The shift towards stakeholder capitalism requires genuine goals and values
- Bloomberg Intelligence estimates that ESG assets are poised to reach US$41 trillion by the end of this year.
- As consumer expectations of greater transparency increase further, the only way to sustain long-term value for shareholders is to take care of other stakeholders as well.
- Amid the developments of rules, metrics and measurements to define ESG benefits, organisations need to consider the values of doing the right thing regardless of quantifiable metrics and profits.
Metric-based frameworks for measuring environmental, social and governance (ESG) goals should be balanced with stewardship values in order to bring about optimal outcomes.
“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.” — Milton Friedman
Five decades after its publication, Friedman’s doctrine about the purpose of business remains a subject of vigorous debate. Those defending him point to the fact that thanks to capitalism, the proportion of people living in extreme poverty has dropped from 42 per cent of the global population to under 10 per cent today. Those opposing cite the deepening income inequality and rising unemployment.
However, there is no denying that calls to reject it in favour of a more balanced stakeholder approach have intensified. In 2019, the US Business Roundtable abandoned its long-held position about a corporation’s primary purpose, which stated that “the paramount duty of management and of boards of directors is to the corporation’s stockholders.” Instead, 181 CEOs adopted a new commitment to deliver value to a wider array of stakeholders, including customers, employees, suppliers and communities, in addition to shareholders.
Increasingly, the needs of the shareholder and the stakeholder are merging, and both the written and unwritten “rules of the game” have changed.
The power of consumer demand in response to climate change, social injustice and poverty has already disrupted and shaped the future of major industries, including car making, transport, household goods and retail sectors, energy and commodities. This trend is evident because the ESG industry is flourishing. ESG assets are poised to reach US$41 trillion by the end of this year, Bloomberg Intelligence estimates. In addition, ESG-related assets account for one in three US dollars managed globally, based on estimates by the Global Sustainable Investment Association.
However, investing in and touting ESG and sustainability does not make one a champion for society and the environment. Firstly, ESG has become a marketing tool and a way to build an organisation’s reputation in ethical and green investments. Questions remain on the genuine intent of these investments, and whether they make a real difference to stakeholders’ needs by mitigating global warming, eradicating poverty or reducing income inequality.
Secondly, there is a proliferation of ESG benchmarks, rules and reporting criteria emphasising metrics and measurement methods. Many of these are complex, expansive and inconclusive. While these requirements are necessary to bring about quantifiable impacts, they require an intense amount of capital and human resources that a small business may not be able to afford. Notably, when the pressure to comply becomes a burden, organisations risk building a “tick-the-box” culture, where regulatory compliance is the end goal and not the outcomes of ESG efforts.
Clearly, a significant amount of work is still required by investors and businesses to incentivise ESG practices. To this end, organisations must balance measurements efforts with values-based principles. In particular, corporate leadership and governance must be steeped in stewardship values. More importantly, everyone in the organisation should step up as a steward leader and possess an undeterred determination to bring about a real difference.
Stewardship is creating value by integrating the needs of stakeholders, society, future generations and the environment, and the genuine desire and persistence to create a collective better future. Being a steward leader requires the understanding of four values: interdependence, long-term view, ownership mentality and creative resilience. Steward leaders believe in the interdependency of different constituents in the world and do not execute based on a zero-sum game as they are well-aware that their success depends on others. Steward leaders are also long-term thinkers and willingly forego short-term gains for enduring returns. Furthermore, steward leaders take ownership. They imagine the collective better future they wish to create and take it upon themselves to do so. Last but not least, steward leaders have creative resilience. The stewardship approach to business requires driving growth by addressing the needs of a much wider variety of stakeholders. Steward leaders realise this is more complex than simply maximising shareholder returns and strive to innovate as much as possible without giving up.
The stewardship approach to business requires driving growth by addressing the needs of a much wider variety of stakeholders. Steward leaders realise this is more complex than simply maximising shareholder returns and strive to innovate as much as possible without giving up. Integrating these values into a business’ organisational purpose will provide a compass to navigate the demands for greater action and impact in ESG and sustainability.
In conclusion, as capitalism resets to integrate the needs of the stakeholder and environment, companies and investors need to consider the pitfalls of blanket acknowledgement that a metric-based framework will result in positive ESG outcomes. Amid the developments of rules, metrics and measurements to define ESG benefits, organisations need to consider the values of doing the right thing regardless of quantifiable metrics and profits.
This article was first published on ASME's corporate website (2 June 2022).