- Stakeholders' demands are forcing executives and decision-makers to rethink their organizations' goals.
- Corporate governance is key to define the role of stakeholders within a corporation and to give a concrete meaning to “stakeholder capitalism”.
- The adoption of collaborative models will require new corporate governance approaches.
- Business leaders have a unique opportunity to transform their companies for the future.
The concept of stakeholder capitalism has been gaining traction against the prevailing shareholder-primacy model of profit maximization. As the World Economic Forum's founder, Klaus Schwab, asked in a recent editorial: “What kind of capitalism do we want”?
Profits are not the sole purpose of a business. Let us remind ourselves that corporations exist to solve problems and provide services. If they are successful at doing this, shareholder long-term returns can increase, as society in general is better served.
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The debate regarding the role of stakeholders within a firm is, primarily, a governance debate. As in most challenges that require robust leadership to change the way we live, work and interact, transformation starts from the top. Corporate governance sits at the heart of this - and for this reason, the World Economic Forum has recently published a framework structured around seven pillars:
1. Defining corporate purpose
2. Governance mechanisms
3. Corporate risk management
4. Regulation and corporate adaptation
5. Governing disruption
6. Long-term vision, short-term needs
7. Cultivating trust
Establishing corporate purpose is not an abstract exercise. A strong purpose guides the complex process of establishing priorities, since all major corporate decisions involve necessary trade-offs. Purpose must not only be explicitly defined, it must also be implemented. Shareholders must understand the organization’s purpose and be able to identify the metrics related to delivering on it.
One example is the clothing company Patagonia, which states that its reason for being is to help protect life on Earth. This is understood by its investors, and implemented by designing, producing and selling products in the most environmentally sustainable way possible, and by building its supply chains and customer service around the circular economy ideas of repairing, reusing and recycling. Responsible corporations create value for society and are motivated by the desire to do so.
During the last 50 years there has been unprecedented progress in human indicators – life expectancy has increased to record levels; infant- and maternal mortality has fallen; more girls are staying in school; more people have been lifted out of poverty than ever before; and inequality between nations has narrowed. The market system has served us well.
But deep fractures are beginning to show: gaping inequality within almost all countries; record environmental degradation and species loss; and the broader impacts of irreversible climate change. Our markets are unsustainable – and we need a new economic model.
To tackle these challenges,Transforming Markets is one of four focus areas at the World Economic Forum's 2019 Sustainable Development Impact summit. A range of sessions will bring stakeholders together to take action that places human and environmental health at the core of market systems and value chains. These include building sustainable markets, responsible supply chains, moving beyond disposability, circularity and scaling solutions of the Fourth Industrial Revolution, among others.
New responsibilities towards society and environment
The Fourth Industrial Revolution is forcing decision-makers to rethink how they create value and reinvent the ways in which their organizations function. While established incumbents are at risk of lacking sensitivity to evolving customer needs, while younger players can lack the financial resources and data enjoyed by older counterparts, each can gear their efforts towards sharing resources in a way that creates value for both parties and for broader economies. Future-oriented collaborative models require new corporate governance approaches that are much less based on traditional vertical control and siloed mechanisms while still maintaining accountability to shareholders.
During COP25, the United Nations emphasized the critical importance of breakthrough innovation to achieve the Sustainable Development Goals by 2030. It is a matter of corporate governance to put together the mechanisms that can reconcile how innovation can both enable long-term economic growth and fulfil each organization’s purpose. Innovation impacts many of a board’s core responsibilities, such as long-term planning, people and culture, executive compensation, corporate strategy, investments and acquisitions. Hence, each board of directors has the responsibility to drive the continuous reinvention of their organization in a way that ensures it is fit for purpose relative to shifting customer demands and social expectations.
A major contribution in that direction are the Principles to Set Up Effective Climate Governance on Corporate Boards, which are being developed by the World Economic Forum and a global network of non-executive directors. This initiative was launched at the 2019 Annual Meeting and is championed by Chapter Zero in the UK.
Align executives, owners and stakeholders
Boards of directors play a vital role in keeping executive teams both accountable and on track relative to their stated purpose and long-term goals. Corporate governance involves establishing mechanisms to align the goals of a company’s executive team with those of owners and other stakeholders in the interest of fostering sustainable and long-term economic growth.
For a board to be truly effective it must decide on multiple aspects, such as its optimal size, the independence of its members, the means to assess potential risks, and the renewal process necessary to remain agile. Another high-profile topic is setting the right type of compensation for top executives in order to encourage long-term decision making that is in line with the organization’s purpose.
Shareholder engagement keeps managers on their toes - and while not every form of activism genuinely adds value, making managers respond to shareholder pressure helps them to avoid becoming entrenched and insulated. A marked increase in corporate responsiveness to shareholder pressure related to climate and gender equality issues has taken place in recent years. We have also seen a greater emphasis on long-term strategic plans, reflecting the fact that many shareholders now have longer-term investment horizons or can’t express their disagreement by walking away, as in the case of index-tracking funds.
As leaders, we must take the opportunity to evaluate whether our businesses are truly serving society in the best possible way. We have a unique chance to give meaning to stakeholder capitalism by engaging in a governance debate and devising new structures to implement it across our organizations.