About the authors: Paul Washington is the Executive Director of The Conference Board ESG Center. Charles Mitchell is the organization’s Executive Director of Content Quality. They are co-authors of the report, Toward Stakeholder Capitalism.
Two tectonic shifts are underway in American capitalism. Expect them to accelerate in 2022 and beyond, with significant implications for CEOs and the C-suite.
The first relates to “who.” In responding to external and internal pressures, and in keeping with their own sense of broader corporate responsibility during the upheaval of the past two years, CEOs and boards are focusing more on their companies’ impact on the long-term welfare of multiple stakeholders, including employees, customers, and communities—not just their stockholders. According to a recent survey from The Conference Board that gauged over 200 C-suite executives, 90% say a shift from stockholder to stakeholder capitalism is underway, and 80% say it’s affecting their firm. The second change relates to “what” companies are focusing on: not just financial performance, but, increasingly, a broader set of environmental, social, and governance issues.
These related shifts are significant and durable, in part because investors—those with potentially the most to lose—are helping drive them. Their support for environmental and social shareholder proposals reached record levels in 2021. That was driven largely by major institutional investors who are focused on broader systemic risks and face client pressure to invest and vote in a socially responsible manner.
Don’t expect this to change: The top 10 institutional investors now hold 30% of the S&P 500. And by decade’s end, assets under management in ESG funds are expected to soar from $8 trillion today to $30 trillion. Expect stakeholder pressure to take stands on hot-button ESG issues only to increase during the coming year.
What’s a CEO to do?
To help answer that question, The Conference Board convened a series of executive roundtable discussions with C-suite executives. We also surveyed them. Our aim was to examine the real-world implications of the move to stakeholder capitalism for corporate leaders.
The overriding message? Executives who recognize and capitalize on these shifts are positioning their companies and themselves for success; those who don’t will be left behind. There are three key areas for CEOs to focus on.
Start with yourself. To lead effectively, CEOs need to increase their fluency in ESG subjects. They need to gain familiarity with the perspectives of stakeholders. And they should enhance focus to ensure the company concentrates on those areas aligned with their business where they have the most impact. CEOs may need to get outside their comfort zones, expanding both their knowledge and networks. Our roundtables underscored the importance of authenticity here: As one CEO put it, leadership in this moment requires “radical humanity,” a new level of genuineness when engaging with employees and other stakeholders.
That authenticity, in turn, helps build a culture of trust. Indeed, even more than the ability to execute, our survey and roundtable participants ranked trust as the top leadership skill for future success. With companies addressing novel issues, making difficult trade-offs among stakeholders, and grappling with greater uncertainty, trust between the CEO and company with other stakeholders, and within the C-suite itself, is essential.
Engage the board. CEOs also need to engage their board on what the stakeholder capitalism shift and the focus on ESG issues mean for their firm. Within legal and market constraints, companies have significant flexibility to decide where they stand along the stockholder-to-stakeholder capitalism spectrum. They can also choose which environmental and social issues to focus on.
CEOs need to have candid and ongoing discussions with the board on what the shift means for their company’s strategy. Many corporate directors were reportedly surprised when, in 2019, their CEOs signed onto the Business Roundtable statement on the purpose of a corporation. There should be no surprises now.
Mind the C-suite. CEOs will want to ensure their direct reports bring multiple stakeholder perspectives to discussions. These executives, however, don’t see themselves as just representing their traditional constituencies, in the way a chief communications officers might be expected to bring a media perspective. Many see themselves assuming a broader strategic or external relations role. Indeed, nearly four in five in our survey expect the shift to impact the skills and knowledge they will have to master for their jobs. Moreover, several see themselves as “first among equals” in working with the CEO to drive their company’s shift toward a stakeholder focus.
CEOs will want to ensure their C-suite officers think more broadly, bring their challenges as well as successes to the table, and collaborate. But they must also be alert to new tensions and rivalries. So, CEOs need to strive for organizational alignment by holding the C-suite accountable, setting up clear structures and shared goals, and communicating expectations.
The good news for business leaders: This period’s replete with opportunity. Nearly 80% of respondents said the stakeholder shift is important for both their company and society. They’re on to something: Executives who authentically convey their commitment to a broader corporate purpose can retain, attract, and motivate talent during this era of a “great reassessment” by workers. CEOs who expand their internal and external networks can identify new business opportunities and build relationships that can serve them during the inevitable times of stress to come. Those who embrace stakeholder capitalism can also foster a culture of greater collaboration that, in turn, can drive business success.
And, of course, leaders who focus on the long-term welfare of the company, its multiple stakeholders, and society at large can do their part to help sustain capitalism itself.
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