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Should You be Beholden to Your Stockholders or Stakeholders?

Decision-making today is like making your next move in a fast-paced game of Jenga: every turn has a possible set of ramifications, each with its own ability to ignite a separate chain reaction. This wasn’t always the case, but the evolution of society to complex adaptive system, which I described in my previous post, has changed the rules of the game. Technological advances, such as the Internet of Things, and demographic shifts–including automation beyond the shop floor, the aging workforce, the rapid rise of virtual work and contingent workforces, and reliance on outsourcing for entire functions–have resulted in highly interactive, interdependent human systems. Because board members must act in an often unpredictable context, the way in which they collectively and individually construct meaning and ultimately how they make decisions must also adapt.

Two academic theories–stockholder and stakeholder theory–apply to decision-making in the board room, but their relevance should not stop there. Aspiring change catalysts: take note. Whether you reside in the C-Suite, a cubicle, or your home office, if you want to usher in transformative change, these theories tell us that those who focus solely on stockholder returns in an environment of complex adaptive systems are missing the boat. While you must certainly strive to preserve and grow the wealth of your investors, you must also expand your audience to those who will be affected by the very change you seek to promote. This holistic mindset is critical for moving from transactional to transformational thinking. To understand why, let’s take a look at both theories.

The Limits of Stockholder Theory

Stockholder or “agency” theorists contend that members of a board of directors act as paid agents on behalf of the company’s stockholders. Board members must make decisions that focus on the short-term bottom line. They must choose a CEO who best promotes the growth needs of the business and continually monitors the CEO’s performance.

Stockholder theory runs up against some limitations, however, when you look at decision-making in complex adaptive systems. The theory has difficulty explaining, for instance, how women come to be represented on company boards. Researchers have found that women board members tend to place importance on employees and other key stakeholder groups whereas men tend to focus on immediate financial results. These types of findings, in which women prioritize other groups over stockholders, make it difficult to explain C-Suite gender diversity using agency theory.

Stakeholder Theory

Stakeholder theory extends the board’s focus beyond stockholders to stakeholders. Board members must think about how their decisions or strategies will impact multiple groups, not just the company’s owners. Along with stockholders, these stakeholders nearly always involve employees, customers, communities, unions, trade associations, partners, and governments.

In this light, stakeholder theory does a much better job of explaining the Sheryl Sandbergs and Marissa Mayers of our day. External stakeholder groups value female board leaders and, therefore, promote gender diversity as well as programs such as corporate social responsibility. Governments in the United States, Norway, and Canada, among others, have urged corporations to appoint more female leaders to board seats.

So Where Do We Go From Here?

In today’s world of complex adaptive systems, stockholders might be your main client, but they are not your only one. Company decisions have far-reaching consequences. Because each decision impacts people and programs, directly or indirectly, it should not be made solely on the basis of precisely calculated investor returns. Environmental sustainability, work-life balance and flexibility, diverse leadership style considerations, corporate governance, paid employee volunteer time, community outreach, the future of work and the workforce, and the spotlight on the customer – all of these trends reflect the importance of a growing base of stakeholders. Successful transformative leaders at all levels, not just in the board room, place stakeholders at the core of their decision-making. Whether they do so from within the company walls or from the outside forms the topic of my next post.

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