By Pamela Cone.
It’s that time of year—when futurists and businesses publish trends and predictions reports.
While these reports are interesting and sometimes even entertaining, this year’s lists are more consistent and prophetic than those from pre-pandemic years.
An increasing number of global companies are responding to critical societal needs and expectations of their shareholders, employees, vendors, and communities. They’re part of a shift to incorporate holistic environmental, social, and governance (ESG) concepts in their business strategy.
Business’s societal role is here to stay Edelman, a global communications firm reporting its 2022 Edelman Trust Barometer survey results, said:
“We find a world ensnared in a vicious cycle of distrust, fueled by a growing lack of faith in media and government,”it noted. “Through disinformation and division, these two institutions are feeding the cycle and exploiting it for commercial and political gain.”
“We now see business as the stabilizing force delivering tangible action and results on society’s most critical issues,”
Survey respondents indicate that businesses need to do more. But they can’t do it alone—they must work with all institutions to foster innovation and drive impact. All stakeholders—customers, employees, and investors—are holding business accountable, noting that:
58% Will buy or advocate for brands based on their beliefs and values
60% Will choose a place to work based on their beliefs and values
64% Will invest based on their beliefs and values
ESG – defining a successful business strategy
As stated in the World Economic Forum’s
“Shareholder value and stakeholder capitalism are often presented as oppositional concepts, but one of the more striking developments of recent years has been increasing shareholder activism and engagement on ESG issues.
Whatever your views on this debate, it’s clear that short time horizons and quarterly reporting imperatives can drive short-term, limited thinking that deprioritizes consideration of longer-term commitments – such as, for example, fighting climate change, providing good jobs, or reducing inequality.
For both long-term shareholders (such as pension funds) and many stakeholders, the ability to think long-term about the ethical imperatives of the business and the social licences to operate is an essential success factor.”
ESG as a competitive advantage
In a report, “The Way Forward for ESG: Firms are Adapting Business Strategy and Boosting Technology Investment,” software provider Cority noted the following:
“Business strategies are increasingly defined by ESG. Until recently, firms only optionally engaged with ESG and sustainability. Our survey suggests that the modus operandi for firms has changed: ESG and sustainability are now integrated into core strategic decision making. Corporate strategies are moving away from minimizing risk exposure and seeking to leverage ESG performance as a competitive differentiator.”
The changing role of businesses
Forbes recently published an article Stakeholder Capitalism: Challenges and Opportunities for Big Law. It included the following points:
“A focus on environmental, social and governance (ESG) considerations is one way for corporations to operationalize the concept of stakeholder capitalism. The rise of ESG is indicative of a profound shift in how corporations view themselves, their purpose, and their role in society.
ESG is a broad concept that includes several threads—diversity, equity, and inclusion (DEI), climate change considerations, reputation management, sustainability issues, supply chain management, governance, reporting and compliance, among others. These elements are often viewed individually, and this obfuscates their purpose and context. The elements of ESG are interconnected, part of a fast-changing human mosaic in which corporations are playing an increasingly important role.
Companies are not only charged with internal adherence to these tenets, but they are also expected to be vigilant to ensure their supply chains do the same. Law firms may be a relatively small cog in the corporate supply chain, but they are high profile.”
JUST Capital measures and ranks companies on the issues Americans care about most so they can then act on that knowledge. It offers these insights:
“Looking back over the past year of polling, we’ve identified seven key imperatives for corporate America in 2022, including:
Focus on action over words.
Put workers at the heart of just business practices.
Accelerate action on diversity, equity, and inclusion.
Don’t let up on worker health and safety protections.
Invest in childcare to support an equitable recovery.
Take a stand on the most important issues of our time.
Get specific on climate commitments.”
The 2022 EY US CEO Survey found that chief executives are maintaining growth strategy while pivoting toward ESG and sustainability.
ESG reporting is moving to the center of the CEO’s radar, joining digital strategy, and leapfrogging the war for talent.
Companies see mergers and acquisitions as the answer to longer-term priorities such as accelerating ESG and innovation.
And in the just-released ESG Report for Corporate Legal and Compliance Leaders published by Global Counsel Leaders, author E. Leigh Dance offers this:
“ESG, especially in 2022, has gone beyond an exercise in reporting and reputation management. An enterprise-wide, integrated strategy for ESG is required, with measurements that provide quantitative metrics and qualitative data of interest to your stakeholders. It will be interesting to see how General Counsel and Compliance leaders continue to use their reasoning, creativity, vision, and advocacy skills to contribute tangible value on ESG. It’s not too late to start, and the opportunities abound.”
