Commentary / World

Walking the talk of stakeholder capitalism

The role of corporate boards has never been more important, nor subject to as much scrutiny, as it is today. The technological, environmental, geopolitical and socioeconomic transformations of the past two decades are driving a re-examination of the prevailing corporate-governance model, just as they are posing fundamental challenges to many areas of public policy and governance.

In particular, these transformations are making environmental, social, governance and data stewardship (ESG&D) considerations increasingly important to companies’ financial performance and resilience. This broad change is eroding the traditional distinction between a shareholder-primacy model of corporate governance (which focuses on financial and operational costs and benefits) and a stakeholder-driven model of corporate responsibility (focused on environmental and social risks and opportunities).

Issues that were previously considered secondary for CEOs and boards — matters once handled by companies’ stakeholder-relations, philanthropy and information-technology departments — have become important determinants of firms’ capacity to create and sustain economic value. For example, climate change, water management and other aspects of environmental stewardship are increasingly recognized as bottom-line issues in a world where technology, regulation and other features of the operating environment can change quickly.

Similar challenges apply to the management of intangible assets — a key source of competitive advantage in the Fourth Industrial Revolution. The talent and motivation of a firm’s workforce, an innovative corporate culture, individual know-how and data all are becoming increasingly important sources of value.

Accordingly, a company’s approach to people, the planet and innovation — including how it protects and applies the value added of its data — must figure more prominently in capital-allocation decisions. And to that end, corporate leaders need to improve their understanding of the trade-offs between longer-term investment in new capacity and capabilities and shorter-term rationalization of existing operations and assets. Over time, more emphasis should be placed on longer-term investment.

Effective administration of ESG&D performance is equally important for risk management. Some companies and sectors have learned the hard way that failure to pay due attention to ESG&D issues can result in the rapid deterioration of investor, employee, customer and societal trust, potentially leading to a substantial loss of value. For example, the 2019 Cost of a Data Breach Report, sponsored by IBM Security, estimates that the global average cost of a data breach has risen by 12 percent since 2014, meaning that organizations can now expect to pay an average of $3.92 million in related costs. Similarly, ForgeRock finds that more than 2.8 billion consumer data records were exposed in 342 breaches in the U.S. in 2018 alone, costing an estimated $654 billion.

According to research published by environmental group Ceres, more than 60 S&P 500 firms in 2017 publicly disclosed a negative material effect on earnings stemming from weather. Moreover, climate-related supply-chain disruptions increased by 29 percent from 2012 to 2019, and in the U.S. there were more than 100 legal filings over climate issues as of May 2019. Globally, the number of climate regulations on the books has grown to 1,500, compared with 72 in 1997.

By the same token, the #MeToo movement has revealed the growing financial, reputational and operational risks facing companies that fail to address issues of workplace discrimination, sexual harassment or misconduct. Fortune, reporting on the Conference Board’s 2019 CEO Succession Practices report, notes that “among the 18 nonvoluntary CEO departures, five oustings were related to personal conduct and #MeToo allegations. That’s especially noteworthy given that only one CEO between 2013 and 2017 was fired as a result of personal conduct unrelated to performance.”

Clearly, in the new environmental, social, geopolitical and technological context of the 2020s, ESG&D issues are not only ethical or public relations matters. They are essential to the exercise of fiduciary duty in the disposition of corporate resources. Still, realizing the full potential of stakeholder capitalism will require companies to translate its core principles into practice. That starts in the boardroom. Boards must transcend the traditional segmentation of shareholder and stakeholder considerations, exemplified by the concepts of shareholder value and corporate responsibility, by integrating them.

Integrated corporate governance is a departure from the mindset and associated practices of shareholder primacy and corporate social responsibility, both of which treat ESG&D factors as primarily non- or pre-financial matters. By contrast, an integrative approach takes a holistic view of shareholder and stakeholder interests by systematically internalizing ESG&D considerations into the firm’s strategy, resource allocation, risk management, performance evaluation, and reporting policies and processes.

If stakeholder capitalism is to be more than an optimistic vision, this integration and internalization must be better defined in operational terms and such practices must be widely adopted by boards, whether their firms are publicly-, privately- or state-owned. That’s what it will take to give practical effect to the principles articulated in the World Economic Forum’s Davos Manifesto 2020, the U.S. Business Roundtable’s revised Statement on the Purpose of a Corporation and a growing number of regulatory frameworks around the world. That is how companies can “walk the talk” of stakeholder capitalism.

Richard Samans is a managing director of the World Economic Forum and chairman of the Climate Disclosure Standards Board. Jane Nelson is director of the Corporate Responsibility Initiative at Harvard Kennedy School.©Project Syndicate, 2020

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