Re­spon­si­ble cap­i­tal­ism is not a dream, it’s a ne­ces­sity

Board­rooms must take up the chal­lenge that Covid has brought to end the pri­macy of share­hold­ers

The Daily Telegraph - Business - - Business Comment - HE­LENA WAYTH He­lena Wayth is chief ex­ec­u­tive of A Bird’s Eye View

Ayear ago the Busi­ness Round­table at Davos made a com­mit­ment to shift from share­holder to stake­holder cap­i­tal­ism. This sum­mer, Black­Rock’s chief ex­ec­u­tive Larry Fink stated stake­holder cap­i­tal­ism is set to be­come even more im­por­tant in a post pan­demic world.

And yet a re­cent study by A Bird’s Eye View in part­ner­ship with the FT Board Di­rec­tor Pro­gramme mem­bers found only 50pc sur­veyed be­lieve the cri­sis will “ac­cel­er­ate” the shift to stake­holder cap­i­tal­ism, and the ma­jor­ity be­lieve a tran­si­tion will take up to 10 years to achieve.

The pan­demic has re­vealed the lim­i­ta­tions of to­day’s eco­nomic model. It has high­lighted the in­ter­con­nec­tions be­tween busi­ness and so­ci­ety across all sec­tors but has also ac­cen­tu­ated so­cial in­equity. In­di­ca­tors from the World Eco­nomic Fo­rum raise fears the eco­nomic fall­out from lock­down will only widen this gap. Many as­so­ci­ate busi­nesses as cen­tral to the sys­tem which has con­trib­uted to this in­jus­tice.

Lead­ers who are con­nected with the world they op­er­ate in and con­scious of their or­gan­i­sa­tion’s im­pact on so­ci­ety, stand a bet­ter chance of nav­i­gat­ing the un­cer­tainty and lead­ing the tran­si­tion to a new and more in­clu­sive econ­omy.

How can boards get ahead of the move­ment to help shape the fu­ture? Eight in ten board mem­bers sur­veyed are aware they need a bet­ter level of en­gage­ment with stake­hold­ers to gov­ern more ef­fec­tively.

In an ef­fort to raise at­ten­tion to is­sues re­quir­ing change, stake­holder ac­tions of­ten man­i­fest them­selves through pun­ish­ing be­hav­iours. Ex­am­ples in­clude the con­sumer re­jec­tion of Brunei-owned ho­tels, the ad­ver­tiser boy­cott of Face­book, di­vest­ment by banks in coal com­pa­nies, Black­Rock’s vote against ExxonMo­bil for fail­ure to make progress on cli­mate change tar­gets,

and an em­ployee walk­out against un­safe work con­di­tions at Tar­get.

Un­der the 2006 Com­pa­nies Act, UK listed com­pa­nies are now re­quired to de­tail how direc­tors en­gage with a wide range of stake­hold­ers, and by 2022 will need to re­port ma­te­rial in­for­ma­tion on cli­mate change, risks and met­rics in line with the Task Force on Cli­mate-re­lated Fi­nan­cial Dis­clo­sure. While there is grow­ing con­cern about the threat of gov­ern­ment reg­u­la­tion, the study found that only 15pc of board mem­ber’s views on stake­holder cap­i­tal­ism were in­flu­enced by this.

The cri­sis is re­veal­ing im­por­tant is­sues with far reach­ing con­se­quences that need to be tack­led. And yet the cur­rent meth­ods of pres­sure are not cre­at­ing the scale, speed or ur­gency of change needed.

En­cour­ag­ingly 80pc sur­veyed be­lieve busi­ness has a grow­ing re­spon­si­bil­ity to in­crease the wealth of so­ci­ety and not just share­hold­ers. How­ever, just un­der half are con­vinced there will be a shift from

share­holder pri­macy to a stake­holder cap­i­tal­ism model. Al­most two-thirds think it could take up to 10 years for the prin­ci­ples of stake­holder cap­i­tal­ism to be em­bed­ded into their or­gan­i­sa­tion’s gover­nance model and prac­tice.

