Stakeholder capitalism and one nation socialism

Andrew Gamble, Gavin Kelly Renewal volume 4, number 1 (1996), pp. 23-32

Reconciling high economic performance with stakeholder participation in company decision-making can help define a ‘one nation’ socialism.

Tony Blair’s January speech in Singapore raises the prospect of Labour at last grasping a ‘big idea’ as an answer to the Conservatives’ enterprise society. The big idea is the stakeholder economy.

Before Blair’s embrace of the stakeholder approach it had received a great deal of publicity and attention, from authors as diverse as Charles Handy and John Kay to being a central theme in Will Hutton’s (1995) book, The State We’re In. There is a flourishing academic literature on corporate governance, and there have been several recent reports, including Tomorrow’s Company, which has been the subject of articles in this journal (one by Stoney and Aylott (1994) and a reply by MacDougall (1995)). The Political Economy Research Centre will hold a major conference next March in Sheffield on this theme.

Stakeholder capitalism therefore seems to be an idea whose time has come. But there remains considerable uncertainty as to what the concept means. At Brighton there was also much talk about one nation socialism, prompted in part by the decision of a one nation Conservative, Alan Howarth, to join New Labour. John Prescott used the phrase in his speech at the end of the Conference. Yet how does the idea of one nation socialism relate to the idea of stakeholder capitalism? Are they mutually contradictory?

Two ideas are caught up in the concept of stakeholder capitalism. The first is that Labour’s aim should be to ensure that every individual citizen and important interest has a stake in society and a voice in the way it is run. The second is that in order to realise this aim, firms should be reorganised so that all stakeholders — such as, shareholders, consumers, and employees — are able to participate in the making of decisions.

The idea of stakeholder capitalism appeals, therefore, to two core Labour values, redistribution and participation. But these are two very different agendas which may be hard to reconcile in practice. The key idea behind one nation socialism is the stakeholder society, a society in which all individuals and interests have a stake through democratic representation, and through the adoption by political parties like the Labour Party of a conception of the public interest which aims at ensuring equality of opportunity and guaranteeing minimum levels of provision for all citizens. The risk is that it can become merely rhetorical. It needs to be pinned down in terms of precise proposals for dealing with key problems such as poverty, dependency, and employment creation, as Frank Field, Richard Caborn and others have begun to do.

One nation socialism has implicitly been Labour’s big idea ever since the Party was first founded. The struggle for universal welfare programmes and universal suffrage were conceived as means to extend citizenship and equality of opportunity. In the nineteenth century, Joseph Chamberlain argued that property must be prepared to pay a ransom in exchange for its security. During the twentieth century, Labour played a crucial part in negotiating its terms. In this sense stakeholder capitalism means programmes, above all in social security, health, training and education, by which governments ensure that all citizens can participate fully in the economy and society.

However, one of the means by which Labour hoped to achieve one nation socialism was through common ownership of the means of production, distribution, and exchange. As Labour has now abandoned common ownership as a goal, does it have anything to say about the question of the ownership of assets and the structure of organisation in contemporary capitalism, or should it concentrate as Stoney and Aylott argue on questions of redistribution? As Alan MacDougall’s rejoinder to Stoney and Aylott indicated, there are many who think that if stakeholder capitalism is to have real meaning, it should involve stakeholding not just at the level of national legislation and welfare policy but stakeholding at the level of the organisations in which people work. One of the problems with the way in which nationalisation was implemented was that while ownership was changed at the national level there was little internal re-organisation of the companies that were nationalised. Traditional management hierarchies remained in place.

Corporate governance: background to the debate

The second meaning of stakeholder capitalism focuses on the idea of the stakeholder firm. There are two main reasons why Labour might seek to promote new forms of corporate governance; firstly because it will improve economic performance and secondly because it is a step towards economic democracy. These two aims again need to be analysed separately, although it is sometimes claimed that in practice they often run together. But if there is a tension between economic efficiency and democracy the former will dominate; New Labour is no more likely to impose radical changes on firms in the name of the stakeholder society than Old Labour was in support of industrial democracy.

