Chapter 4: Stakeholder approaches to strategic analysis and strategy formulation


  • Japanese Stakeholder capitalism
  • Climate Finance and Reporting
  • Big oil – a turning point
  • Gro Harlem Brundtland (profile)
  • Housing co-operatives in Denmark: A solution to property prices in a perfect world?
  • Patagonia outdoor clothing
  • End-of-chapter indicative answers

Japanese stakeholder capitalism

The Economist views the Japanese economic system as “stakeholder capitalism”. In an article on 20 March 2021, Analect and Abacus, the authors describe what they mean by this, though not before labelling it as “stubborn”. It is based on the trinity of buyers, sellers and society (the philosophy of Shibusawa Eiichi, a 19th Century industrialist).

Firms often provide secure employment in return for high-skills and loyalty. Boards are dominated by long-term company insiders, often with family links and loyalties. There are networks of cross-shareholdings between firms, often limiting transparency. CEOs are paid less than their western counterparts.

The Economist argues that this has held back many companies as they hold on to less productive employees. Managements hold on to cash for a “rainy day”. They are risk-averse and the current government is calling for more transparency and more diversity, not least from outsiders to the country. The focus is shifting towards financial performance more than the creation of value “beyond pure profit”.

This stakeholder approach potentially explains the seeming corruption scandal at Olympus.

Climate finance and reporting

Investors are presented with a sharp dilemma – should they divest and relinquish their influence over the firm, or should they retain their investment but become activist with regard to climate mitigation and adaptation?

Divestment arguably raises capital costs and leads to decarbonisation investment becoming less likely. Better to retain the shareholding but push – by a variety of means – for that decarbonisation investment as the price to pay for continued support and legitimacy.

There are a number of investor groups doing just that. Climate Action 100+ (CA100+), for example, is a global investment engagement group. Founded in 2017 it has over 500 members that hold significant shareholdings ($54tn worth in 2021). Members include Japan’s Government Pension Investment Fund. CA100+ demands three things of firms:

A valid question raised in a recent article in the Economist was – how much action would have been taken by large corporates, including oil companies, without the likes of CA100+? The newspaper’s own research demonstrates CA100+ has a modest effect on behaviour. Those committing tend to be small polluters. Consumer goods firms such as Unilever and P&G are much more proactive than oil companies, cement and other major polluters.

There are other mechanisms for firms; for example, the Science Based Targets Initiative (SBTi) – a pledge organisation with the reassurance that climate mitigation can lead to:

  • Boosted profitability
  • Improved investor confidence
  • Innovation
  • Reduced regulatory uncertainty
  • Strengthened brand reputation

There are also reporting protocols such as the Task Force on Climate-related Financial Disclosures. The task force is chaired by Michael Bloomberg. The TCFD offers a framework for listed companies and other organisations through their existing reporting processes to disclose climate-related risks and opportunities.

The Climate Now podcast, Climate impacts profits: How businesses should report climate risk, dated 24 September 2021 includes a discussion with a business consultant, Emily Wasley, who runs WSP USA’s Corporate Climate Resilience practice. In this discussion, she highlights the four pillars of reporting:

  • Governance
    • board-level responsibility for climate reporting (GHG emissions, retrofitting estates, energy efficiency measures, etc.
    • management-level clarity about assessing and disclosing opportunities and risks
  • Strategy
    • climate change risk and opportunity on how the business strategy will be impacted qualitative or quantitative financial analysis on how climate change will impact the business strategy and the financial portfolio
    • resilience – how resilient is the business strategy to climate change impacts and a more sustainable future?
  • Risk management
    • management of the impacts of the climate-change risks on the business
    • integrating climate risk management into broad enterprise risk management processes
  • Metrics and targets
    • where are scope 1, 2 and 3 GHG emissions located in the business (e.g. factory, suppliers of energy and supply chain)? What metrics are being used? Are they fit-for purpose?
    • are the targets feasible and sufficient to reach the end-point of a more sustainable future?

