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The Rise of Stakeholder Capitalism

By Alyce Lomax - Updated Apr 6, 2017 at 8:05PM

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A "new" trend is restoring business and investing to more soulful roots.

Stakeholder capitalism is poised to take the investing world by storm. The best companies must generate value not just for shareholders, but for customers, employees, and communities as well. Businesses that ignore these other stakeholders risk losing competitive advantage, and face dwindling shareholder returns. But when managers shape their strategies to account for all the people affected by their actions, they can create long-term value for their companies -- and for shareholders.

Striking gold
According to one recent study, stakeholder engagement can be more valuable than gold. Literally.

Wharton's Witold Henisz, Sinziana Dorobantu, and Lite Nartey recently released a research paper called "Spinning Gold: The Financial Returns to External Stakeholder Engagement." The trio dug through data for 26 actual gold mines owned by 19 public companies between 1993 and 2008. They found the value of stakeholder engagement was worth twice as much as the value of the actual gold within the mines.

In this conflict-ridden industry, companies that leave stakeholders feeling abused, ignored, or cheated can find themselves saddled with delays, disruptions, cost overruns, and revenue shortfalls. The authors also noted that companies once notorious for their poor relationships with external stakeholders have now become leaders in stakeholder engagement.

The authors concluded that solid stakeholder engagement, coupled with the "social license" businesses obtain by treating stakeholders well, collectively give companies a real competitive advantage.

Paving the way to sustainable profits
Academic research papers aren't alone in their growing respect for stakeholder engagement's financial benefits.

Tony Hsieh, CEO of Amazon.com's (Nasdaq: AMZN) 2009 acquisition Zappos, recently appeared on The Colbert Report to discuss his book Delivering Happiness: A Path to Profits, Passion, and Purpose. In the interview, Hsieh spoke about how happy employees and customers make good business sense, driving operational excellence. Engaged employees are more productive, helping Zappos also deliver the all-important "wow" customer service factor that brings loyal consumers back for more.

Hsieh isn't the only successful corporate-leader-turned-author who has touched on running such stakeholder-friendly, enlightened businesses. Starbucks (Nasdaq: SBUX) CEO Howard Schultz's recent book Onward chronicled the coffee giant's difficult recent years. Much of the book related to his efforts to get Starbucks back to its roots.

"As I saw it," Schultz wrote, "Starbucks had three primary constituencies: partners, customers, and shareholders, in that order, which is not to say that investors are third in order of importance. But to achieve long-term value for shareholders, a company must, in my view, first create value for its employees as well as its customers."

Don't sell your soul
The modern, relentless drive to generate "shareholder value" has too often encouraged short-term thinking, short-term profit-taking, and short-term investing, all at the expense of long-term operational strength.

When a company forgets the importance of its own customers and workers, it risks losing revenue, losing productivity, and losing its soul. The rising return of stakeholder capitalism restores business and investing to more soulful roots.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

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