Originally published January 22, 2020 on Harvard Business Review
by Doug Sundheim and Kate Starr
Stakeholder capitalism, a popular management theory in the 1950s and ‘60s that focused on the needs of all constituents, not just shareholders, has been poised to make a comeback since weaponized financial instruments brought down the economy in 2008. Now, spurred by the alarming climate crisis and increasing social challenges such as rising inequality, the movement is gathering additional steam. Increasingly, there’s a sense among business leaders that the prevailing ideology of putting shareholders above everyone else — which has reigned for the past 40 years — needs a serious update.
Naysayers will call stakeholder capitalism a PR stunt. Window dressing designed to placate protesters and pretty-up corporate images. But there are signs that it’s far more than that.
This month, Larry Fink of BlackRock, the world’s largest investor with $7 trillion in assets under management, sent his annual letter to CEOs placing long-term sustainability at the center of his investment approach. “Awareness is rapidly changing,” he writes, “and I believe we are on the edge of a fundamental reshaping of finance.” Last month, The World Economic Forum, whose annual meeting kicks off this week, updated its Davos Manifesto for the first time since 1973 to more clearly state that businesses must be stewards of the environment, uphold human rights throughout their global supply chains, and pursue sustainable shareholder returns that don’t sacrifice the future for the present. And last August, 181 multinational CEOs of the Business Roundtable revised their Statement on the Purpose of a Corporation to explicitly move beyond shareholder primacy — a stance they’ve held since 1997 — to express “a fundamental commitment to all of our stakeholders.”
The list goes on.
How did we get here? Like all cultural change it’s a long and winding tale of social, financial, and political forces. The story is filled with good intentions, questionable assumptions, data-light economic models, willful blindness, and a fair amount of hubris. Yes, shareholder capitalism has delivered economic growth with many important benefits, but it’s also left a path of environmental and social destruction for future generations to grapple with. As Kate Raworth succinctly articulates in her excellent book, Doughnut Economics, this tension lays bare an extremely uncomfortable reality: “No country has ever ended human deprivation without a growing economy. And no country has ever ended ecological degradation with one.”
This reality leaves us with two critical and wickedly tough questions:
1) How can groups across socio-economic and political divides get better aligned on the current reality we’re facing?
2) What is the appropriate approach, including taxation and regulation strategies, to produce the economic, environmental, and social outcomes we need to survive and thrive for generations to come?
Business leaders need to help answer these questions or run the risk of getting uncomfortable answers foisted upon them. Changing the narrative from shareholder to stakeholder won’t happen overnight, but we need to make room for the conversation. Our organizations — and ultimately the planet — depend on them.
Like all change, the best place to start is locally, identifying opportunities and priorities in your own organization. Here are four suggestions:
Measure the right things
Today’s climate and economic realities require laser-like focus. If you’re not careful, you can get lost in an unending dashboard of performance indicators with varying degrees of usefulness for your organization. To separate signal from noise, we recommend using SASB’s Materiality Map as an initial measuring stick to evaluate your organization’s performance against the environmental, social, and governance (ESG) issues that are likely to affect your industry. A deep focus on metrics that relate to day-to-day deliverables will support your team in successfully measuring ESG issues, even if the results, by definition, will occur in a longer timeframe.
At the same time, pick your spots where you want to become an industry leader. Doing so can lead to a meaningful competitive advantage. A great example is Eli Lilly, whose initial diversity efforts were yielding no meaningful results for advancing the careers of women and people of color. Then they commissioned a detailed survey called the “Employee’s Journey” that uncovered deeper, personal reasons why their diversity efforts were failing and pointed to proactive steps they could take to remove those organizational barriers. These actions have helped increase diversity in their clinical trials, spur innovation, and market their medicines more authentically.
Be a thoughtful voice for regulation
Business leaders must rethink their relationship to regulation. The widely accepted notion that regulation decreases competitiveness and is a drag on growth is too simplistic and short-term. In the long term, a habitable climate and peaceful society are the bedrock of an economic system that delivers prosperity. And these things require strong and effective policy frameworks to protect them. Forty years ago, business, labor, and public interest group lobbying was on relatively equal footing. Today, large corporations and their associations outspend labor and public interest groups 34 to 1 on lobbying efforts. Business’s large thumb on the scale in Washington has led to a taxation and regulatory environment that tends to serve corporate interests above broader public interest.
Corporate executives are starting to see the writing on the wall. At the 2019 New York Times Dealbook conference, eight technology executives discussed the topic and a majority agreed that the time has come for additional oversight, even if it will be difficult. Facebook founder Chris Hughes struck an optimistic tone. “We can get regulation right. We do it with airlines. We do it with pharmaceuticals. We do it with the F.C.C.,” he said. “We have come to a cultural agreement in the United States that when private industry is crucially important in our lives, we have to ensure that it works for the people.”
Paint an integrated picture for shareholders
Stakeholder capitalism can’t succeed if shareholders don’t see the value. In a stakeholder model, measurement must be a team effort. While the CFO bears central responsibility for delivering financial results to shareholders, he or she will need support from the COO, CMO, CIO, and CEO to also articulate how working on ESG issues affects financial performance. Research is beginning to show clear value in this approach. For example, George Serefeim at Harvard Business School has found that strong sustainability performance is translating to increased valuation premiums.
Moreover, the picture painted for shareholders can’t be overly focused on short-term performance. The return on smart, sustainable business practices isn’t measured on a quarter-to-quarter basis. The CFO needs support in shifting shareholder discussions to the longer term. Successfully doing so will give your organization the runway needed to implement the right competitive and strategic investments for the future.
Don’t be afraid to take some risks
Your stakeholders don’t expect you to have all the answers. However, they do expect you to get into the conversation. Engage in dialogue with customers, peers, employees, scientists, activists, and investors about what’s happening and how it relates to your business. See the world through a variety of lenses as you determine best courses of action. Then focus on some knotty problems and begin to experiment with solutions. Successful or not, be transparent. We all must learn together.
Humans have never had to deal with the challenges we’re now facing. Simple solutions and sound bites coming from one side of the ideological spectrum or the other won’t cut it. It’s time we get serious about writing a new chapter on capitalism, before it’s too late.
