Stakeholder Governance, Stakeholder Capitalism
On the anniversary of the historic statement on the purpose of a corporation from the Business Round Table, a group of 181 CEOs in the United Sates there has been an update, and also a flurry of loud debate around stakeholder governance and stakeholder capitalism. The number of CEOs signing up to the statement has grown to 200 over the last year, expanding its reach potentially to embrace thousands more of working lives. Only now the world is also in the middle of an economically crippling pandemic.
Some of the high profile academic thinking on the debate has come from Harvard Law School in a piece entitled ‘The illusory promise of stakeholder governance’ . As it shared sentiments that were echoed in the UK business media, it sparked a joint response from me and Alison Taylor of Ethical Systems at NYU Stern across the pond, after we called the coverage out to each other. I published our response on Board Talk, my independent platform and Harvard Law School have pleasingly reprinted it on their Corporate Governance Forum, in the spirit of debate.
It was pleasing because it’s a debate that is essential, given the current challenges. We must rebuild better businesses than before Covid-19 arrived. Essential reading follows from the New York Times which pulled together a series of business leaders and economists in the US for their views on Milton Friedman reconsidered today, with the original Friedman essay printed at the start.
The thoughts at the end from Darren Walker, CEO at the Ford Foundation, resonate. He said: “In propaganda, an accusation often betrays an admission. The most “subversive doctrine” was — and remains — Friedman’s own. His doctrine absolved the firm of its responsibility to serve as a force for racial integration and inclusion. It produced generations of corporate leaders dedicated to the sacred primacy of shareholder value. In that way, Friedman’s thinking became theology — the intellectual scaffolding that allowed its disciples to justify decades of greed-is-good excess. Gone were the days when someone like my semiliterate grandfather, with only a third-grade education, could work as a porter and benefit from a profit-sharing plan provided by a company that dignified his work. In their place were new conditions in which our social contract frayed and our economy tilted out of balance — fomenting the unsustainable inequalities that plague America today.
I am a proud capitalist. I believe in the market’s unique power to lift lives and livelihoods, especially when it’s fair and inclusive. After all, Adam Smith himself admonished that “no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” But ultimately Friedman ignored that in a democratic-capitalist society, democracy must come first. “We, the people” grant businesses their license to operate – which they, in turn, must earn and renew.”
ESG and Investors
Environmental, Societal and Governance (ESG) concerns are high on the list of priorities for both investors and a younger generation of consumers and stakeholders. If you accept the age demarcations given by Pew Research, millennials are getting old and many are already in positions of leadership. It’s beyond time for corporate leadership on both sides of the pond to take their views seriously, and those views include taking ESG as a given, not as an academic debate.
There is also ample evidence that ESG as a basis for investment continues to surge in popularity, even in a pandemic. According to Morningstar in a report just out, ESG index funds hit $250 billion from the acceleration of the pandemic. “Despite lagging behind Europe in ESG investing, US assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total” it says.
With climate change now centre stage in the forthcoming US presidential election, scrutiny of a corporate’s policy on environmental issues is unlikely to ease. The credit rating agencies have joined investors in their close focus, and while their views have an impact on all industry sectors, the financial services industry might wish to pay particular attention.
Fitch Ratings has just published a report on deforestation, saying it believes ESG factors “could increasingly influence banks' financing activities relating to commodity producers in forest-risk regions, as deforestation is under growing scrutiny from activists and policymakers.” Global investment banks, it says, have become increasingly attentive to the issue of deforestation and are incorporating it into their ESG policies. “We expect attention on deforestation to remain high in the short term, with the formal establishment of the Task Force on Nature-Related Finance Disclosures and the UN Climate Change Conference both scheduled for 2021” it adds.
While environmental impact can be more easily measured by metrics, it is harder to do the same on the societal and governance component of ESG, for the simple reason that it involves complicated human beings at both ends of the measurement alongside their ethical choices. As noted in the last Governance Watch, corporate ethics is a management mind-set dictated by corporate culture and leadership.
The environment and climate change will continue to dominate ESG, given the urgency of the challenge now facing us. According to a report out yesterday (eds Tuesday September 15) by the UN Convention on Biological Diversity, humanity is at a crossroads and we have to take action now to make space for nature to recover and slow its "accelerating decline".
But, given how hard it is to see all three components of ESG in evidence putting pressure on a business at once… Rio Tinto, the Anglo-Australian FTSE 100 mining company has stepped into the frame. The world’s largest producer of iron ore has just had all three come together with a bang. I commented on Board Talk yesterday.
Governance Watch will return to see how this story progresses. Executive pay awards at many a business – including most recently Pearson, another FTSE 100 company, have recently been described as having a “bad taste in the mouth for investors” and are an example of where S and G in ESG come together in a way that can be measured – in comparison to the workforce. The Rio Tinto website states that the company employs 46,000 people and has 37,000 suppliers for just 2,000 customers across 36 countries.
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