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Opinion article

Stakeholder capitalism is on the rise. How do companies deliver?

Society’s expectations of business are now at the same level as governments with respect to societal impact. 87 per cent of people believe companies exist to create value for broader stakeholders. Only 33 per cent believe CEOs are doing enough, writes Bruce Simpson, Senior Adviser on ESG to McKinsey & Company and Blackstone. 

Shareholder capitalists push for a singular corporate focus on profits. Wiser minds add a different ‘qualifier’: stakeholder capitalism or inclusive capitalism. This broadens corporate accountability to include employees, suppliers, customers and society more broadly – a more complex task. Why are companies doing this? To address three urgent crises: 

We talk of net zero by 2050, but forget that to solve the environmental crisis we have to get half way there by 2030. The planet can’t wait for regulation. 

We also have a governance crisis. Governments across the world are struggling to be effective. People expect companies to fill the gap. 

And we have a social crisis. Friedman’s shareholder capitalism failed miserably. Only a few got rich. In the US, frontline wages haven’t gone up in real terms in 40 years. Governments aren’t solving these issues. 

Society’s expectations of business are now at the same level as governments with respect to societal impact. 87 per cent of people believe companies exist to create value for broader stakeholders. Only 33 per cent believe CEOs are doing enough. 

Tension on several fronts complicates the challenge: Workers are ‘walking away’ physically and mentally; US$1 trillion GDP annually is lost in businesses from voluntary turnover, leading to the ‘great attrition’ now. Furthermore, 40 per cent of workers have mental health challenges coming out of the pandemic. About 70 per cent were not actively engaged at work anyway pre-COVID and aren’t keen to come back to work now. Worker scarcity is reinforcing this. Demographics are tightening labour markets, increasing labour power. Focusing holistically on worker wellbeing is now a critical business necessity.

The shift to Gen Z (aged early to mid-20s) is also expanding workforce expectations. They engage in community activities outside work less than prior generations. Instead, they carry societal aspirations to their workplace. Across all age ranges, 58 per cent of employees now consider companies’ societal commitments when deciding where to work. They are activists: 65 per cent boycott products based on their societal reputation and 80 per cent of employees feel empowered to speak out against their employer on social issues (as seen at Amazon and Meta).

Activist employees and customers now expect CEOs to take a stance on societal issues. But they’re often criticized for it by other stakeholders. Disney’s CEO spoke up publicly against recent ‘Don’t say Gay’ legislation in Florida which forbids any mention of LGBTQ+ in primary schools. Florida’s Governor removed Disney’s special status in Florida. Disney’s stock plummeted.

Regulators are catching up with public opinion: last week the United States Securities and Exchange Commission (SEC) charged BNY Mellon for misstatements relating to its ESG funds. This week it’s taking on Goldman Sachs for similar reasons. The SEC is also proposing the most far-reaching company disclosure mandate in decades. The regulatory world is messy but is certainly moving to more disclosure.

How do successful companies deliver? 

Chronic short-termism still dictates many corporate decisions. 65 per cent of CFOs would veto positive net present value (NPV) projects which hit next quarter’s earnings. In contrast, companies focusing five to seven years out generate better financial performance on every dimension. Stakeholder interests align long term. It’s a false choice between purpose and profit. The real choice is between short term and long term. 

Execution combines purpose with ESG and this starts with rediscovering company purpose: an organization’s unique benefit to society. Every company had one at inception. Purpose also answers: ‘What would the world lose if your company disappeared’? Employees will have views too: what excites people to come to work? 

Purpose is then anchored in strategy, culture and processes, using ESG language and measurement. We need to marry these two concepts. Purpose without ESG isn’t anchored in the business or measured. That’s when CEOs start sounding like yoga instructors. ESG without purpose isn’t focused. It’s just a laundry list of possibilities. Purpose with ESG enables choices on where to play and where to win across a few ESG dimensions, compared to all.

Most ESG focus is on ‘E’. But the most important single ESG dimension to the broader public (at least in the US) is ‘S’, specifically whether the company is paying a living wage. Those that are paying this rate will have 30 per cent lower attrition. Given the social crisis, companies are now building whole strategies around ‘S’. Best Buy’s purpose is ‘enriching lives through technology’. They delivered it by ‘taking care of employees, who take care of customers, which takes care of business’. They invested in training; diversity, equity and inclusion (DEI) and belonging; and delegated significant decision-making to lower levels. Best Buy generated 8x returns over 8yrs. 

Return to work post-COVID also requires an ‘S’ focus. One issue is that 80 per cent of top management get purpose from work, while 80 per cent of the front-line workers don’t. Part of the ‘S’ challenge is changing that equation so everyone feels purpose at work. 

About the authors
BS

Bruce Simpson

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Bruce Simpson is a Senior Adviser on ESG to McKinsey & Company and Blackstone. 

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