Here is an excerpt from an article written by Vivian Hunt, Robin Nuttall, and Yuito Yamada for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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Embracing an ethos of stakeholder capitalism is not easy. Many companies, McKinsey included, don’t always get it right. There is evidence, however, that doing so can be good for companies regarding not only their reputations but also their performance. In a study that looked at 615 large- and mid-cap US publicly listed companies from 2001–15, the McKinsey Global Institute concluded that those with a long-term view—something that is essential to stakeholder capitalism—outperformed the rest in earnings, revenue, investment, and job growth. Other McKinsey research found that companies with strong environmental, social, and governance (ESG) norms recorded higher performance and credit ratings; other research has found that such companies perform better during crises.

In a previous article, we explained the principles of stakeholder capitalism. In this one, we set out a five-step approach to help companies put those principles into practice.

[Here are the first two.]

Step 1: Understand who the stakeholders are

Several years ago, a researcher found 435 different definitions of “stakeholders.” At the risk of adding a 436th, we suggest thinking about three broad categories (Exhibit 1):

• stakeholders who are inside the company, including employees, executives, the board, and shareholders
• those who are outside the company but interact directly with it, such as customers, suppliers, and non-shareholder investors, such as banks
• entities that are outside the company but are critical to its operations, such as governments, communities, and the environment

Admittedly, the categories are not as clear-cut as this suggests. Governments can be customers, too. An employee can also be an investor, a consumer, and a resident of the local community. And the environment is everywhere. That said, these categories provide a useful way to think about the subject; moreover, understanding the varying roles that stakeholders play can give deeper insight into their needs.

Not all stakeholders will be equally relevant for all companies, so it is important to decide where to start, based on the company’s business model and values. A financial-services company might choose to prioritize financial-capability building because it is embedded in that sector and has expertise. An oil refinery, on the other hand, might decide to prioritize operational impact and therefore choose to address the local environment, such as air quality, traffic, or emissions.

Stakeholder groups are rarely homogeneous. Understanding the segments within each group can help companies to better understand their needs.

For example, employees can be segmented in many different ways: by demographic characteristics, such as ethnicity, gender, and age; by type of job (manufacturing or office work), or by their position in the organization (frontline or executive). In addition, employees have nonwork characteristics, such as health, debt, or family and caretaking responsibilities, that are vital to their well-being and productivity at work. Not everyone will want to disclose such personal details to a company, particularly if the level of trust is low. Those who choose to share will hold companies to a high bar for safeguarding that information and using it responsibly. And some stakeholder needs aren’t within a company’s remit to address. But understanding stakeholders in all their complexities is the first step to knowing what can be done.

The use of powerful analytics can help companies negotiate this complex and shifting territory. For example, while it is important to respect privacy and other ethical concerns, by using big data, artificial intelligence, and natural-language processing, companies can analyze and better understand what stakeholders are thinking.   McKinsey’s research on diversity in the workplace used a natural-language-processing algorithm to discern employee sentiment—positive, negative, or neutral—as well as indicators of equality, openness, and belonging. Sources included employee reviews about the companies they work for on US-based public forums such as Glassdoor and Indeed. In an entirely different context, researchers applied this approach to gauging attitudes toward gold mines and found a clear correlation between positive stakeholder sentiment and financial-market valuation.  

Step 2: Understand stakeholders’ needs and build trust

Creating change requires listening to stakeholders. At this stage, it is important to be open to all ideas and not to be constrained by feasibility considerations; that will come later. Listening is not a one-off exercise; needs may change over time, and companies will want to keep up. And understanding what stakeholders want or need doesn’t mean companies have to act on all of those needs. For those they do choose to address, there will be many options.

In all cases, however, listening is critical to building trust—and without trust, stakeholder capitalism is impossible to achieve. According to the January 2021 Edelman Trust Barometer, business is the most trusted of the four institutions considered (business, nongovernmental organizations, government, and media) and is the only one seen as both competent and ethical—something that was not the case in 2020. Moreover, among employees, trust in their company rose in 18 of 27 countries; on the other hand, 56 percent of those surveyed believe business leaders sometimes are purposely misleading. Finally, stakeholders want to be more involved: 68 percent of consumers and 62 percent of employees surveyed believe they should have a say in corporate decision making.

Internally, listening means understanding the experiences, expectations, and concerns of employees, executives, and members of the board. For example, Japanese electronics company OMRON encourages employees to share and develop their ideas for solving social challenges through the OMRON Global Awards (TOGA) program.  External stakeholders, such as government leaders and community members, also need to be heard, such as through conferences, summits, and town halls. Companies can also learn from what other companies are doing, such as by looking at the work of companies who rank highly on ESG scoring lists.

Supplement the listening tour with data. For employees, this could include items such as diversity metrics and satisfaction surveys. For example, Microsoft uses an internal sentiment analysis called the Inclusion Index  to understand whether employees feel a sense of belonging at work.

For consumers, analyzing buying behavior, price elasticities, relationship networks, and click-through rates are possible options to use. Update this information regularly to measure changes. The point is to get a baseline reading of the company’s reputation and performance—for better or worse—and then to prepare to take action.

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Here is a direct link to the complete article.