Professor Klaus Schwab was already going to write a book on stakeholder capitalism before Covid-19 upended the world.
It was a cause he had been advocating for decades, long before it was fashionable. He had argued in a 1971 book that a company needs to serve not only shareholders but all stakeholders if it wants to succeed in the long term. Achieving this tilt from shareholder to stakeholder capitalism was the raison d’être for establishing the World Economic Forum (WEF) that same year.
“It was quite natural to me [as a concept] because I think that the company is not only an economic unit, but also a social organism, and it has to fulfill not only the economic objectives but also social expectations,” Schwab tells Investment Monitor.
“The major difference between stakeholder and shareholder capitalism is short-term versus long-term thinking and I personally do not see any dilemma because stakeholder capitalism is also in the best interest of shareholders in the long term.”
The major difference between stakeholder and shareholder capitalism is short-term versus long-term thinking.
How Covid-19 changed everything
Schwab remains executive chairman of the WEF – famous for its gathering of global VIPs each January in Davos, Switzerland – but also spearheads corporate social responsibility initiatives through the Schwab Foundation for Social Entrepreneurship, The Forum of Young Global Leaders and the Global Shapers Community.
Back to early February 2020 when Schwab was in his Geneva office, speaking with a colleague about the book that would be released in January 2021, Stakeholder Capitalism: Making the Case for a Global Economy that Works for Progress, People and Planet, co-authored with Peter Vahnam, head of the International Media Council and chairman’s communications at the WEF. The phone rang. It was the director of the WEF’s Beijing office, describing in stark terms how the outbreak of a novel coronavirus was spreading rapidly across China and creating a public health crisis of epic proportions. At that time, the rest of the world was still considering Covid-19 a China problem, but it was apparent it would not stay that way much longer. Schwab calls it an AC/BC moment, or ‘after Covid’ and ‘before Covid’, when the grim reality of the situation hit home.
The ensuing crisis did not change Klaus’s viewpoint on the flaws of the global economic system – which he identifies as rising inequality, slowing growth, sputtering productivity, unsustainable levels of debt, accelerating climate change, deepening societal problems and a lack of global cooperation around these core challenges. But it did create a new urgency.
The challenges didn’t necessarily change between BC and AC, Schwab writes in the preface to the book, but a greater awareness had arisen that building a more equitable, sustainable and resilient global economy would require genuine collaboration between business leaders, policymakers and the public. He writes in the book: “The idea that we need to rebuild differently post-Covid is widely shared. The sudden and all-encompassing impact of Covid-19 made us understand… that an economic system driven by selfish and short-term interests is not sustainable.”
The financial arguments in favour of a more responsible approach have also become clearer, he adds: “What we have seen in the view of the pandemic is that companies that invested in their long-term vitality – by strengthening investment in research and development, education, skills, etc – performed better in the crisis.”
How to make sustainability a reality
However, while it has become widely accepted that companies should at least publicly embrace environmental, social and corporate governance (ESG) criteria and talk the talk of sustainability, putting it into practice is inevitably more complicated. There are debates as to how corporate stakeholders can best be incentivised towards socially responsible action, whether this should happen through sticks or carrots, and the role of regulation.
Every company will have to decide: does it want to be on the right side of history, or does it want to be left behind?
“It is not black and white, you have to find some balance,” says Schwab. “In certain cases, [external] pressure is good, because it forces a company to make necessary adjustments and structural changes.” He points to gender parity legislation as a righteous use of regulatory intervention.
Having comparable frameworks to allow companies to voluntarily benchmark themselves on ESG criteria is crucial. To that end, the WEF and the International Business Council, chaired by Bank of America CEO Brian Moynihan, along with the Big Four accounting firms – Deloitte, PwC, EY and KPMG, came together in 2020 to create an ESG reporting framework. The standards, known as the ‘Stakeholder Capitalism Metrics’, have been adopted by more than 60 major companies.
“The combined value of these companies is more than $1trn,” states Schwab. “So stakeholder capitalism is not a fiction or an idealistic concept hanging around somewhere in the sky. No, it is now [practiced] by companies in a real way.”
Ultimately, he says: “Every company will have to decide: does it want to be on the right side of history, or does it want to be left behind?”