In 2019, 181 of America’s top CEOs made a bold, collective statement to the world: A company’s purpose had to be more than just making a return for its investors. This powerful group argued that there are other stakeholders in the equation that companies need to be answerable to, including customers, employees, suppliers, and the communities these companies serve. This statement flew in the face of the long-running capitalist mantra of maximizing shareholder value, and many experts argued that it was about time.
Being the CEO of a publicly traded company today is a whole different ball game than what it was even two decades ago. Consumer activism is far more prevalent today thanks to access to social media. One study estimates that about 38% of all Americans boycott at least one company at any given point in time, with the number of boycotters growing double digits annually. The Fairtrade movement, which ensures that suppliers such as farmers get paid fairly, has been consistently growing in popularity for the past several decades. The conspicuous impact of the Black Lives Matter movement as well as the divisive presidential term of Donald Trump highlighted that companies could no longer remain indifferent to the political opinions of the communities they served. All these macro trends, coupled with an increased urgency around climate change, meant that the public at large warmly welcomed corporate America’s new statement of purpose.
For the optimists among us, it appeared that corporate America had finally taken the first step to discovering its soul. Yet, nearly two years later, we do not have much to show for it. In fact, just a few months ago, one of the more prominent advocates of the corporation-with-a-soul movement, Danone CEO Emmanuel Faber, was unceremoniously removed from his position. Shareholders ousted Faber because he could not generate a return for them during his tenure as CEO. Ironically, his public firing did not generate any uproar from the other stakeholders he had focused on serving.
A sobering reality
Corporate accountability can be a tricky thing to get right. Despite their elite statuses and high-compensation levels, most CEOs and top managers operate within the same framework as regular employees. They get hired for top jobs based on their skills, networks, and experience, are incentivized to perform well and can get fired if they don’t. All three steps are executed by the equivalent of a hiring manager for a CEO, which is usually the board of directors. The board represents investors’ interests in a company. So, in effect, the CEO’s boss is the investor.
The question then becomes: Why are only investors represented in a board and not all stakeholders? Surely Faber could have saved his job if he had all his stakeholders evaluating his performance.
The answer here lies in the order in which various parties get paid when a business generates value. For any value to be distributed, an investor first needs to pay for setting up a company, hire and pay employees, pay for supplies and technology, and pay debtors as well as the government in the form of taxes before any profit flows back to her. There is also always an element of risk where a business fails or underperforms, leading to an investor losing all or some of her investment, while everyone else still gets paid. This hierarchy of returns in which investors get paid last creates a potent moral and economic argument for maximizing shareholder value above everyone else. Both theory and practice show that if you focus on generating maximum return for your investors, all other stakeholders are inevitably taken care of as they all get paid in the process.
Is the tech way the right way?
But despite its simplicity and efficacy, it cannot be denied that a profit-only focus comes with its fair share of issues. Companies often take creative license with the law, purposefully generate climate impact, and take outsized risks that can tank an entire economy. The rate of change, especially in the tech space, is so rapid now that by the time policy makers catch up it can be too late. So, there is a case to be made for self-regulation that tethers such actions.
Tech companies such as Microsoft, and Salesforce have been at the forefront of the self-regulation movement by adopting environmental, social, and governance standards (ESGs) that ensure that these companies, at least on paper, play well with other stakeholders in their ecosystem. Critics have been quick to point out that these virtuous-seeming tech companies are not exactly doing society any favors. These high ESG performers usually pay markedly lower taxes and employ 20% fewer employees in comparison to poorly ranked ESG companies.
This paradox exposes another chink in the armor of the ‘keep everyone happy’ goal set out in 2019: Which of your many stakeholders can you really keep happy concurrently? In this case, it can be argued that tax collection is critical for communities to thrive, paying better prices versus the lowest possible ones to suppliers is key for ensuring their sustainability and rapid automation is clearly not in the best interests of employees, who usually end up losing their jobs in the process. However, global markets consistently reward companies that can lower their tax bills, keep their suppliers on rock-bottom prices, and continue to drive automation in order to build better products and reduce headcount per dollar earned. In other words, what is more preferable for you as a community stakeholder: a tech company with a stellar ESG ranking or a tech company that pays its taxes?
A team effort
As a result, the search for corporate America’s soul will continue to languish unless we change tact. While there are many opinions on what else could work, a good example could be the seemingly unlikely partnership between Tesla and various governments across the world. With a climate goal of reducing carbon emissions from cars, governments in U.K., U.S., Norway, and Canada have been subsidizing the purchase of electric cars for their citizens for nearly a decade now. These policies allowed a then-nascent Tesla enough breathing room to scale its electric car production as well as generate demand for these vehicles thank to lower prices. Tesla’s shareholders are better off, and so are the communities and environments where electric cars have grown in popularity. As the electric car sector becomes self-reliant, these subsidies will sunset, leaving behind a net-positive impact for most if not all stakeholders.
Finding corporate America’s soul is likely going to be a team effort, rather than the sole prerogative of fortune 500 CEOs. Investors, customers, governments and CEOs will have to come together to find and crystallize the parameters of this ‘soul’ without downgrading the basic rights of an investor.
To achieve this, investors need to push for contemporary governance and monitoring policies that ensure that incentives for unethical behaviors are curbed. Robust demand by end customers for products and services that are good for the world will ensure that corporate profit focus aligns well with societal goals. Government policy refreshes will need to be expedited at a global pace to ensure that the law isn’t playing catch up to new business models and disruptive innovations. Such policies need to have a healthy mix of penalties and incentives, versus just the former. Lastly, CEOs will have to set out to do good in the world primarily by how they create shareholder value. After all, they were hired to do exactly that.
Hamza Mudassir is a fellow in strategy at Judge Business School, University of Cambridge, and founder at Platypodes.io.