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Is Stakeholder Primacy Dead in Banking?

by internationalbanker

By Jeffrey P. Marsico, President, The Kafafian Group, Inc.





The Business Roundtable (BRT), an association of American chief executive officers (CEOs), periodically issues its “Principles of Corporate Governance”. In essence, these principles guide US corporations on how they should conduct their businesses. And during the 20 years prior to 2019, they followed economist Milton Friedman’s belief that the sole purpose of a corporation is to maximize profits for its owners.

In 2019, the definition shifted. Here is an excerpt from the BRT’s August 2019 press release on this shift:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.1

Stakeholders include shareholders, employees, customers, suppliers and communities. The most ardent capitalists saw this as a veiled move toward socialism, whereby everyone works for the social good, and individual or corporate rewards are diluted by the dispersion of resources to all—or to politically favored persons or entities, even those with little connection to a corporation’s success.

This would be justified if a corporation were run for the benefit of all stakeholders at the expense of shareholders, its rightful owners. In 2007, author, professor and scholar Rajendra Sisodia wrote Firms of Endearment: How World-Class Companies Profit from Passion and Purpose. He subsequently wrote a second edition in 2014. In researching that book, Sisodia found that “firms of endearment”, defined as companies that earn their profits by helping all of their stakeholders, thrived and outperformed the S&P 500 (Standard and Poor’s 500) index by significant amounts over 3, 5, 10 and 15 years.

These companies were well-known US firms, such as the Walt Disney Company, 3M Company and Boston Beer Company (the maker of Samuel Adams). Internationally, they were companies such as Honda Motor Co., Tata Motors Ltd. and IKEA. Firms of Endearment was followed by Conscious Capitalism: Liberating the Heroic Spirit of Business, co-authored by Sisodia and John Mackey, the then co-CEO of Whole Foods Market (today an Amazon subsidiary). Stakeholder primacy was on a roll that resulted in the 2019 Business Roundtable’s shift away from shareholder primacy. You could do well by your shareholders by doing good for all your stakeholders.

But, as feared by the staunch capitalists, in came the socialists. And stakeholder primacy began to change. It started to morph from a model with an equal focus on all stakeholders to one that singled out certain types of employees, customers, suppliers and communities. Through laws, regulations and social pressures, we began forcing corporations to pick sides and slice and dice their stakeholders into ever smaller groups, so the preferred groups reaped the benefits of a zero-sum slice of the stakeholder pie. Or worse. We have pressured corporations to dedicate precious resources to areas of little concern to their stakeholders.

If this is the revised definition of stakeholder primacy, I suggest the BRT should consider returning to its pre-2019 “Principles of Corporate Governance”.

Not a zero-sum game

When writing my book Squared Away: How Can Bankers Succeed as Economic First Responders in 2021, I evaluated the returns on average assets (ROAAs) of the top 10 “Best Banks to Work For” as cited in the US banking magazine American Banker’s annual list. Those “best banks” achieved the same ROAAs as all US banks. If given the choice to be the best according to your employees and achieve the same financial results as those not considered the best by their employees, which would you choose?

The challenge, however, is how stakeholder primacy is executed. More recently, I evaluated the total returns of publicly traded US banks included in American Banker’s top 25 “Best Banks to Work For” and compared their performances to the banks in the S&P United States BMI (Broad Market Index). The results were less promising than those in Firms of Endearment or Squared Away.

These results feed Friedman’s narrative that the sole purpose of a corporation is to maximize profits for its owners. It appears from this table representing year-to-date profitability through September 30, 2023, and total returns over one-, three- and five-year periods that those banks recognized as the “best” by their employees achieved this standing at the expense of their other stakeholders.

Everything requires context. The median best bank to work for, which was in the top 25 and publicly traded, had $3.4 billion in total assets. The S&P United States BMI Banks Index includes all banks with more than $100 million in market capitalization, roughly equating to about $1.5 billion in total assets for the smallest while also including the largest financial institutions in the country. There were likely scale issues in the comparison that more heavily influenced performances (for example, return on assets [ROA] and return on equity [ROE]) and trading multiples, but the “best banks” still underperformed the index banks in one-, three- and five-year total returns. And that flies in the face of what was presented by Sisodia in Firms of Endearment. What gives?

Execution is key

I listened to a World Economic Forum (WEF) podcast on stakeholder primacy that amounted to nothing more than environmental, social and governance (ESG) initiatives. If these initiatives result in happier and more talented employees delivering noticeably better customer experiences efficiently, resulting in superior financial performances, sign me up.

But if it directs scarce resources to preferred causes that are not demanded by the corporation’s stakeholders and do not result in superior financial performance, move along. There are enough demands on a corporation’s resources without diverting them to a political mishmash of causes that stakeholders do not demand. If this is your bank’s definition of stakeholder primacy, then I suggest moving back to Friedman. Your longevity will be better served.

When considering dedicating resources to a strategic initiative, the first question a bank should ask is: “Will this benefit most or all of our stakeholders?” If the answer is no, don’t do it.

Look for win-wins.

For example, in executing a stakeholder-centric business model, a bank could adopt a higher purpose, such as elevating the economic well-being of its communities and those that reside in them. This sounds altruistic enough. And employees are drawn to this higher purpose because it gives greater meaning to their work than when their bank’s stated purpose is to maximize profits for its shareholders’ benefit.

Elevating the financial well-being of its community is critical to a bank’s success. A bank in a thriving and growing community typically performs better than one in a moribund community that still relies on an industry long gone. Elevating customers’ financial well-being within their community is consistent with growing their net worth and balances and, ultimately, profitability for their bank.

Such a bank should draw employees who believe in the higher purpose and stakeholder mentality. Higher-performing and happier employees should search for and destroy friction points and unnecessary processes. They should look for ways to utilize technology to its fullest. And they should deliver an efficient and noticeably superior customer experience, one in which the customer doesn’t demand the best price.

One bank set a strategic goal to have above-average salaries and benefits per employee, accompanied by top-quartile revenues per employee. Think about it. The bank wanted its employees to receive greater compensation than their peers, accompanied by greater productivity than their peers. This plan requires engaged employees. But if your stakeholder model focuses on favoring certain employees over others for something other than merit, it will fail. Highly productive employees will lose faith in your stakeholder culture and higher purpose, eventually becoming average employees—or they will leave. There is no superior customer experience. No superior financial performance.

Successful banks likely make more decisions on what not to do than what to do. There are enough demands on resources to move your bank forward without dedicating those resources to initiatives demanded by outsiders wanting you to spend your shareholders’ money on their causes.

Don’t do it. Stakeholder primacy demands you don’t.


Jeffrey P. Marsico is President and a founding shareholder of The Kafafian Group, Inc., a US-based financial-institution consultancy. He specialises in banking strategy, process optimisation and financial advisory. He has worked for and with US banks for more than 30 years. He was also a US Navy cryptologist specialising in tactical-intelligence gathering for at-sea warship commanders.




1 Business Roundtable (BRT): “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’,” August 19, 2019.

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