Capitalist firms have many potential stakeholders: managers, workers, shareholders, banks, consumers, local regions and communities, and environmental groups. Which of these should have rights to influence the key decisions on how and by whom the assets of the firm are managed? What form would these rights take? The emerging orthodox view of the capitalist firm, as stated for example by Williamson (1985), is that since the purpose of the firm is to maximise profits, only those stakeholders who bear financial risk directly, the shareholders, should have the right to determine policy — what economists call the right of voice. Other key stakeholders have the right of exit. In other words consumers can stop buying the product, workers can leave employment, banks can cancel loans. Shareholders are special, it is argued, as they are the only stakeholder whose relationship with the firm does not come up for ‘periodic renewal’, and because it would be particularly difficult for each shareholder to agree to a contract with the firm before investing in equity. Moreover, giving voting rights over company decisions to other stakeholders would impose additional costs, reduce the drive to maximise profits, and therefore lead to muddled objectives and deteriorating performance.

In this view, which Stoney and Aylott seem to share, capitalist firms should be left to do what capitalist firms do best— maximize profits. But many economists have criticized this orthodox view because it does not accurately describe the way in which modern firms operate. The divorce of ownership and control means that risk bearing by shareholders often occurs in a highly diversified manner. Both Freeman (1990) and Stiglitz (1986) have persuasively argued that the sunk costs faced by other stakeholders (such as employees or local communities) can be far greater than those borne by individual shareholders, especially in countries with developed security markets. Admittedly, individuals or firms who hold a significant share of a company’s stock do face sunk costs if they try and sell their shares (i.e. the price of the shares they are selling will tend to fall). This is an argument in favour of large shareholders having a strong voice in a company; but it does not imply that shareholders are in some sense special in the risks that they face. The corollary of arguing that certain stakeholders, such as employees or suppliers, face firm-specific costs is that these groups have a strong incentive to try and ensure that the firm is successful. This incentive, combined with an often detailed knowledge of the firm’s operations, ensures that these stakeholders would have the information and motivation required to effectively monitor and shape the firm’s behaviour. It is the absence of precisely these qualities that have led many to argue that dispersed shareholders act as poor controllers of management.

The stakeholder approach

The stakeholder approach to corporate governance is seen by its advocates as providing a number of related potential economic benefits. They can be divided into two categories. Firstly, there is the potential reduction in external costs imposed on stakeholders by the firm. This relates to both the sunk costs already incurred by stakeholders (discussed above) and other costs which might be imposed in the future. Instead of the firm treating as many of its costs as possible as externalities and disclaiming responsibility for them, which leads to conflict in the shape of strikes, lawsuits, and government imposed controls and regulation, the stakeholder firm seeks to handle these costs through internal negotiation with its stakeholders. Secondly, the stakeholder approach encourages a better transfer of information between the various elements of the firm. Often the competitiveness of a firm will be affected by whether stakeholders (such as banks, sub-contractors, or workers) can reach agreements with managers which require the sharing of information and the generation of mutual commitment. A governance structure which encourages information disclosure will obviously be vital in generating these types of long-term relationships, or ‘implicit contracts’, between stakeholders.

The concept of a stakeholder firm changes the idea of what is efficient for the firm and for society. Take-overs for example are often argued to be economically efficient if the joint share value of both the acquiring and acquired firm rises. But many take-overs will impose severe costs on other non-shareholding stakeholders. Economists such as Shleifer and Summers (1988) have shown how take-overs that apparently create value in the form of higher share prices (and thereby increase overall social welfare) are often nothing more than an (anti-egalitarian) redistribution of existing value between stakeholders. Moreover the threat of take-over can act as an important deterrent on the formation of long-term stakeholder relationships, or on R&D spending, which many argue are vital to firm competitiveness. Hence take-overs which are privately beneficial to the shareholders involved may actually impose a cost on the rest of society. Conversely, if the boundaries of the firm could be redefined to incorporate key stakeholder interests then those take-overs which did occur would tend to be value creating: there would be a greater congruence between the interests of the firm and society.

This type of analysis has led many on the centre-left to advocate stringent checks on take-overs. But this ignores another important function of take-overs in the UK. Given that we have a weak tradition of shareholder (or bank) control of firm behaviour, it is vital that there is some other mechanism which can discipline, and if necessary, remove inadequate management teams. The dispersed ownership pattern of UK corporations has often impeded this form of active shareholder governance so that the disciplining role is often fulfilled by the take-over process. Simply asserting that there can be a social cost to this process does not represent a case for reform unless other proposals are put forward which would ensure a better way of controlling management. Without this type of strong external check, firms may suffer from poor management and stagnation.