Is it just greenwashing, though? There are some voices suggesting it is. Tariq Fancy was the former chief investment officer for Sustainable Investing at BlackRock. BlackRock is the largest asset management firm on the planet. Writing in USA Today (March 2021) he says that investment firms use environmental, social and governance (ESG) for PR purposes, rather than for investments in sustainability. He says simply that “[t]o advance real change in the environment simply doesn’t yield the same return.” More recently, Larry Fink, the CEO has written in his yearly newsletter (2022) that “Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke’…We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” Fink predicted in this year’s letter that “the next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonise and make the energy transition affordable for all consumers”, adding that established companies should strive to do the same. (Guardian, 19 January 2022).

Subsequent to this, Fancy has become a bit of a celebrity. On 30 March 2021 he was interviewed in the Guardian newspaper and expanded slightly on his points. Ultimately there is no incentive for firms to meet carbon emission target, and no incentive for fund/portfolio managers to do so either unless governments intervene and tax carbon. Then, says Fancy, every fund manager would change the portfolio, because the worst emitters would pay a high price for their violations.

Divestment is not an option, argues, Fancy. It only stops institutions with carbon investments from being criticised or labelled. Institutions that sell their stakes in oil companies, for example, hand over the returns to hedge funds that are perfectly willing to buy the shares and profit from them. This is a point taken up by Eric Lonergan and Corinne Sawers in their book, Super Charge Me: Net Zero Faster (2022). They argue (pp72-3) that transparency is important (and should be required by hedge funds or other private equity funds, too). But another way around the problem might be for governments to legislate to:

  • restrict creditors from financing the purchase of polluting assets
  • ensure that current owners of polluting assets are liable for the lifetime performance of those assets
  • promote the purchase of polluting assets by so-called impact investors (the Norwegian Sovereign Wealth Fund is one such investor). It buys assets to decommission them and to maximise social return by doing so.

Aviva has £262bn under management and its CEO, Mark Versey has explicitly informed directors that they will be challenged on matters of ESG if they do not perform. The Financial Times reported that:

In a letter sent to 1,500 companies in which Aviva Investors is invested, Mark Versey said the fund house will focus on their performances against four themes: biodiversity, human rights, climate and executive pay. He said the company would hold both boards and individual directors accountable at companies “where the pace of change on climate, biodiversity and human rights does not exhibit sufficient urgency”.

FT January 24 2022:

Greenwashing, however, is common amongst corporations. Royal Dutch Shell is seemingly particularly adept at this. Sufficient, it seems, for comedian Joe Lycett to challenge the company and create a truer picture of the company’s investment priorities. It highlights a marketing strategy that shows what the company is doing with respect to renewables in order to distract attention away from not only continued extraction, but also investments in new exploration and drilling, despite the International Energy Agency explicitly declaring that there is no need for further fossil fuel exploration as the world pursues zero emissions by 2050.

27 May 2021 – a turning point for big oil?

Notwithstanding lobbying efforts by so-called Big Oil against climate-mitigation legislative efforts, campaign groups have forced oil companies to reduce their carbon emissions either by deploying activist funds, or through the courts on the grounds that they are bound by international agreements, most specifically, the Paris Agreement of 2015 (which is a binding international treaty).

CalSTRS CIO Chris Ailman on ExxonMobil board victory, shareholder activism

CalSTRS is a pension fund with significant market investment. He does not want to be the “next Kodak” – a company that failed to see change coming and understand how a core competence can be leveraged even when the core product’s market contracts.

Ailman supported Engine No. 1, an activist hedge fund, that now has 3 seats on the ExxonMobil Board. Ailman is no advocate of macro-level degrowth; he does believe, however, that “big oil” has to reconfigure its resources.

Resorting to the Courts

The courts are already proving to be a battleground being used by campaigners against corporate interests. In 2017 a Peruvian farmer sued Germany utility company RWE in a German court and won the right to proceed through the legal system. Saul Luciano Lliuya was looking for damages from RWE on the grounds that its carbon emissions are threatening the capacity of a glacier lake that is filling due to the glacier progressively melting. It seems that RWE is responsible for  0.5% of all global emissions since industrialisation!

Meanwhile, Royal Dutch Shell was forced by Dutch court to speed up its decarbonization – including Scope 3.

