Creating stakeholder value: the new normal?

Creating stakeholder value: the new normal?

Companies can no longer operate within the law, but without concern for their wider societal impact

by Andrew Feldman
Managing Partner, Tulchan

What does it mean,” Milton Friedman asked, “to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman?” His answer was simple. The singular responsibility of business leaders is to increase profits “without deception or fraud.”

And for the past fifty years that’s what business leaders did: boost profits, pay higher dividends, and let each shareholder decide what’s good for society. They operated within the law, but with little concern for the wider societal impact of their actions.

But there is change in the air. Obeying the law is no longer enough. Business leaders are being expected to go further than the law requires. To play by and inform new rules of corporate behaviour. The latest example of this comes from the Business Roundtable in the United States. In 1997 it said that duties to stakeholders are a “derivative of the duty” to shareholders, but this year it redefined the purpose of a corporation to promote “an economy that serves all Americans.” Its newfound principles for business leaders: value your customers, invest in your employees, treat your suppliers ethically, support the communities and protect the environment where you work, and generate long-term value for your shareholders.

The restated principles are what Jamie Dimon, JPMorgan’s chief executive and the Roundtable’s chairman, has called “an acknowledgment that business can do more to help the average American.” The same ideas have already taken root in the UK. The country’s revised corporate governance code starts by saying that a successful company is one that’s “generating value for shareholders and contributing to wider society.”

What explains this dramatic shift? Technology, climate change and inequality are rewriting the rules of our lives and people feel locked out of the decisions that govern them.

In the fifty years since Friedman’s article, chief executives in the US have seen their compensation go from 24 times more than the average worker to 200 times more. Those average workers have, since the financial crisis, seen their wages grow by a meagre eight per cent. In Britain, they remain at crisis level.

A majority of young people have now turned away from capitalism to socialism. A majority of adults think corruption in business is widespread. Technology, from robotics to AI, is moving business so quickly that it’s creating a sense of insecurity among workers and society at large. There’s scientific consensus that climate change is urgent and there’s popular anxiety for change.

It’s against this backdrop that new expectations have formed for customers, investors, employees and, crucially, business leaders.

There are signs that customers are prepared to sacrifice some money to act in a socially responsible way. Increasingly, they expect companies to do the same. Look, for example, at the speed with which anxiety about plastic packaging has moved. Tote bags are replacing plastic bags, the once ubiquitous plastic straw is now paper, and disposable plastic bottles have given way to reusable aluminium ones. It isn’t just individual purchasing power that affects change.

Each customer’s decision, thanks to the explosion of expressive power, is now amplified. Social media has given customers a greater and more scalable voice than ever before. Companies and business leaders who are unprepared for split-second social media uprisings find it impossible to pushback.

The market is reflecting this change. Investors were once reluctant to integrate environmental, social and governance (ESG) factors into their decisions, arguing that their fiduciary duty was to maximise shareholder value irrespective of those factors. But they have now put, in the US, $11.6tn in ESG investment funds. That’s $1 of every $4 invested in the US and it’s a sharp increase from 2010, when the total was $3tn. Collectively, these funds comprise an influential shareholder base that cares about environmental and social impacts.

The rise of ESG investing, from its conception in 2005, is a measure of how quickly our values are changing: a market-led alignment of stakeholders and shareholders. While the pool of ESG funds is larger in the US, it is in Britain that those values are racing ahead. Britain’s pensions minister, Guy Opperman, wants to tackle climate change by introducing ESG regulations that require pension funds, which manage £1tn, to make environmentally sound investments. Companies, and not just policymakers, must now step up.

As employees, people are demanding more of their companies. When Google persisted with its plans for Project Dragonfly, a censored search engine for China, eleven employees signed an open letter calling for the project to be cancelled. “Many of us accepted employment at Google with the company’s values in mind, including its previous position on Chinese censorship and surveillance,” they wrote, “and an understanding that Google was a company willing to place its values above its profits.” Within hours, hundreds of other Google employees signed the letter. This July, seven months after the letter was published, Google's vice president of public policy, Karan Bhatia told US senators that "we have terminated Project Dragonfly".

Across these groups, and in the media, there is now a lot more pressure on business leaders to take positions on political topics, such as race and immigration. With Colin Kaepernick, Nike took a stand against discrimination when the National Football League and the country’s political leadership didn’t.

For business leaders this creates a dilemma. Some like Nike’s Mark Parker or Jamie Dimon, see the opportunity that this new space provides: the businessman as quasi-politician, setting new rules for corporate behaviour. Others are less comfortable in this new world. Without the guard rails provided by Friedman’s simple mantra, they are uncertain how to balance their duty to create value for shareholders with their obligation to other stakeholders.

They are also wary of empty gestures which will only erode public trust still further. Think of Pepsi’s ill-fated TV advert: reality TV star Kendall Jenner walks through protestors, carrying placards that read “love” and “join the conversation,” to give a can of the drink to a police officer. The advert caused outrage. Pepsi, embarrassed, pulled it.

Unilever’s new chief executive Alan Jope has consistently warned brands against woke-washing – branding that cashes in on identity politics – and called for them to “unleash purpose.” The company’s sustainable living brands, Jope points out, outperform the rest of the business. He understands that a solely rhetorical embrace of stakeholders will be seen, at best, as woke-washing and, at worst, an attempt to hold off regulatory reform.

There is no escaping business leaders’ obligation to ‘think again’ and think seriously about their responsibilities. Simply obeying the law and delivering the bottom line is not going to be enough to satisfy restless stakeholders. The die is cast, and increasingly success will be measured by the ability to grapple with these difficult and multi-layered problems. To deliver profitability that is long term, based on fair working practices and does not destroy the environment. Creating stakeholder value is the new normal. Ignore it at your peril.