Businesses make ESG a priority
Nearly every list or report I have read includes a reference to ESG and/or stakeholder capitalism and predicts they will be a top priority for 2022 (and beyond).
Could it be true? Is society at an actual tipping point? Is the traditional business model of shareholder primacy finally facing its due scrutiny?
In September of 1970, Dr. Milton Friedman wrote an essay for the New York Times entitled The Friedman Doctrine: The Social Responsibility of a Business Is to Increase its Profits.
He concludes the essay with the following:
“There is one and only one social responsibility of business—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.”
Stakeholder capitalism: How does it differ from shareholder primacy?
The Enterprise Engagement Alliance focuses on strategies and goals that foster all stakeholders’ engagement. In an article Stakeholder Capitalism: A Primer posted on Engagement Strategies Media, it noted:
“Stakeholder Capitalism seeks to create shareholder returns by creating value for society – customers, employees, suppliers, communities and the environment.”
The movement away from a narrow focus on shareholder primacy is clear.
Even the annual letter to CEOs from Larry Fink, CEO of Blackrock, mentions the movement toward stakeholder capitalism:
“Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
Is stakeholder capitalism different than ESG?
For many, the term “stakeholder capitalism” can be confused with environmental, social, and governance discussions. Are they different? I believe they are two different frameworks that discuss the same concept. When using the term “stakeholder capitalism,” the discussion focuses on various stakeholders who are part of your business—employees, customers, communities, vendors. And it’s important to remember the shareholders. Shareholders ARE part of the stakeholder group.
When using the term ESG, we’re framing the discussion into categories of considerations and obligations—each of which also touch on our stakeholders.
Environment. When it comes to the environment, all stakeholders of all businesses are subject to our earth’s climate. We all have an interest in reversing the damage of the climate crisis to maintain sustainable businesses, a strong economy, and a healthy world.
Social. In the social category, this includes everything concerning people: employees, diversity and inclusion, access to justice, health and well-being, and community investment.
Governance. And finally, governance covers the policies and practices around conduct for businesses and those we do business with.
Duty to shareholders
While some see the stakeholder capitalism movement as CONTRARY to that of shareholder primacy, to me, it is simply a difference of timeline/time horizon.
If, indeed, shareholder primacy is to ensure the business is successful to return profits to the shareholders, then steps must be taken in the short-term to ensure the long-term viability of the business—and the health and well-being of the other stakeholders and the environment.
After all, as famously said by Paul Polman, former CEO of Unilever and current CEO of Imagine, “Business cannot survive in societies that are failing.”
The pandemic: Its tragedies and its gifts There is no denying the terrible tragedies brought on by the pandemic. Loss of lives. Loss of businesses and livelihoods. Loss of health and well-being. Loss of structure, stability, and social skills of our children.
And loss of that which we used to consider “normal” perhaps?
Even Larry Fink, in the conclusion to his annual letter, implores CEOs (and their businesses) to recognize what the pandemic has taught us and for businesses to have:
“… a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its North Star in this tumultuous environment. The stakeholders your company relies upon to deliver profits for shareholders need to hear directly from you—to be engaged and inspired by you. They don’t want to hear us, as CEOs, opine on every issue of the day, but they do need to know where we stand on the societal issues intrinsic to our companies’ long-term success.”
An imperative for action
Recently, I heard “inertia” defined as a “sucking vortex.” If the pandemic has done us any favors amongst its tragic consequences, It might be that it has forced businesses and society OUT of the sucking vortex of inertia.
The pandemic forced us to do the hard work of disruption practically overnight, more than two years ago now. Our challenge now is to avoid getting sucked back into that which we used to consider “normal.” Perhaps it never was normal, or never really should have been.
Now, the outstanding question is how can we leverage that disruption to leapfrog forward, fix those aspects of our previous world that weren’t working very well, and emerge as a more just, sustainable, and viable society?
The trends and surveys indicate that innovative and visionary companies are lighting the way.
About the Author
Pamela Cone is the founder and CEO of Amity Advisory. She works with the leadership teams of professional service firms to address the growing expectations of all stakeholders – clients, prospects, employees, recruits, and communities – around their firms' ESG, social impact, and sustainability programs.