Stoney and Aylott are clearly right in saying that the stakeholder firm is not a simple panacea to all the problems and insecurities of contemporary capitalism. Stakeholder firms are still capitalist firms; they have to make profits and they can go bankrupt. But these simple facts do not get us very far. Indeed there is a real danger of pushing the sceptical argument too hard. If New Labour is only to concern itself with the politics of redistribution this implies that the current structures of corporate governance cannot be improved upon, which seems unlikely. It also undermines Labour’s assertion that a series of fundamental supply-side measures are required for economic regeneration. This does not imply that a straightforward application of the stakeholder model would necessarily be beneficial or easy to deliver. It simply means that Labour must think clearly about its position on corporate governance and the form of governance structure it would like to move towards, in the knowledge that it will face strict limitations in its ability to impose reforms which encounter resistance from many of those who exercise economic power.

Problems with reform

In deciding how to go about reforming corporate governance a number of problems need to be faced.

Who are the stakeholders?

If any group which is affected by the operations of a company is considered to have an equal stake in it, then the idea of stakeholding would be unworkable. Obviously the set of relevant stakeholders vary according to the circumstances of the firm. (Consumers would need a strong voice in monopolies such as the utilities, which would be inappropriate for firms operating in a competitive market. As a general rule, increased competition in markets reduces the cost of stakeholders using the ‘exit’ mechanism and thereby lessens the need for ‘voice’.) There would have to be a clear procedure for determining firstly the weight to be given to different stakeholder interests, and secondly the specific rights which recognition of stakeholder status would confer. Such rights include ownership, a vote on the Board, veto powers, a right to consultation or compensation. It is not necessary that every stakeholder should have the same rights — there are different ways in which participation can be achieved. The starting point should be that the recognition of being a stakeholder in a firm confers certain rights as well as obligations.

How many stakeholders?

If there are a very large number of stakeholders and if they all have some veto powers over how the firm is run, it is easy to imagine how the firm could become deadlocked, and the taking of strategic decisions could become very difficult. One solution would be to allow only share owners to have the final say in (accepting or rejecting) strategic management decisions. Other stakeholders might be given a right to consultation, and possibly beyond that a right to compensation, but the executive autonomy of the firm would be preserved. The question of which stakeholders should be share owners and exercise these rights is a separate matter.

Widening the definition of who has a legitimate stake in the firm has obvious problems. Obviously a stakeholder governance structure might help ensure that many potential conflicts never occur, but contrary to the views of some proponents of the idea (e.g. Porter, 1992) certain conflicts will not be avoided by invoking the ill-defined notion of the corporate interest. It is not difficult to imagine how potential stakeholders such as consumers or environmental groups, could be in sharp disagreement with producer stakeholders. In some circumstances, conflict between stakeholders could paralyse the firm. This is why a clear demarcation of power and responsibility between the various groups would be required; any system of corporate governance which produced deadlock between stakeholders could be highly costly. But the inevitability of some stakeholder conflict does not invalidate the stakeholder argument; rather, it implies that we have to compare the relative efficiency of the stakeholder model in resolving conflict, with that of other governance structures.

Who has power?

If the stakeholder firm is interpreted as meaning a programme to achieve either real economic democracy, or to create a new form of corporatism with every stakeholder interest given a right of veto over company decisions, then it would represent the most radical programme Labour had ever adopted in its history. Opponents of the stakeholder concept believe for this reason that it has no real substance, because it implies such a direct challenge to the existing balance of economic power. Those who at present own and control assets are unlikely to concede even a share in that control without a prolonged struggle. The Labour leadership is hardly likely to take the stakeholder concept seriously if the consequence is that it loses the support of the corporate sector which it has spent such a long time persuading that it has nothing to fear from New Labour.

Who benefits?

One argument against introducing a wider concept of stakeholding is that the main beneficiaries would not be firms based in Britain, but competitors. The nationalist free market right in the Conservative Party are opposed to closer integration in Europe on the grounds that Britain should not burden itself with the additional costs which (they argue) are imposed by systems of corporate governance characteristic of the German model of capitalism. The costs of minimum wage legislation and the provisions of the social chapter are most often cited in this respect. It is further argued that the apparent distinctiveness of a Japanese or a German model of capitalism and corporate governance, dedicated to long-term investment and close participation of both banks and workers in the firm, will soon disappear. The requirements of global competition will oblige all companies and national governments to converge on Anglo-American patterns of corporate governance, because only these provide the flexibility in handling costs, and executive autonomy in making strategic decisions, which are needed to compete internationally.

