As companies transition from shareholder to stakeholder capitalism, they must change the way they consider risks if they are to win the confidence of their customers and investors and stay on the right side of the regulators.
Consumer and investor demand for more ethical corporate practices have helped to drive the adoption of stakeholder capitalism, where companies move from thinking only about numbers, profits and returns for shareholders to the overall impact of their business on society and the environment. The Covid-19 pandemic has accelerated the shift, but questions are being raised over levels of commitment.
Shareholder capitalism calls for companies to be resilient to external risks, for instance ensuring their operations are not affected by climate change. With stakeholder capitalism, they are also obliged to address the risk they pose to climate. Under the transition from the former to the latter, companies have to recognise that a much wider set of risks and issues come into play.
At the same time, stakeholder-orientated firms should try to follow through on commitments to being more sustainable and purpose-driven, in particular over adherence to environmental, societal and governance (ESG) standards, now taking the form of fully fledged metrics. There is currently a big gap between pledges and delivery. That raises questions about companies’ commitment to stakeholder capitalism and leaves them vulnerable to charges of purpose-washing, where ESG claims fall short of reality.
Companies doing too little, too late on ESG?
Fewer than one-quarter of the world’s biggest companies are aligned with the international aim of limiting the global temperature increase to 1.5°C by 2050 (the Paris Climate Agreement goal), according to a 2021 study based on data from 14 of the largest stock indexes. In its 2022 report, the Corporate Human Rights Benchmark concluded that companies were improving their record on human rights, but the pace of improvement was very slow.
For companies to close the gap between commitment and action to bolster stakeholder capitalism credentials, they must devote more effort to identifying and determining risks to a broad range of stakeholders; address them with mitigation strategies; regularly monitor their effectiveness; and be flexible and nimble enough to make revisions when circumstances change.
Long under scrutiny, the extractive industries have probably done more than most to try to minimise the impact of their activities on stakeholders, largely through corporate social responsibility (CSR) programmes that seek to improve conditions for affected communities. Mining and oil and gas companies have become more attentive to those living in the vicinity of extraction projects, not least because the environmental and social concerns are often very tangible and visible. But that’s not always so clear in less impact-intensive sectors.
Tech giants are increasingly having to address governance challenges across developed and developing markets, notably relating to end-user data privacy and protection. They need to ensure that they are not only compliant with local regulations and legislation but also considering business solutions to data issues. It is a matter of urgency because eventually, the right to privacy will be a human right – it’s where general data protection regulation (GDPR) is leading.
Major retailers, meanwhile, must focus on reducing the risk of polluters and human rights abuses entering their supply chains, especially as these become more diversified to avert a repetition of the disruption experienced at the height of the Covid-19 pandemic. But rather than delegate such risks to supply chain partners, corporates should start regarding them as central operational concerns, not just a compliance clause in a sourcing contract. In practice, that means robust ongoing supply chain due diligence.
Stakeholder risk is growing
The bottom-line and reputational costs of falling short on stakeholder risk mitigation are growing every year as consumers, investors and regulators demand ever more demonstrable corporate commitment to sustainability and ethical business practices.
Access to capital and customer and employee loyalty is increasingly dependent on companies’ record on ESG standards while those breaching regulations face financial penalties and other sanctions – the recently introduced German supply chain due diligence law and the proposed EU-wide supply chain due diligence directive reflect growing levels of regulatory scrutiny.
Yet corporates do not need to reinvent the wheel when it comes to the management of stakeholder risks. In recent years, a good many have made efforts to identify and mitigate them. But with rising pressure to operate more ethically, they will have to get better at doing so, guarding against purpose-washing. Ultimately, what’s required is a mindset change – companies considering themselves as responsible corporate citizens, with operational records that say as much.
To a degree, that’s already beginning to happen, as evidenced by the rise of the B Corp movement, in which companies meet high social and environmental performance standards. The more progressive among such firms are likely to be re-evaluating their business models, some perhaps undertaking fundamental operational changes that prioritise stakeholders. So, for instance, in the case of tech giants, this might mean building products that are designed to protect the data and privacy of end-users. For retailers, it could see wider adoption of sustainable procurement practices, essentially hardwiring ESG standards into supply chains.
Some companies are recognising it faster than others. In the long term, a major shift in thinking is necessary, with boards looking at how they can effectively integrate stakeholder considerations into the running of their businesses.
Cvete Koneska is head of advisory services at the geopolitical and security intelligence service Dragonfly.