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The coronavirus crisis will speed the end of shareholder primacy

This moment in time has realigned the values of society and business, paving the way for stakeholder capitalism, writes Nasdaq’s global head of board engagement.

The coronavirus crisis will speed the end of shareholder primacy
[Source Photos: PhonlamaiPhoto/iStock, IvanC7/iStock]

We will not know the lasting effects of COVID-19 on the global business community for some time, but the immediate impact has taught us many lessons about globalism, innovation, and the value of stakeholder interests. Businesses have played a crucial role in addressing the full scope of this crisis—from maintaining important channels of communication through innovative technology, ensuring access to capital through open markets, and supporting supply chains with transportation and logistics teams deemed essential workers.

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Many CEOs and corporate leaders worldwide took swift action, demonstrating their humanity and commitment to corporate purpose in response to this unprecedented moment in time. One large retailer committed to pay employees for 30 days, even as it shuttered almost all operations. Major apparel companies shifted production to making protective gear. Executives atop these companies and many others are acting for the community at large, not just on their shareholders’ behalf.

As we approach annual meeting and proxy season, it is important to note how the COVID-19 crisis brought the collective “stakeholder” back in focus. Gone are the days of companies providing value solely to shareholders. To borrow a phrase recently adopted worldwide: we’re all in this together. As corporate leaders showcase this employee and community-based mind set, their leadership will continue to boost innovation that can help spur progress for all stakeholders as the virus subsides.

[Source Photo: IvanC7/iStock]
Does this mark the end of shareholder primacy? That decision may ultimately rest with our future corporate leaders. A corporate governance theory dating back to the 1970s, shareholder primacy narrowly prioritizes owner interest as the driver of corporate strategy and success. But the groundwork has been laid for a sea change. Thanks to a mix of technological advancements, increased and sustained efforts to improve corporate culture and employee inclusion—combined with the global nature of business—the last 30 years have paved way for a more inclusive concept: stakeholder capitalism.

This rise of stakeholder primacy shows itself in the evolving influence of the institutional investor as well as the global business community’s commitment to environmental, social, and governance matters. Shareholders should not view these new stakeholder influencers as a threat. Rather, their influence and accountability benefits all stakeholders, ultimately directing increased attention to sustainable value and helping to promote a longer-term perspective.

A strengthened corporate culture focused on stakeholders helps prevent unsustainable actions such as unconscious bias, for example. In an evolving and more connected world, intolerance for bias and disrespect increases, which benefits all of humanity. Stakeholder capitalism, a de facto social contract, strengthens accountability from within.

The year began with corporate purpose in full view. In BlackRock’s annual CEO letter published in January, CEO Larry Fink noted a company “cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.” This sentiment echoed that of the 180 CEOs who had signed the Business Roundtable’s “Statement on the Purpose of a Corporation” last summer, signaling that shareholder primacy could no longer be status quo.

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So what’s at stake? Beyond the tangible toll of COVID-19, corporate leaders will be under ever increasing scrutiny. How have they responded to the crisis? Are commitments to clients and employees being fulfilled? Which stakeholders were considered when tough decisions were made? The resolution of this pandemic will not be adequate shelter to companies who remain focused solely on their shareholders. Importantly, COVID-19 has put a spotlight on the importance of employees, who are essential to the speed of a post-crisis recovery and long-term growth of their respective companies.

Nasdaq CEO Adena Friedman, a signatory of the Business Roundtable’s letter, said recently that “the best path to sustainable earnings growth and corporate success is to attract and retain great talent, to provide value-added products and services to our clients, and to have positive and productive supplier relationships. Therefore, the two concepts–creating shareholder value and creating community value – go hand-in-hand.” Friedman’s thesis was simple: companies are not left to choose between their shareholders or society. They must serve both.

It’s increasing clear that how a company’s leadership responds to this crisis will have a lasting impact on their reputation among both employees and external stakeholders for years to come. As the world responds to COVID-19, our communities are adapting to the challenges of isolation and the uncertainty of what lies ahead. A stakeholder capitalist environment invites increased innovation and business creation, fueling recovery and a quickened return to growth. The values of society and business are more aligned than ever, giving corporate leaders a platform to enable greater success for all stakeholders. It is a unique opportunity for stakeholder capitalists and the business community to prove the shareholder primacy theory obsolete.

Byron Loflin is the global head of board engagement at Nasdaq.

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