The re­search found there are three lines of thought – 50pc of board mem­bers be­lieve the cri­sis will ac­cel­er­ate the shift to stake­holder cap­i­tal­ism, 30pc are un­de­cided and 20pc be­lieve the shift will not hap­pen. While a num­ber of re­spon­dents felt the tran­si­tion would vary by sec­tor and or­gan­i­sa­tional size, board mem­bers on listed and fam­ily owned com­pa­nies are more likely to lead the change. In­ter­na­tion­ally based board mem­bers are more sup­port­ive of this shift, as are fe­male board mem­bers.

The find­ings re­in­force the ben­e­fit di­verse at­ti­tudes and val­ues as well as ex­pe­ri­ence can bring to boards. They also raise the ques­tion about the com­mit­ment, pace and breadth of multi-di­men­sional change re­quired by boards to shape the fu­ture.

We are about to em­bark on far­rang­ing changes to how so­ci­ety, gov­ern­ment and pri­vate en­ter­prise col­lab­o­rate. No one in­di­vid­ual, or­gan­i­sa­tion or state can do this alone.

The board of the French con­glom­er­ate Danone, en­abled by leg­isla­tive changes, re­cently cre­ated a new stake­holder cap­i­tal­ist res­o­lu­tion and share­hold­ers voted to legally em­bed en­vi­ron­men­tal, so­cial and gover­nance goals in the com­pany’s by­laws. Last year Capita elected two em­ploy­ees to the board to bring an em­ployee per­spec­tive and in­crease di­ver­sity of thought.

The chal­lenge for boards should not be how long change should take, but how board­rooms col­lab­o­rate more ef­fec­tively to bring to­gether new skills, ways of think­ing and work­ing to speed up change.

Only 9pc of FTSE All-World com­pa­nies cur­rently link ex­ec­u­tive pay to en­vi­ron­men­tal, so­cial, and gover­nance cri­te­ria, ac­cord­ing to Sus­tain­a­lyt­ics.

The ma­jor­ity of board mem­bers sur­veyed felt new def­i­ni­tions and clear cri­te­ria are es­sen­tial and could be em­bed­ded into ex­ist­ing re­mu­ner­a­tion poli­cies to re­ward the cre­ation of stake­holder value.

The stake­holder ap­petite for change is al­ready there and grow­ing. To ef­fec­tively sup­port and guide their or­gan­i­sa­tion’s tran­si­tion into a new eco­nomic model, boards need to be more in sync with this move­ment. How busi­nesses work to­gether with gov­ern­ments and civil so­ci­ety for the com­mon good is crit­i­cal if the shift to stake­holder cap­i­tal­ism is to be ac­cel­er­ated.

Now the chal­lenge is for boards to step for­ward to sup­port man­age­ment to en­sure that em­ploy­ees, cus­tomers, sup­pli­ers and com­mu­ni­ties are pro­tected as much as prof­its; greater pri­or­ity is given to more eq­ui­table wealth dis­tri­bu­tion; and to en­sure their or­gan­i­sa­tion’s en­vi­ron­men­tal im­pact is em­bed­ded in its val­u­a­tion. Re­spon­si­ble cap­i­tal­ism isn’t just a long-term am­bi­tion. It’s a ne­ces­sity for to­day.

The coro­n­avirus cri­sis has placed com­pa­nies’ so­cial con­tracts far higher up the agenda in the board­room. The tran­si­tion is here and hap­pen­ing at speed, and it’s not just Larry Fink who thinks so. And it can’t take 10 years.

‘A to­tal of 80pc sur­veyed be­lieve busi­ness should in­crease the wealth of so­ci­ety’

An ExxonMo­bil-run oil­field in Basra, Iraq. Black­Rock piled on pres­sure over its en­vi­ron­men­tal record

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