In a case brought by Friends of the Earth (Netherlands), a court in Den Haag, ordered the company to reduce its carbon emissions by 45 per cent by the end of 2030! The company has, it seems, a duty of care “and that the level of emission reductions of Shell and its suppliers and buyers should be brought into line with the Paris climate agreement.” (Guardian, 26 May 2021). Th court ruled that the company was violating the Dutch Civil Code and the European Convention on Human Rights. The implications for the company, its suppliers and buyers cannot be over-stated. Not surprisingly, the company committed itself to appeal the decision.

Elsewhere, Royal Dutch Shell finances a lobbying organization called The American Petroleum Institute (API). In its own words

API represents all segments of America’s oil and natural gas industry. Its nearly 600 members produce, process and distribute most of the nation’s energy. The industry supports millions of U.S. jobs and is backed by a growing grassroots movement of millions of Americans. API was formed in 1919 as a standards-setting organization. In our first 100 years, API has developed more than 700 standards to enhance operational and environmental safety, efficiency and sustainability.

Drawing from a report in the Guardian (21 July 2021), Royal Dutch Shell donated $10m dollars to the API in return for access to Congress and decision makers. The API is particularly involved in lobbying against the Biden administration’s energy transition objectives, including against rapid adoption of EVs.

ExxonMobil lobbies to water down climate legislation

Lobbying efforts more widely are sometimes contradictory. In the United States, the Biden administration sought to push through wide-ranging climate mitigation and adaptation policies through the House and Senate against the backdrop of wholesale opposition from Republican members and senate Democrats in receipt of funds from fossil fuel companies (Joe Manchin, for example, is the fiscally-conservative Democratic senator for West Virginia).

Of equal weight is the revelation that many leading companies that claim to have progressive carbon mitigation policies (including Microsoft, Apple, FedEx, Verizon, AstraZeneca, Bayer, Dow, Johnson&Johnson, Goodyear, Amazon, Alphabet (Google) and Exxon) actively participate in lobbying efforts against legislation. They are represented by trade bodies – Business Roundtable, Pharmaceutical Research and Manufacturers of America, The Rate Coalition, The US Chamber of Commerce – that have robust lobbying programmes against climate legislation.

The contradictions are curious. Microsoft, for example, is a member of the US Chamber of Commerce that actively seeks to stop carbon mitigation legislation in the USA (notably the Build Back Better Act) whilst simultaneously contracting with Climeworks, a Swiss carbon capture and storage service, to extract legacy carbon from the environment. Joppa, Luers, et al (2021) estimate that the cost of sequestration being procured by Microsoft is in the region of $141 per tCO2 ($20–10,000 per tCO2). The initial contract in January 2021 was for 1.3 million tonnes of carbon dioxide to be removed from the atmosphere.

Royal Dutch Shell and Brent Spar

The text makes reference to the Brent Spar case from 1995. There are two videos cited in the text; one in English, the other in German. Both show how Greenpeace prevented the platform from being dumped in the North Atlantic by direct action and building alliances with stakeholders that had an interest but little power.

Gro Harlem Brundtland

The contemporary origins sustainability can be traced back to the Brundtland Commission report (WCED 1987) also known as Our Common Future. Gro Harlem Brundtland is as significant as Porter or Barney in the strategy discipline. She transformed the World Health Organization in her time as Director-General between 1998 and 2003. In the 1970s she was Minister for Environmental Affairs in the Norwegian Government, and then Prime Minister. It was in her time chairing the World Commission on Environment and Development (WCED) that she developed and popularized the concept of sustainable development. She tells her own story in the United Nation History series (UN 2010).

Housing co-operatives in Denmark – a solution to rising property prices?

I lived for 13 years in a housing co-operative in Brighton, England. I joined for a couple of reasons: low rents and shared utility costs; political idealism (sharing and equality). The co-op that I lived in was modest – three houses and 12 members. But the co-operative principles are shared by all co-operatives irrespective of size and purpose (I buy my food largely from an organic food co-op, for example). These principles are:

  1. A co-op is owned and controlled by its members. It exists for the benefit of its members, who may be customers, workers, suppliers or the wider community.
  2. A co-op is democratic – this means every member has an equal say in how it’s run and how profits are used.
  3. Every member contributes financially in some way – from buying products, working for the co-op, investing in it or deciding how to spend its profits.  
  4. A co-op is an independent business, owned and controlled by its members.
  5. It offers education and training to everyone involved, so they can develop the co-op and promote the benefits of co-operation.
  6. It co-operates, works with and supports other co-ops.
  7. A co-op supports the communities it works with.

