Views on improving the integrity of global capital markets
20 January 2022

Stakeholder Capitalism in Action: Is it possible to reconcile the stakeholder governance model with traditional shareholder interests?

As the EU is discussing the form and the substance of its awaited sustainable corporate governance framework, the debate is naturally raging on the nature of capitalism the EU wishes to uphold. The EU prides itself on having developed the concept of a social market economy, rooted in Germany’s postwar social–democrat political system and the famed Ordoliberalismus, which has underpinned much of the EU’s legislation.

The protracted debates on the sustainable corporate governance framework illustrate the complexity of reaching an EU-wide consensus on this topic, which historically has been the remit of national state company law, thus resulting in a web of loosely aligned rules across the European Union.

The thinking around corporate governance has greatly evolved since its emergence in the 1970s. Today, Germany counts among the most advanced nations in the elaboration and practise of stakeholder capitalism, through its employee co-determination and representation laws.

Can stakeholder capitalism and shareholder capitalism converge?

CFA Institute and CFA Society Germany are releasing a white paper on the development of stakeholder capitalism in Germany, with a focus on employee co-determination and the work performed by Works Councils—the internal bodies that are the interface between employees and their employers.

This joint white paper looks at the history of stakeholder capitalism as it has been applied in Germany as early as the 19th century through law and business practice. We approach this subject through one of its particular dimensions, that of employee co-determination. In practice, Germany has managed gradually to engrain in its corporate governance structures the notion that management and employees must work cooperatively towards the success of their companies.

We review the origin of employee co-determination in the country and discuss how it has shaped the economic development of the German industrial complex over the years. Specifically, we were interested in analysing how Works Councils are operating in practice. These internal bodies that exist within companies to represent employees play a meaningful role in the general decision-making framework. Their overarching objective is to align interests among shareholders, management, and employees towards the long-term success of the company.

From the analysis of these interviews, an important theme that formed gradually across the testimonies is that of resilience. Respondents perceive employee co-determination as favouring the long-term resilience of the company by fostering mutual trust between employees and their employer. What may underpin this evaluation is the notion that decisions that are understood and supported by a large contingent of a company’s workforce ultimately may be implemented more efficiently and successfully.

This concept of resilience could be one that clearly distinguishes stakeholder capitalism from shareholder capitalism. In its purest theoretical form, capitalism is advocating for the perfect mobility of capital, one in which it will be most productive through the workings of voluntary transactions operating within a free-market economy. Stakeholder capitalism, instead, may be proposing a softer form of the market economy, one in which companies are rendered more resilient through the stabilisation of their capital. This stabilisation is achieved through a greater economic and societal consensus agreed upon by the various parties that have an interest in the manner in which the company operates.

Follow this link to see an infographic which summarized the historical dichotomy that has formed between stakeholder capitalism and shareholder capitalism.

In the foreword to our paper, Susan Spinner, CEO of CFA Society Germany, reminded the reader of economist Milton Friedman’s famous headline in his New York Times 1970 essay on the purpose of the business corporation: “The Social Responsibility of Business Is to Increase Its Profits.”

The tone is clear. This debate will be about whether there is a way to align traditional shareholder interests in financial profits with a wider set of concerns coming from other stakeholders, including employees, the local community, the environment in which the company operates, or the customers and even the wider economy. About shareholder primacy, US lawyer Martin Lipton wrote the following in 2020 in the Harvard Law School Forum on Corporate Governance,[1] as he prepared the World Economic Forum’s 2020 Davos Manifesto:

‘This concept of capitalism took hold in the business schools and the boardrooms, became ascendant in the eighties and continued as Wall Street gospel until 2008, when the perils of short-termism were vividly illuminated by the financial crisis, and the long-term economic and societal harms of shareholder primacy became increasingly urgent and impossible to ignore. Since then, acceptance of and reliance on the Friedman doctrine has been widely eroded, as a growing consensus of business leaders, economists, investors, lawyers, policymakers and important parts of the academic community have embraced stakeholder capitalism as the key to sustainable, broad-based, long-term American prosperity.”

The challenge or the difficulty resides in the imperative need not to oppose the interests of stakeholders relative to those of traditional shareholders.

CFA Institute is in a good position to weigh in on this conundrum, having released the first edition of its Corporate Governance Manual for Investors in 2005. By the third edition in 2018,[2] the concept of stakeholders had been crystallised in the manual as an important consideration for board directors and investors.

Returning to Lipton’s essay, the notion that companies’ inherent objectives should continue to include profit generation has been established: “The basic objective of sustainable profitability recognizes that the purpose of for-profit corporations includes creation of value for investors.”

The development of stakeholder capitalism therefore cannot be done at the expense of investors’ interests. CFA Institute has made this point clear multiple times, including through its work with the trade association Better Finance on the concept of sustainable value for money.[3]

This takes us to the crux of the model that the EU wishes to establish. In effect, the development of the Capital Markets Union, its sustainable finance package, and the upcoming sustainable corporate governance framework aim to crystallise an alignment of stakeholder and shareholder interests over long-term economic objectives that shall serve the Union’s strategic goals.  

Several authors contributed to the report and the blog and they include: Martina Bahl, CFA, Susan Spinner, CFA, and Josina Kamerling.

[1] See Martin Lipton, “The Friedman Essay and the True Purpose of the Business Corporation,” Harvard Law School Forum on Corporate Governance, 17 September 2020,

[2] See Matt Orsagh, Linda Rittenhouse, and Jim Allen, The Corporate Governance of Listed Companies, 3rd ed. (Charlottesville, VA: CFA Institute, 2018),

[3] See Edoardo Carlucci, Josina Kamerling, et al., Sustainable Value for Money, (Brussels, Belgium: Better Finance and CFA Institute, November 2019),

About the Author(s)
Olivier Fines, CFA

Olivier Fines, CFA, is head of Advocacy and Capital Markets Policy Research for EMEA at CFA Institute. With teams based in London and Brussels, he leads the effort in researching and commenting on the major trends that affect the investment management industry as well as changes to the profession and policy and regulatory developments. The positions taken on these issues and the research pieces that are published are meant to promote the fundamental principles upheld by CFA Institute, that of investor protection, professional ethics, and market integrity. Fines joined CFA Institute in March 2019 after a 15-year career in investment management spanning research, portfolio management, product management, and regulatory compliance work at firms based in Paris and London. Prior to joining CFA Institute, he was head of Risk and Compliance at Rothschild & Co in London for the private equity and private debt division.

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