These arguments are based upon a simplistic account of ‘national competitiveness’ and trends in corporate governance and are questionable on several grounds. Firstly, it is far from clear that social protection in the form of minimum wage legislation will inevitably damage employment levels (see for example, Ingram, 1995). Moreover, others have questioned the whole notion of rigid models of national capitalisms with markedly different patterns of corporate governance and finance (Edwards and Fisher, 1994). There is also evidence from within the UK (and the US) that different forms of workplace governance are emerging and have relative strengths and weaknesses.

What can New Labour take from the stakeholder approach?

There is little prospect that the stakeholder concept, certainly in its radical form, will spread spontaneously through the private sector. But there are movements like Investors in People and the Employee Share Ownership Scheme (ESOS) as well as organizations in the non-profit making sector which embody different aspects of the stakeholder concept. These may assist in a gradual dissemination of new practices.

If the concept of stakeholder capitalism is to be more than just a rhetorical flourish, the limits of what can be done have to be recognised. What the concept does provide is a framework for thinking strategically about the direction in which a Labour government wants to promote change. To adopt it would require, firstly, a strong stakeholder ethos to be incorporated into the formation and delivery of policy at different levels — global, national, regional, and local; and secondly, a willingness to learn from past experience within the UK and to use this experience as a basis for new forms of governance and institutions. A particular example of successful organisational innovation in the formation and delivery of regional policy is that of the Northern Development Corporation (see Murphy and Caborn, 1995), which has managed to bring together the main regional economic stakeholders (such as business, local authorities and trade unions) to devise and implement development strategies in the north-east of England. It represents the type of public-private partnership which should be replicated elsewhere.

Current Labour plans for reforming corporate governance in the private sector appear to be limited to encouraging a more active role for institutional investors through compelling them to vote at shareholders’ meetings, ensuring greater transparency and accountability, and providing tax incentives for long-term shareholding. The thinking behind these proposals is that if institutional investors took a closer interest in the firms in which they invest, they would represent the stakeholder interest of their policy holders, and the result would be better management, and firms which are more strongly committed to long-term investment. Raising tax levels on short-term shareholding should have some impact on investment behaviour. But merely compelling institutional investors to be present at shareholders meetings will not in itself change the way they vote or relate to the firms. The objections of the influential president of CalPERS (the Californian public employees pension fund, which is unusually committed to the cause of corporate governance reform) offer a salutary warning of the problems of legal compulsion in this area (Guardian, 20 October 1995). Other institutional investors argue that they already serve their policy holders’ interests by investing in whatever promises to give the highest return, and many of them in any case already have a policy of holding shares for considerable periods.

There is also scope for initiatives which reach beyond the role of institutional investors. Currently there is considerable diversity of organisational structures in the public, private and voluntary sectors in the UK. Labour needs to be clear about which models it regards as offering best practice in each sector. The case for policy initiatives which change corporate governance do not have to be made defensively as there is growing evidence that change could be beneficial. Fernie and Metcalf (1995) develop an empirical study, similar to those carried out in Blinder (1990), which suggests that employee involvement in workplace governance, either through participatory schemes such as Joint Consultation Committees, or through employee stock ownership (ESOSs or SAYEs) tend to increase labour productivity.

 One way forward for a Labour Government would be to sponsor a number of experiments to promote and spread different kinds of corporate governance. A flexible approach is required: reforms to the governance of public utilities will obviously be different to initiatives targeted at small firms. The size of operation is different, the stakeholders are different, and the public interest is different. All this needs to be reflected in the way the guidelines for different sectors are drawn up.

There have already been several proposals which offer a stakeholder approach to the regulation of the public utilities (e.g. Souter, 1994). The general aim of these proposals is clear: to ensure that there is proper balance between the key stakeholders such as shareholders, consumers and suppliers, and to ensure that the regulatory procedure is transparent. The emerging consensus is that utilities must give greater weight to consumer interests. Some argue that this requires a regulatory structure that guarantees that a fixed share of profits benefit consumers in the form of price cuts (Burns, 1995). Others such as John Kay (1995) argue that in order to have more consumer oriented utilities a change in management remuneration is required. Share options should be scrapped and replaced by incentive schemes which directly link executive pay to price cuts and the quality of consumer service.

