Whenever I come across a business philosophy that I haven’t heard of before, I want to dig into it.
So when I was asked if I had heard of mutualism, and that some companies were changing the way they operated because of it, I decided to dig into the idea.
Mutuality is a concept BCG is running with that emerged from Mars, Inc. and was formalized in research from Mars and Oxford in 2007. BCG describes how they apply it to disruption, including AI disruption, in this paper. It is described as an important method for companies to strengthen their stakeholder ecosystems to better prepare for economic shocks. They define it as follows:
The ability to build reciprocal relationships in which critical stakeholders, including the planet, are structurally better off with the firm than without it. It secures commitment when trade-offs become unavoidable.
The way they suggest applying mutualism is as follows:
• Leadership incentives: Promote leaders who build future business and reinforce critical ecosystem relationships, even at short-term cost, over those simply optimizing quarterly results.
• Capital protection: Safeguard investments in renewal and stakeholders’ relationships during downturns, signaling their strategic importance.
• Clear accountability: Sanction behaviors that shift risk, exploit asymmetries, or erode trust—even when they deliver financial results.
• Public recognition: Celebrate and reward behaviors that reinforce mutuality.
They review company failures, and separate out failures they attribute to lack of performance, lack of adaptiveness, and lack mutualism. In their view, many companies would have survived if they were better at sharing value with their ecosystem as it was being created and had better allies to support them through stress and disruptions.
One of the main ways they propose to align economic interest is as follows:
• Human capital debt: burnout, low employee engagement, underinvestment in skills and upward mobility, or short-term productivity gains that erode long-term capability.
• Social capital debt: erosion of trust, social cohesion, and capacity for collective action across employees, suppliers, customers, regulators, and communities.
• Natural capital debt: overuse of environmental resources or deferred regeneration that increases long-term exposure.
• Shared financial capital debt: pricing pressure on customers, delayed suppliers’ payments, downward pressures on wages, and financial risk transfer to other parties that erode the financial viability of the ecosystem
Social capital debt seems to address categories of problems that arise from dishonesty, unreliability, lack of communication, or ill-will arising from other forms of debt. Natural capital debt can be conceptualized as reducing potential liability from government or consumer backlash, as well as agricultural or other natural resource-tied companies figuratively eating their seed corn. But the most actionable issues are the solutions to human capital debt and shared financial capital debt, as the solutions are effectively based around sharing more economic rents with stakeholders.
This leads to two main issues with a naive approach to mutualism:
1. Not all businesses are in a position to prosper from sharing significant economic rents.
When companies are in industries that command high margins, such as those at the cutting edge of technology, they can afford to share significant upside with employees or suppliers when those moves secure the future of the business. Silicon Valley created many wealthy employees as companies were pushed by market forces to share appropriately aligned upside while giving out significant perks, as without them the best employees would have left to go work at a competitor who is giving out better stock options.
Meanwhile, companies in less differentiated commodity businesses with low margins that are chasing larger market share often cannot sustain a large market share if their costs get too far above their competitors.
One way to think about this is in the following graph of rent-sharing versus long-term value creation. There are two local optima on this chart, the one for businesses who are trying to be the minimum viable partner, and the one for businesses trying to be trusted long-term partners. There is value in being a good enough cheapskate that people want to do business with you. And there is value in establishing a strong mutual partnership, but giving up too much will backfire at some point even for those partners.
Many companies outside of the technology industry have business models where sharing economic rents makes sense, such as how Costco and In-N-Out pay higher wages for more effective workers. Luxury businesses are another category where they want to make sure they are closer to the second equilibrium.
But commodity businesses will often find the first local maximum to be higher than the second. If basic fast food franchises or a low cost courier service started paying more, it wouldn’t turn their employee base into an equivalently friendly and effective labor force overnight. There may be some higher margin opportunities for trusted partners, but the commodity side of some markets are orders of magnitude larger. There is a path-dependency to companies who are near these local optimums, and switching from cheapskate to a trusted partner is not an easy or necessarily viable transition.
