Year after year, the Davos Agenda globally impacts on the mindset of business and political leaders. More than ever, capitalism is prompted to foster an inclusive and sustainable economy. Moving from shareholder value to stakeholder capitalism – as promoted by the Davos Agenda – is an important first step. But it will remain insufficient if companies do not shift their paradigm to integrate public value into their strategies and operations in order to combine profit and the common good. Your Public Value Vice-Chair Maria del Peso reflects on the Davos Agenda and the way companies should address society’s overall expectations.
Who would have thought, a few years ago, that world leaders would one day gather in Davos – even virtually – to promote the idea that business should serve the social good?
Yet, three years after the 2007-2008 global financial crisis WEF Founder and Executive Chairman Klaus Schwab called for “abandoning the excesses of capitalism” and “returning to a market economy in which individual responsibility and social commitment are not just empty words”. For the first time in 40 years, the WEF in late 2019 updated its ‘Davos Manifesto‘, which now plainly states that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation”. Also, the Forum last year focused on the responsibility of business leaders with respect to climate change and the social good. This is indicative of the new impetus for sustainable strategies in business and finance.
As the COVID-19 pandemic continues in full swing, the Davos Agenda has set an even more ambitious goal. It now calls for more resilient, inclusive and sustainable economies, including through strengthened global cooperation and the engagement of all stakeholders. Business is expected to participate actively in this process of restoring trust, which is a necessary condition for overcoming the crisis and building the future.
The Davos Agenda and a paradigm shift in progress
The late 20th century’s celebrated mantra that “the business of business is business” no longer brings money. In the late 1970s, Nobel prize-winning economist Milton Friedman was the first to popularise the idea that a corporation is only responsible for increasing shareholder value. In Friedman’s view, executives work for the owners (shareholders) and the only social responsibility of a company is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. For decades, business schools, consulting and investment firms have been spreading Friedman’s words. This theory is still prevalent today and it would be premature to say that the primacy of shareholders is over.
Departing from Friedman’s position, U.S. academics Michael E. Porter and Mark R. Kramer argued in 2006 that companies capable of leveraging on corporate social responsibility could make a difference. An international study conducted by Unilever in 2017 shows that, at the time, one-third of consumers were choosing to buy brands they believed were doing social or environmental good. There is a growing perception that socially responsible organisations can win the financial battle as well as the customer approval and the war for talents.
The notion of a narrowly defined shareholder economy based on investor requirements and the bottom line is gradually giving way to the concept of a broader stakeholder economy, or stakeholder capitalism. Stakeholder capitalism is a system in which corporations are oriented towards serving the interests of all their stakeholders. Proponents of stakeholder capitalism, such as the New-Keynesian economist Joseph E. Stiglitz, believe that it should replace the primacy of shareholders as a principle of corporate governance.
In practice, stakeholder capitalism can be an ideology adopted by individual business leaders or a model imposed by governments through laws and regulations. Paying fair wages, ensuring safety in the workplace, providing good customer service, investing in local communities, preventing environmental damage are some examples of commitment to stakeholder capitalism.
Stakeholder capitalism invited itself to the 2019 Business Roundtable, which in its “Statement on the Purpose of a Corporation” said that although all its member companies serve their own corporate purpose, they share a fundamental commitment to all their stakeholders. In the words of Business Roundtable Chairman Jamie Dimon, who is also chairman and CEO of JPMorgan Chase & Co., “major employers are investing in their workers and communities because they know it is the only way to be successful over the long term”.
The Davos Agenda and the common good
The natural cataclysms that took place in Australia, Amazonia or Siberia before the COVID-19 pandemic erupted may have accelerated the pace of general awareness. But it is more likely the growing pressure on companies from consumers and employees to become proactive common-good enablers that prompted forward-thinking leaders to put public value at the top of their agendas.
This significant development raises the question of corporate responsibility. Because corporations use natural, human, technical and financial resources, they can legitimately be considered accountable for the use of these resources. For decades, only their financial responsibility has been scrutinised in the light of profitability and maximised shareholder value. But the time has come when public opinion considers that companies are primarily responsible for the impact on their global ecosystems, regardless of when and where they operate, produce, invest and recruit.