The British Government is not particularly supportive of the co-operative model for businesses and providing for housing and management. Some countries, however, are much more co-operatively minded. In Denmark, for example writes Rosie Collington “7% of the Danish population live in a form of co-operatively owned housing – and it accounts for one-third of the housing stock in Copenhagen.” (Observer,  23 Jan 2022)

The andelsboliger that Collington lives in has its own model. Members become so by purchasing a share of the association that owns the apartment building. The share is equal to the value of the apartment (of which there are 158 in this particular example). The share can be purchased through a loan; but prices have not changed much since the establishment of the andelsboliger in 1975! Hence members who leave do not make a profit – there is no capital gain.

The andelsboliger has a unique governance structure (the board is elected by members of the co-operative). The board has responsibility for building maintenance, membership and other strategic issues. Moreover, members share common spaces such a garden and launderette.

Co-operatives are often a legacy of social movements in past years. In Denmark, co-operatives have their origins in agriculture, trade unions and progressive laws. For example, the Danish Government gave private rental-sector tenants the opportunity to buy apartment blocks or other dwellings from landlords seeking to sell. Tenants had the first right to buy over private buyers.

Co-operative ownership is no bed of roses, however. There are internal challenges (the governance systems are designed to manage these), but also changes in laws, particular when more economically-liberal, free-market governments are elected. In Denmark, for example, it is much more difficult now to establish co-operatives than it was in the 1970s.

There are also inclusivity issues, too. Collington reports that some groups seem to be excluded from cop-operative membership as boards tend to rely on existing networks to fill vacancies, rather than through open application (in the co-op that I lived in, members were very conscious of this and recruitment was always open and free). Financial mismanagement by boards has also led some co-operatives to bankruptcy and the privatisation of apartment blocks. These are significant businesses, and membership/election to a board does not necessarily equate with competence.

Patogonia outdoor clothing

California-based Patagonia has been a leading global brand in outdoor clothing for many years. Leading in terms of purpose and sustainability. It was a pioneering B-Corp and already donated 1 per cent of profits to environmental groups fighting environmental destruction (sod-called 1% for the planet movement). Employees have also been at the centre of the business model – enjoying benefits such as on-site nurseries and working-time flexibility. Indeed, an outdoor clothing firm that is not cognizant of climate change and environmental degradation is working – under normal competitive strategy frameworks – to deplete the very environments and pursuits that its equipment is designed to enable and enhance.

Patagonia, however, has gone one step further. An announcement on 14 September 2022 by its founder, Yvon Chouinard (below right), that the company had set up a trust [Holdfast Collective] into which the shares have been transferred and, in perpetuity, the profits (the trust will still invest profits in the business) will all be used to defend the planet and its biodiversity. This structural change represents a complex legal arrangement that also defends the trust – and hence the company – from legal challenges in a capitalist structure that mandates profit and shareholder supremacy. In the text of the book there is a discussion on legal requirements in the UK and the USA around profit maximisation. In both these jurisdictions, firms (and their directors) that do not profit maximise and distribute the proceeds (through dividends) to shareholders because they share some of the profits with other stakeholders, can be in breach of the law.

Source: unknown

This move by Patagonia is more than CSR. Patagonia has, arguably, now become an active defender of the planet against a brand of capitalism that is progressively – and increasingly rapidly – destroying not only the wilderness that the company’s explore but also the life support systems of the planet for all life. Chouinard said that “[I]nstead of extracting value from nature and transforming it into wealth for investors, we’ll use the wealth Patagonia creates to protect the source of all wealth…Instead of ‘going public’, you could say we’re ‘going purpose’” (source: Guardian, 15 September 2022).

End-of-chapter indicative answers