Need for a global reset along a more sustainable path

There is no doubt that we are faced globally with a terrible pandemic but it seems that we, humans, have yet to gain the level of wisdom necessary to see through to the consequences of our current way of life, organisations and relationships and also the long-term damage it has dealt to prospects for economic growth.

The concept of leaving the world a better place can be traced back to a quote from Ralph Waldo Emerson: “To leave the world a bit better, whether by a healthy child, a garden patch or a redeemed social condition; to know that even one life has breathed easier because you have lived — that is to have succeeded.”

The purpose of sustainability is to meet the present-day needs in a way that does not compromise the ability of future generations to meet their needs. Sustainability places a lot of focus on preserving and using natural resources wisely but it also focuses on economic and social issues that affect everyone around the world, with increased emphasis on people and societies most in need.

The renowned economist Milton Friedman (1912-2006) preached that the business of business is to engage in activities designed to increase profits. He certainly in the current context got it horribly wrong. The business of business isn’t just about creating profits for shareholders — it’s also about improving the state of the world and driving stakeholder value.

As former UN Secretary General Ban Ki-moon said, “We are the first generation that can end poverty and the last generation that can take steps to avoid the worst impact of climate change. Future generations will judge us harshly if we fail to uphold our moral and historical responsibilities.”

On the other hand, shareholder value creation is a refreshingly simple construct i.e. companies that grow and earn a return on capital that exceeds their cost of capital, create value. The 2008 Financial crisis is the most recent reminder that when executives, boards and investors forget their guiding principles, the consequence is disastrous – so much so, in fact, that some economists call into question the very foundation of shareholder-oriented capitalism.

Academics and even some business leaders have changed their focus from increasing shareholder value to a broader focus on all stakeholders, including customers, employees, suppliers and local communities. Many of the companies that are now the world’s most admired put significant effort into engaging their stakeholders (employees, customers, partners) for a wide variety of things: explaining the vision, policies and beliefs of the company, communicating strategy and milestones and often involving them in seeking solutions and new ideas.

As companies sought capital in the public markets and listings on international exchanges, they had to communicate their vision for not just the company — but the country as well. Companies making forays overseas had to work hard at winning the trust of customers and partners. This process demanded strong corporate cultures.

Shareholder value

Creating shareholder value is not the same as maximising the short-term profits and companies that often confuse the two, often put both shareholder value and stakeholder interest at risk. A system focused on creating only shareholder value isn’t the real problem; short-termism is.

Great managers don’t compromise on safety, don’t make value by destroying their existing networks, just because their peers are doing it and don’t use creative accounting or financial gimmicks to boost their short-term profits because ultimately such moves undermine intrinsic value.

What we need now more than ever before is a clearer definition of shareholder value creation that can guide managers and board of directors rather than blurring their focus with a vague shareholder agenda.

Companies are better able to deliver longterm value to the shareholders when they consider key stakeholder concerns; the key would be for companies to examine those concerns systematically in one go to create opportunities to deliver on both objectives and thereby build a sustainable business.

Balancing stakeholder interest

There is now a need for companies to focus on a broader set of stakeholders, not just shareholders. Therefore, to create long-term shareholder value it is now necessary to satisfy other stakeholders as well.

A company for example that tries to boost profits by providing shabby working environments relative to competitors, by underpaying employees or cutting back on benefits will have trouble attracting and retaining high-quality employees.

Lower quality employees mean lower quality products, reducing demand and hurting reputation. More injury and illness can invite regulatory interventions and more union pressure. Higher employee turnover would increase recruitment cost, loss of productivity and training cost.

With today’s more mobile and more educated workforce, such a company would struggle in the long term to retain good staff against competitors offering more attractive incentives. However, if the company earns more than the cost of its capital, it might afford to pay above market wages and still prosper.

Invest in people

One common trait amongst organisations that have emerged as winners was due to the investment in their people — from employees to channel partners. For example, to attract FDI into the garment industry, the industry had to build talent and fight hard to retain them, as new opportunities opened up.

The winning companies have invested in strong HR systems and continued to invest big in learning and development. The IT companies were the leaders in this process, as much of their growth depended on work from outside but other well-known groups maintained their strong performance in large measure because of good HR policies.

Among the family-owned businesses that emerged stronger in Sri Lanka, there was an effort to professionalise management. The hallmark of many of these companies has been creating a tough but meritocratic system and investing in world-class facilities.

Conclusion

But how well is well enough? A shareholder focus doesn’t provide an answer. Stakeholders’ focus does. Shareholder capitalism has taken a huge beating in recent years and given the complexity of the issues, it is unlikely that either the shareholder or stakeholder model of governance would be seen to be far superior to each other.

However, a shareholder model thoughtfully embraced as a collective approach to present and future value creation is the best at bridging the board and varied interest of the shareholder and other stakeholders alike and the best path to broad economic prosperity that is sustainable.