Citizens, consumers and employees expect companies to deliver public value, as do investors and regulators. Echoing the pressing demands of civil society, legal frameworks are evolving. France’s PACTE – short for Plan d’Action pour la Croissance et la Transformation des Entreprises, i.e. Action Plan for Business Growth and Transformation – that was signed into law in 2019 provides a good example of how national legislations can serve this purpose. One of PACTE’s two stated goals is “to put back companies at the centre of society by amending the Civil Code and involving employees more closely in their governance and results through the development of incentive and profit-sharing schemes”.
All eyes are on CEOs
An overwhelming majority (76%) of respondents to the 2020 Edelman Trust Barometer said that CEOs should initiate change rather than wait for governments to impose it. Many respondents said they believed the public sector was not doing enough to protect people. Fears about the possible negative effects of hyperglobalisation, automation, artificial intelligence or gig economy are real. How to adapt to the transformation of the labor market and develop the skills needed to get and keep a decent job are widely shared concerns.
Forward-looking companies have not waited for new legislation to be passed to adapt their discourse and policies to these new trends. Following a more traditional risk mitigation approach, other companies have been driven to innovate mainly because they were seeking to reduce potential damages to their reputation. A third category of companies has been trying to neutralise negative externalities by adopting a Do-No-Harm model.
In a proactive approach aimed at using the ethical pressure of public opinion as a growth opportunity, many brands have integrated Sustainable Development Goals into their corporate strategies. As highlighted by the United Nations, SDGs are critically needed as a source of financing, a driver of innovation and technology, and an engine of economic growth and employment.
Research conducted by Your Public Value has highlighted two patterns leading to companies reporting on their contribution to the SDGs:
- Their leaders have a strong background from the Global South and have a personal awareness of one or more ot the SDGs;
- Following a publicity scandal, companies had to focus their strategic priorities on public value creation as a way to re-establish trust.
Things have changed dramatically since investors, in turn, began to speak out. In his traditional letter to CEOs, BlackRock CEO Larry Fink last year unequivocally defined sustainability as BlackRock’s new investment standard, while foreseeing a fundamental overhaul of finance in the very near future.
Ultimately, purpose is the engine of long-term profitability
Rethinking growth and performance standards
In its Global Competitiveness Report-Special Edition 2020, the WEF focuses on the priorities for recovery and presents what it calls “the building blocks of a transformation towards new economic systems that combine ‘productivity’,’people’ and ‘planet’ targets”. The intention is clearly stated to define a new vision of a country’s competitiveness that takes into account not only GDP figures but also sustainability and inclusion targets.
At a micro-economic level, this trend is clearly in line with the adoption by companies of triple bottom line accounting frameworks and integrated reporting. This is nothing new. Awareness of corporate responsibility is at its peak. But we are just at the beginning of the transformation process.
Experts agree that only 10% of companies report on their sustainability policies. As of today, the UN Global compact, the world’s largest corporate sustainability initiative, brings together just 12,354 companies worldwide. This gives an idea of the work that still needs to be done in order to get all of the world’s CEOs to voluntarily commit to SDGs.
Also, when it comes to integrating environment and social dimensions into core business strategies and operations, the depth of transformation of business models varies greatly from company to company. Yet this transformation is essential for change to actually happen.
Generalising stakeholder capitalism represents a big step forward. But its implementation requires concrete and bold actions on the part of companies to review their governance principles and overall business cycle, namely:
- To identify each stakeholder – including the less visible ones – and their respective roles;
- To define sustainability roadmaps and implement them with all stakeholders;
- To assess the impact on each stakeholder;
- To produce and share data that allows for benchmarking and improvement. This data needs to be understood not only by sustainability experts or the companies themselves, but also by the general public.
For systemic change to happen, participation and transparency are essential.
Time for action
Even virtual, the Davos conference remains and will remain essentially a platform for discussion and networking. But words are no longer enough. Decision-makers must now go beyond mere declarations of intent, otherwise discrepancies between facts and deeds will have a counterproductive purpose-washing effect. As the COVID-19 crisis continues, civil society expects business leaders to translate their good intentions into action and accelerate the movement. Only then will the Davos Agenda be successful. What is at stake is confidence in the system and, ultimately, its resilience.