

Professor Hee-Jun Ahn, School of Business, Sungkyunkwan University

The fall semester at universities begins this week. In my first financial management class, I always mention maximizing corporate value as the goal that managers should pursue in corporate management. Maximizing corporate value means maximizing the value of corporate assets as evaluated by the market, which aligns with maximizing shareholder value. Shareholder value maximization is based on shareholder capitalism, but recently, alongside criticism of shareholder capitalism, discussions on stakeholder capitalism as an alternative have become active.

Criticism of shareholder capitalism includes various arguments, such as that if managers base their decisions on maximizing stock prices, they may focus only on short-term performance and harm the long-term value of the company, or that the pursuit of corporate profits may result in outcomes contrary to the interests of employees, partner companies, or society. On the other hand, stakeholder capitalism aims for managers to pursue the joint interests of various stakeholders while coexisting with the internal and external corporate environment.

Are shareholder capitalism and stakeholder capitalism completely different concepts? I tell my students that in developed capital markets, these two are not conflicting concepts.

Some say that stock prices are short-term indicators easily influenced by immediate corporate performance, but stock prices are by no means a short-term concept. For example, companies with high growth potential but no immediate profits often have high stock prices. In other words, stock prices are the result of long-term value evaluation that takes into account corporate performance far into the future. Moreover, market valuation reflects various information including sales, costs, risks, and corporate reputation. If a company acts against stakeholders, it affects the company’s reputation and negatively impacts stock prices. If the stock market functions properly, maximizing shareholder value does not conflict with stakeholder demands, and shareholder capitalism and stakeholder capitalism converge.

Recently, developments in information technology, the maturation of civic consciousness, and the rise of ESG (Environmental, Social, and Governance) investing have made this possible. If a company acts against stakeholders such as employees or local communities, it is immediately reflected in stock prices, damaging shareholder value. Representative examples include the abusive behavior of a senior executive at a domestic airline toward employees and the abusive practices of a domestic food and beverage company toward its dealerships. News of these incidents spread rapidly through media and social networking services (SNS) as soon as they occurred, causing significant stock price declines.

Next is the rise of ESG investing. According to the US Sustainable Investment Forum (US SIF), ESG investments in the United States grew from $3 trillion in 2010 to $12 trillion in 2020, increasing about fourfold in ten years. It is also reported that about one-third of investment assets managed by professionals in the US are related to ESG investing. A recent characteristic of ESG investing is that companies are required not only to pursue social value but also to achieve financial performance. The expansion of ESG investing, which pursues both social value and economic performance simultaneously, brings shareholder value and stakeholder value closer together.

It is now difficult to maximize shareholder value without consideration for stakeholders. Just as in the case of Emmanuel Faber, who recently stepped down as CEO of Danone, pursuing only social value while neglecting economic value is also unsustainable. This trend will accelerate further as technology develops, civic consciousness matures, and capital markets advance.