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Stakeholder capitalism – emergence of corporate conscience
The economist Milton Friedman famously wrote that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”. Covid-19 has, however, accelerated the evolution of organisations’ broader value to society.
Over the past few months, companies have gone the extra mile to support employees and communities. From repurposing manufacturing lines to produce face masks, converting hotels into quarantine facilities, redeploying airline crews to support the healthcare system, to taking a stand against racial injustice – companies have stepped up to discharge their social responsibilities, which has in many cases, also helped support their businesses.
Guided by a sense of right and wrong, as opposed to mere profit-maximisation, companies are increasingly balancing the interests of all stakeholders – shareholders, customers, employees, supply-chain partners, environment, and broader society. What’s clear is that corporate conscience is becoming more important.
Driven by purpose
In August 2019, 181 prominent CEOs signed a new “Statement on the Purpose of a Corporation” committing to lead their companies for the benefit of all stakeholders. In doing so, the Business Roundtable publicly acknowledged a shift from its long-standing policy of shareholder primacy, to an emphasis on stakeholder primacy.
This includes delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, protecting the environment, supporting communities, and generating long-term value for shareholders.
For example, the global consumer goods brand Unilever’s stated purpose is to “make sustainable living commonplace”. The company’s vision is to grow its business, while focusing on three big goals – improving the health and wellbeing of people, reducing the company’s environmental impact, and enhancing the livelihood for millions.
Doing the right thing
Modern-day governance systems use regular financial reporting for management to explain company performance to shareholders. However, this may lead to increased emphasis on short-term results – and cause some companies to be over-capitalised, engage in share buy-backs, prime their dividend policies, and engage in cost-cutting exercises (such as job-cuts) to manage profitability.
However, in the past few months, many companies have managed the current crisis differently. They have implemented furloughs and cut salaries, especially senior management compensation, rather than jobs as a way of managing costs. Not only is this more socially responsible, but companies have also learned the hard way that it is more expensive and time-consuming to attempt to re-hire people when market conditions improve, and to bring them up to optimal productivity levels.
A multi-year or lifetime perspective to business strategies will likely result in different investment priorities and basis for assessing performance. A growing number of companies have reconstituted their portfolios to focus on renewables and sustainably sourced ingredients. Companies such as Berkshire Hathaway monitor sustainable profits, growth in franchise value, long-term shareholder returns, capital reserves and financial stability.
Supporting an ecosystem
Traditionally, companies have taken an inwardly-focused, standalone, and self-sustaining view to business and human capital strategy. Differentiation, and doing things your competitors are not, is seen as a source of competitive advantage.
The pandemic however has highlighted the necessity of strong partnerships and alliances. Successful businesses work with partners, suppliers and ancillary industries to thrive, and engender a healthy, sustainable ecosystem.
Take, for instance, the baggage handlers and airline cabin crew who were successfully redeployed to supermarket chains and hospital administration. Or the example of Aldi and McDonald’s in Germany, where the grocery retailer deployed furloughed back-office employees from the fast-food chain to meet the surge in demand. The future will indeed be interconnected.
Guided by a moral compass
Today, most companies have codes of conduct that articulate their corporate values and guide employees’ behaviour at work. Given the moral imperative of respecting and embracing diversity – of gender, race, age, sexual orientation, being differently-abled etc. – companies are increasingly taking a zero-tolerance stand to insensitive actions, harassment, or discrimination.
Recently, Franklin Templeton dismissed one of its employees for racially insensitive remarks caught on camera while she was walking her dog in the park. Although the incident did not occur at work, the company took prompt action as the employee’s behaviour was not aligned with its corporate values. As lines between work and personal life get blurred, companies will need to review their codes of conduct, employment contracts, and data privacy and protection issues.
Call to action
Companies will increasingly be judged on what they do beyond profits. Now, more than ever, tending to corporate financial health will be key, but demonstrating leadership, commitment and alignment with employees, customers, supply-chain partners, broader society and the environment will be equally important.
As Klaus Schwab, founder of the World Economic Forum, puts it: “A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.”
Companies can achieve this balance by doing the right thing, by having a moral code that cares deeply for all stakeholders and, indeed, by heeding their corporate conscience.
The writer is a member of the Board Diversity and Appointments Committee of the Singapore Institute of Directors.