A Market System that Puts the Needs of Stakeholders at its Heart
The purpose of the economy is to support the needs of society. Too often it can seem the other way around. The doctrine of shareholder primacy seems to confirm these misgivings, particularly when people see issues like climate change or excessive economic inequality go for decades without sufficient progress. The market economy has led to greater life expectancy, greater liberty and given us more security and opportunity than previous generations — but concerns are real that its progress is arguably insufficient when compared to the needs of society and it has not been as inclusive as desired — and the system must respond.
A year ago, the Business Roundtable and its members showed foresight when it argued for a transformative shift and need for change. In recognizing a responsibility to a range of stakeholders rather than solely to shareholders, the BRT statement challenged decades of conventional wisdom.
When the BRT set out this agenda, it did not know what was coming. Both COVID-19 and the #BLM movement and the related social challenges have shown how important it is that business responds to the needs of employees, customers and communities, alongside shareholders.
While still dealing with the impact of the virus, its uncertain trajectory and the broader health and economic implications, the task now is to embed the best aspects of the COVID response into the approach companies and others take to the many concerns we faced pre and post-COVID. Lack of economic inclusion and racism have been further exposed by the pandemic. Others — like climate change — are not going away and are only going to get worse unless we see fundamental change. To solve these challenges, we need a market system that puts the needs of stakeholders at its heart and connect goals, actions and outcomes into desired social and economic results that will fuel long term sustainability.
So, one year on from the BRT statement we need to ensure we embed its principles into organizations and their strategies, day to day plans and behaviors more consistently and more prominently. It’s the only way to achieve change at the pace and scale needed. That means three things:
- First, every business should articulate its purpose from the perspective of its stakeholders.
- Second, every business should align their corporate governance and incentives with their purpose.
- Third, this should be done transparently — reporting must be consistent and open, covering the issues which matter to stakeholders, drawing on common standards that allow organizations to demonstrate progress and allow for others to recognize comparability.
This should not be purely a matter of voluntary action. The BRT letter was signed by 181 CEOs, but this has to be an agenda for every CEO of a significant corporation. The BRT coalition will grow, but we need broader adoption outside of its membership and change in the broader public policy space to raise the baseline.
Delivering on this agenda will take a broad push on several fronts. The issue is not primarily one of individual corporate behavior but of a whole system of incentives, norms and patterns of activity. As a result, the change has to be systemic. But it would be wrong to think it needs some sort of Year Zero reset. Our economic structures have been built piece by piece and that is how they will change, but the change is needed across all aspects of the entire system.
At the micro-level, every business can start, and many have, by articulating a Stakeholder Purpose, by embedding this in strategy, governance and incentives, and by reporting against matters of importance to stakeholders. For example, companies that have put people before profit during COVID, responded strongly to social justice protests or are addressing the challenge of climate change are showing the way.
At the macro-level, investing organizations are analyzing and judging on aspects beyond the short term financial results. Organizations like SASB, GRI, IIRC, and WEF’s International Business Council (IBC) and others actively engaged in creating frameworks and standards that will enable greater consistency around non-financial reporting. There is also a pressing need to consider other public policy actions outside of things like reporting in order to address the needed change in the overall system. This agenda is right both from the broad perspective of society, but also from the narrow perspective of maximising return on investment and the efficient allocation of capital. Doing good and doing well can and do co-exist. Threats like climate change or social disruption put shareholder capital at risk — investing in these areas addresses societal needs and fosters long term value creation and sustainability.
Business leaders are stepping up, making the needed changes and demonstrating progress. Is it perfect — no. Is it enough — no, but it is progress and needed change to reflect the world we all live in. Others need to step up as business alone cannot drive the needed systematic change.
The commitment of the 181 CEOs to the BRT announcement in favour of shifting the balance from shareholders to stakeholders is the right one. Business leaders and policy makers must be willing to continue to work together in support of this common agenda if we are to succeed in addressing some of the greatest challenges we have faced for decades. We are committed to do the same and help to support the journey.