If private sector stakeholder firms are to thrive they must be successful as capitalist firms. Though it would be legitimate to assist them through the provision of specific financial incentives (such as increased tax breaks on ESOSs), direct state subsidies (to firms) could be highly distortionary while also not assisting the spread of new and viable forms of corporate governance. To avoid this, Labour needs to take its enabling role seriously, considering if institutional or regulatory innovation would assist in facilitating change. Examples of this approach include the highly successful venture capitalists ‘3i’, who commenced operations 50 years ago. It could provide the model for a series of regional development banks which could pioneer new financial relationships between banks and small firms on a strictly commercial basis.

But there is also much that could be done to provide encouragement to the growth of third sector organisations. The stakeholder approach, if it is to mean anything, must be applied imaginatively to different forms of governance structure and not just to traditional profit making enterprises. Though recent announcements on benefit-plus for the long-term unemployed working in the voluntary sector is a step in the right direction, other steps need to be taken at a local level to encourage more ‘social entrepreneurship’. Of course, there are many factors other than finance which are crucial to the organic growth of successful community-based firms, but the availability of often small sized loans could act as a vital catalyst to regenerating run down areas. This would require a network of community-based development banks, involving local people with local knowledge, offering small sized loans at subsidised interest rates — and without extortionate collateral requirements — to local groups. There is much that can be learnt in this area from the successes of many Community Development Banks in the US. Undoubtedly, this type of proposal would require some public funding. But the success of experiments in this area suggest that, with the correct incentive-structures and with local peer group monitoring of loans, the community benefits can far outweigh the cost involved.

Labour’s programme

The types of proposals outlined above would have to fit in to a wider policy agenda and would be dependent for implementation upon several different government departments. That is why the sometimes nebulous notion of a ‘big idea’ such as stakeholder capitalism may actually serve a useful purpose. It can help to tie together seemingly disparate initiatives into a more meaningful policy package. Four particular links between changing corporate governance and other economic policies can be identified.

First is the link between organisational change at the firm level and macroeconomic policy. Organisational change can be thought of as a form of investment; there will be costs and discounted benefits. As with other forms of investment, a crucial factor in determining whether entrepreneurs are willing to embrace change and commit themselves to new work patterns is the macroeconomic environment. A stable and predictable macroeconomic policy allows firms to feel more confident in bearing transitional costs, and is therefore crucial to the success of many supply-side measures. Second is the link with Labour’s increased emphasis on the role of the state in ensuring proper training and labour market mobility for individuals. This will help individuals leave poor jobs and is therefore an important objective in its own right — especially as many employers resist improvements to workplace conditions and governance. But it should not be seen as an alternative to initiatives seeking to reform elements of corporate governance. Better learning opportunities for individuals are the complement, not the substitute, of efforts to encourage participatory workplaces.

Third is the relationship between initiatives aimed at improving corporate governance and Labour’s increased emphasis on competition policy (an issue previously alluded to in Renewal by McGowan, 1995). Efforts to encourage greater stakeholder involvement in governance need not contradict stricter competition laws. Indeed a clearer notion of the ‘stakeholder interest’ could help to substantiate the vague notion of public interest used in the evaluation of take-over bids.

Last, there is the issue of Labour’s general approach to the design and implementation of policy. Centralised blueprints to correct alleged market failures were never an efficient approach towards policy. They are even more untenable now. If Labour is to build an ‘intelligent state’ it must first of all recognise the limitations of the state’s knowledge; even if we can identify clear areas of market failure or distributive injustice we often simply do not know before-hand what kind of impact corrective policies may have. A radical approach to policy would recognise this and therefore encourage a range of measured experiments, recognising failure when it occurs, and learning from it.


New forms of corporate governance need to show that they are superior to the old. At the moment we do not have the knowledge to say that they are, although there are some pointers. Reconciling high economic performance with stakeholder participation in decision-making in firms can help define a one nation agenda and give purpose to Labour’s economic programme. A clear grasp of the limits but also the opportunities of the concept of stakeholder capitalism and the stakeholder firm provides an important set of guidelines for that programme and suggestions for policy.


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