2. Not all partners deserve to share economic rents.
When a business is commodity business, or an employee is truly a commodity employee, it can make sense to treat them more like cheapskates. They should be properly incentivized and treated fairly, but in a market where they are easily replaceable, very little economic rents need to be shared with them.
Apple has a famously contentious relationship with memory storage companies that it couldn’t change overnight if it wanted to. And while it has profited from that tight-fisted behavior in the past, today it is cutting into their profit margins.
But it has not treated every supplier in that way, as it has a far healthier long-term partnership with Corning involving long term partnership and investment. Apple has picked and chosen which stakeholders are commodities that should be squeezed, and which ones deserve longer-term investment and commitment. Apple has also invested in a long-term partnership with TSMC, but as economic dynamics have shifted, Apple has had to explore other partners in order to avoid being forced to share even more economic rents.
And on the employee front, their critical engineers are paid more than others, but their centralized, secretive and top down model allows Apple to pay their engineers less compensation than employees at similar levels would receive at other top tech companies. Apple doesn’t just blindly get stakeholders to commit, they are being strategic about which ones are worth investing in.
A company that is overly enthusiastic about sharing economic-rents is headed down the path towards being a public charity. If a company is unable to determine who their key stakeholders are and tries to please everyone, they become less profitable without capturing significant upside.
And there is a path dependency to relationships, some relationships cannot be solved in a short time. A company that spends capital to try to turn an ecosystem that was against them into a more cooperative ecosystem is giving up capital that it might have been able to use to survive while it tries to adapt to a changing environment.
Any rational business should be picking and choosing which stakeholders deserve investment in the same way that Apple does. If a business is being short-termist and might be angering key suppliers, they should monitor and be ready to proactively fix those relationships. But at the same time, profits that aren’t given to other stakeholders by applying mutuality where it isn’t needed can threaten the growth or even existence of the business via reduced retained earnings.
In the age of AI, many companies fear disruption and are looking for any changes that will help them adapt and survive through the expected period of economic disruption, so mutualism offers an attractive philosophy. It offers the promise that if they play positive sum games with all of their stakeholders, they will perform into the future. But it isn’t that simple.
If a business owner is thinking of changing their practices due to the appeal of mutuality, they need to consider a few different variables.
1. The direction of causation:
Many highly successful and profitable companies are able to waste money on all sorts of endeavors and still thrive. Things like diversity programs, sustainability, and significant employee perks driving culture have been promoted by consultants as sure ways to improve outcomes. But most of the studies supporting these practices have strong survivorship bias and causation direction issues, where the business was already working and had either cheap funding and/or high margins to allow them to spend freely on the newest trends.
2. Identify the desired local optima:
Commodity business models, and commodity stakeholders lend themselves less well to giving up economic rents in order to ensure trusted partnerships, especially when partners are looking for lower prices from your own business. In theory it would be great to be able to stop offering a commodity service and start offering one that people will pay a premium for, but it’s harder to make that happen. But even for commodity businesses, the idea of mutuality isn’t useless. There may be some practices that would move a business from being immediately deprioritized in a disruption towards being a minimum viable partner that is no longer at the bottom of the list.
3. The substitutability of the stakeholder
If the stakeholder is being replaced by a better competitor or by an AI service that vastly outperforms them, it doesn’t make sense to automatically continue the relationship. But when the stakeholders are not easily replaceable, it makes sense to take steps that assure them of the long-term mutually beneficial arrangement.
Final thoughts:
Mutualism is an interesting concept for businesses who are thinking too short-term about their reputation with key employees, suppliers or other stakeholders. But it’s not a one-stop solution to problems, and the people most receptive to the ideas of mutualism are probably already acting as proper partners and aligning themselves with important stakeholders.
As AI adoption drives business changes, different stakeholders will emerge with new levels of bargaining power. The new levels of bargaining power will help determine the winners and losers in the new era. Businesses that are willing to cut some stakeholders off, such as those with a large overhang of administrative employees or outside contractors whose workflows should be replaced by fewer employees utilizing AI are more likely to prosper into the next era compared to those who are too attached to their existing but now less economically viable partners.