André Pratte is chair of the Canadian Centre for the Purpose of the Corporation and a principal at Navigator.
In early May, Strive Asset Management was launched with the mission of “restoring the voices of everyday citizens in the U.S. economy by leading companies to focus on excellence over politics.” The $20-million fund is led by entrepreneur Vivek Ramaswamy, who criticized leading American asset-management firms for “using their clients’ funds to exercise decisive influence over nearly every U.S. public company to advance political ideologies that many of their clients disagree with.”
Strive’s launch is part of a powerful pushback by some business leaders and politicians against what is called “stakeholder capitalism”: the notion that corporations should consider not only the interests of their shareholders, but also that of all their customers, their employees, the communities in which they operate and the environment.
A few weeks ago, former U.S. vice-president Mike Pence accused the finance industry, which increasingly calls on corporations to address environment, social and governance goals, of “weaponizing the financial system to do the exact opposite” of its traditional economic mission. Mr. Pence denounced “capricious new ESG regulations that allow left-wing radicals to destroy American energy producers from within.”
For his part, after Tesla was dropped from the S&P 500 ESG Index while oil and gas producer Exxon was added, chief executive officer Elon Musk attacked ESG ratings: “ESG is a scam. It has been weaponized by phony social justice warriors.”
Some of those comments raise valid issues – specifically the large number and inconsistency of ESG ratings. But companies should not allow those concerns to undermine their determination to address the preoccupations of their stakeholders.
The thesis promoted by the critics of “stakeholder capitalism” is based on false premises. For instance, they believe that action on the ESG front means lower profits. This is simply not true, as several studies have demonstrated. A business focused on its true purpose and on building solid relationships with its stakeholders will, in the long run, be more profitable and sustainable. Doing so minimizes risks (for instance, to its reputation) and opens markets that may not have been discerned before.
As the CEO of asset manager BlackRock, Larry Fink, stated in his latest letter to CEOs: “Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
Another blatantly incorrect premise is that companies that do not care about their social purpose have chosen “excellence over politics.” Yet inaction is in itself a political statement. Moreover, such corporations never cease to be active on the political front, lobbying all levels of government for this and that change in policy. The critics of stakeholder capitalism are not opposed to companies taking political stances; indeed, they do not mind at all as long as businesses endorse the Republican agenda.
Anyhow, stakeholder capitalism is not about companies taking positions on controversial issues, although that may be required from time to time. Public stances are only the surface of a much deeper transformation. Employees, customers, investors and citizens are increasingly demanding that, consistent with its purpose, each company contributes to the solution of society’s problems.
That does not mean that a company should adopt a “left-wing agenda” or that it should weigh in on every contentious topic; it means that businesses should act according to their raison d’être, their purpose, which inevitably encompasses more than simply making money. Of course earnings remain critical: a company that is not profitable will not be in a position to address social and environmental problems.
Admittedly, these are troubled waters to navigate. The business environment is changing fast, and CEOs, governments and regulators are building the plane in midflight. However, as the chief social innovation and communications officer at Telus, Jill Schnarr, wrote recently in an advertising feature for The Globe and Mail: “Having a social purpose is no longer optional; it’s a license to operate.”
In other words, society will simply not let businesses operate unless they implement a sustainable purpose. Furthermore, thanks to concrete experience and applied research, we have an increasingly clear view of what we need to do to get there. For instance, we know that purpose will work only if it is authentic and consistent with a company’s activities. We also know that ESG positioning is risky if it does not lead to concrete action. Supporting the Black Lives Matter movement is only good to the extent that a company is making significant efforts to hire and promote racialized people within its ranks.
Last year, the Walt Disney Company was ranked 37th in Axios-Harris’ survey of American brands. This year, after it bungled its position on Florida’s “Don’t Say Gay” legislation, it dropped to 65th place. Now more than ever, an outstanding reputation can be badly damaged in a matter of hours, often not owing to a specific stance that was taken but because the manoeuvre was not thoughtfully prepared.
The campaign against stakeholder capitalism is just beginning. That should neither startle nor discourage those who believe that our economic system needs a reset. It should, however, push them to make their case stronger. For instance, they should be careful not to neglect the importance of profit when they discuss “social purpose.”
The adversaries of ESG and stakeholder capitalism underestimate the forces behind the movement. Citizens of Western democracies know that capitalism is a fantastic engine of prosperity, but they have also come to understand that large externalities are involved – whereby the private actions taken by companies can produce public costs that burden society.
As customers, employees, and investors, they are demanding that businesses play a role in alleviating the environmental and social costs of rapid but unequal economic growth. Doing so is not “woke” or “leftist” but alleviates significant business risks and represents new opportunities. Ms. Schnarr from Telus is right: It is no longer optional.
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