Stakeholder Capitalism Needs Stewards

Any CEO who wants to convert his company to a stakeholder model will need patience and faith during the early years. A company that has long devoted itself to short-term gains may find itself going through shareholder withdrawal—literally and figuratively—during the shift. When a company decides to invest in its future—through more equitable employee compensation, rebuilding R&D, capital investment in workplace improvements, and so on—shareholders who have come to rely on quarterly rewards may divest or overtly oppose the conversion to a more responsible model for profit. Long-term thinking requires patient supporters rather than those with a close eye on quarterly profits.

Leadership shareholders—shareholder stewards—who become a bridge of communication and motivation between the C-suite and a company’s shareholders, can help steady the transition. Harvard Business Review recently published an essay that offered guidelines for cultivating these stewards. As a warning, the authors cited Danone’s ouster of its CEO Emmanuel Faber after he had turned the $36 billion food conglomerate into a model of environmentally responsible capitalism.

“This decision puzzled many observers; in an age where the business community seems to be readily embracing stakeholder capitalism, Faber and Danone were stalwarts. Now Unilever
UL
— another stakeholder-centered consumer goods darling — is under similar strain from an even more well-equipped and seasoned activist investor, Nelson Peltz. Mark DesJardine and Wei Shim author of the HBR piece, point out that “these predicaments are disrupting the stakeholder agenda and costing CEOs their jobs.”

It’s easy to understand the pushback. Shareholders have enjoyed the best seats at the table: their interests have traditionally come first. When employees, suppliers, the company itself, customers and communities have an equal voice, shareholders can feel demoted and disrespected. They look for any setback, any slackening in the flow
flow
of quarterly earnings, to reject the leadership that strategizes for the long-term future. According to the authors, what’s needed is “shareholder management.”

It isn’t about crafting good spin. Gone are the days when you can script a PR narrative about the company’s future and dole it out through mission statements, annual reports and investor events. Ironically, the authors point out, these old tactics attract shareholders who want short-term results and will most oppose any five-year plan that wagers on long-term returns.

One classic rule still applies: don’t overpromise and underdeliver. Returns on ESG plans that bring enlightened investors aboard will be slow and steady and will emerge well into the future. Any company that promises immediate earnings after shifting to stakeholder principles asks for conflict by attracting investors who will rebel when quarterly results disappoint. That sets the stage for the sort of shake-up they cited at Danone.

“Such plans can take substantial time to produce far but uncertain returns. Therefore, when managers oversell stakeholder-centered initiatives, shareholders attracted to those messages can quickly become discontented when those strategies come up short — or don’t produce results fast enough,” they point out.

Using persuasive narratives to bring in shareholders is also largely ineffective because most shareholders aren’t studying the literature that arrives from the dozens of companies in their portfolios. What’s needed are, in the parlance of social media: influencers.

The authors advise companies to recruit what they call shareholder stewards. Imagine them as a corps of Warren Buffet clones: people who study a company inside and out and look for long-term value. These stewards invest in a relatively small number of select firms and take pains to understand what management attempts to do and why. They don’t abandon a company in downturns and thus stabilize the stock price. They focus on long-term growth and act as partners in identifying stakeholder initiatives. Best of all: they become bellwether voices, leaders who can rally the lesser-informed shareholders and encourage them to stay the course when returns temporarily aren’t robust.

Here’s how they suggest you can recruit or cultivate and recruit these stewards.

Leverage: Managers can engage existing steward shareholders to identify and attract more just
just
like them. Seek out stewards through a company’s network of suppliers and customers. In other words, leverage relationships already established to find and bring in new stewards.

Ownership: Private stock placements to stewards can increase their power by increasing their share of the company’s stock ownership. It’s a simple way to increase their volume over the voices of dissident shareholders. Time-weighted voting rights can also grant stewards more power as it gives stewards more say in corporate affairs, which is a draw for recruiting new ones. “The J.M. Smucker Company uses time-weighted voting to grant long-term shareholders more power over short-term traders and potential dissidents. At Smucker, an investor receives ten times more votes per share once they have held their shares for more than four years, well past the average activist hedge fund’s holding period of about one year.”

Governance: Leadership can institute the sort of governance practices that attract stakeholder-minded stewards. “The key lies in understanding the types of governance practices that stewards favor,” such as board composition, appointments of certain director types, and adopting executive compensation schemes that align with steward shareholders’ long holding periods. The key is to compensate based on long-term results. At PepsiCo
PEP
, “the CEO’s performance-based payouts depend on achieving long-term targets, often at least three years out, sometimes seven to ten, some of which are also tied to ESG performance to cater to PepsiCo’s growing cohort of socially minded investors.”

Rhetoric: You become what you say you are. With the right rhetoric, a CEO can transform his company over a few years. The authors cite how Paul Polman announced that the Unilever hedge fund investors would have no place at the table. The stock price took a nosedive but it recovered, and he stayed the course rhetorically. Eventually, the short-term activists abandoned Unilever and were replaced by stewards mindful of the long-term, enabling the company to distance itself from quarterly earnings conversations and targets.

“Over the ensuing months and years, Polman continued to communicate on long-term plans and Unilever’s investor base slowly transformed from being heavily dominated by short-term traders to over 80% owned by long-term stewards.” These are marvelously simple tools and tactics that any company’s leadership can adopt. The only ingredient any CEO would need to add is grit. These methods have worked at companies that adhered to them during the downturns and resistance that any change will inevitably trigger. Once those rough waters are negotiated, the results will only improve; at that point, even fewer will be saying nay.