The Stakeholder and the Social Contract

The pandemic exposed some long-existing gaps in our civic life that had been dismissed or simply overlooked as we ran our busy lives. These gaps can be most easily explained as the duties we owe each other in a free society. Some duties are political like the duty we owe each other to abide by a common set of laws. Other duties are much more in the realm of commerce, the duties businesses owe customers for instance but also, the duties they owe employees and other stakeholders.

Corporate social responsibility means more than being profitable for shareholders.

These duties reveal a social contract, an agreement that’s implied by life in a free society — something few people actually take an oath to, but binding, nonetheless. Democracy is founded on a social contract and the business community is extending it, however slowly, to commerce.

The typical business-to-customer relationship is fairly barebones, centered around a product or service, and it expires when, perhaps, a customer is no longer actively paying the vendor for products or services. You can trace this back to the generally agreed idea of what the corporation is for, namely, making a return for the shareholder. We can call this shareholder capitalism. That’s been the way of the world since capitalism got going in the 18thcentury when people like Adam Smith wrote about new economic ideas (“The Wealth of Nations”) like the invisible hand of the free market in which all players are more or less expected to look out for their own self-interest.

But since the advent of the Internet newer companies have taken on a broader understanding of the social contract between them and the universe of customers, employees, partners, and local communities that they operate in. There are many reasons for this. For example, it’s hard to attract and retain good employees for a fast-growing company so savvy businesses put in a little extra effort there. Ditto for customers and here, new business models play an important role. Perhaps you can summarize this new social contract as vendors simply being smart about relationships, but it is better defined as stakeholder capitalism because there are multiple kinds of relationships.

Lots of Internet businesses operate on a subscription business model and their customers can and do churn regularly. A well-run subscription business aims for 10 percent churn or less because any churn means having to replace that lost revenue before you can think about this year’s growth. So, the less churn or attrition, the better.

Subscription companies have it a bit tougher because revenue per transaction is small because customers more or less pay as they go. There are costs to onboarding new customers too, so a subscription customer that leaves early most likely costs the company money regardless of what they may have paid to that point. Compared to a traditional vendor-customer deal where the customer pays up front, subscriptions can be a difficult way to make money.

We could say similar, but different, things about the challenges of dealing with business partners and suppliers as well as local communities. All of these relationships matter. Resellers need to be recruited and nurtured, partners too, and turnover in their ranks can disrupt the revenue stream of even traditional businesses. Lastly, no one wants a bad relationship with the host community that has taxing and zoning authority over a business.

So, it’s no surprise that many businesses have broadened their concepts of what a corporation is and its purpose. Some traditional companies are adopting these ideas simply to stay in the game with younger and more nimble companies. Shareholders will always be important but the class of people and entities they owe some form of duty to is only growing and that group is generically referred to as stakeholders.

Stakeholders might or might not own stock, but they have a determined influence on the success of an enterprise, nevertheless. This is actually very good news for the corporation and its shareholders because it means that other entities can help in ensuring the success of the corporation and its profits, if their relationships are managed right.

Studies have shown that when corporations involve their employees in community outreach, it benefits the business in multiple ways. People in the community might be more favorably disposed to the company and its products. Employees who donate their time in company paid community service get a sense of accomplishment that is reflected in less job turnover and more positive word of mouth. There’s also a birds-of-a-feather phenomenon in which companies that engage in community outreach have more in common and sometimes partner in the marketplace. So how does a traditional company get from point A to point B?

Understanding the new social contract and the implied relationships is the first step to stakeholder capitalism. With the social contract in mind, it’s easier to see that potential customers are everywhere and step one to winning them is to promote positive relationships on multiple levels. More than that, it becomes clear that organizations can seed their future customer bases by paying something forward and establishing good will.

That’s why there’s a movement in business today for corporations to engage with and often find ways to give back to stakeholders. It’s broadly called corporate social responsibility (CSR) because it can encompass anything from approaches to the community to dealing with local pollution to valuing customer input.

Employees can play a big role here and literally thousands of businesses have launched programs to give back to their communities leveraging the enthusiasm of employees. The acts of giving are many and varied and they don’t have to cost a lot, many of the most effective programs donate paid employee time to worthwhile community efforts. This might include volunteering in regular settings like schools but it can also encompass special projects.

Whether the efforts are performed only by employees or by some combination of the employees of partners and other volunteers is situational. No matter what, the social contract between the corporation, its employees, partners and many others is strengthened through attention to stakeholders and that reflects back and benefits the organization.

No wonder there’s a movement afoot. Based on the success of organizations like Pledge One Percent and new software systems from vendors like Salesforce and Microsoft, it’s likely that this trend will continue and that the commercial social contract will continue to be enhanced.

Researcher, author of multiple books including “The Age of Sustainability” about solutions for climate change. Technology, business, economics.

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