Next Steps for Shareholder Capitalism: Reflections from the World Economic Forum 2023

By Richard Howitt, Skytop Contributor / January 20th, 2023 

Richard’s background celebrates three decades as a strategic thinker who integrates innovation into organisational practice. A 22-year member of the European Parliament Rapporteur on Corporate Social Responsibility, he led the EU’s Non-Financial Reporting Directive. This initiative, recognized as the world’s foremost legislation on Corporate Transparency, brought him to new challenges. 

This includes his work as CEO of the International Integrated Reporting Council, the Task Force on Climate-Related Financial Disclosure, Advisor to the UN Global Compact, Member of the European Commission SDG Platform, and the UN Guiding Principles for Business and Human Rights Reporting Framework Eminent Persons’ Group. 

Richard is recognized as a Sage Top 100 Global Business Influencer, Thomson Reuters ‘Top 30’ Influencer in Risk, Compliance and Regtech. He is a Member of the B20 International Business Leaders’ Group and its Climate and Resource Efficiency Task Force. He currently serves as Strategic Advisor on Corporate Responsibility and Sustainability, and Senior Associate at the law firm Frank Bold LLC. 

Pandemic and War 

It’s now four years since major U.S. business pronounced the end of shareholder primacy in the Business Round Table’s revised principles of corporate governance. Likewise, it’s been three years since the World Economic Forum published its Metrics for Stakeholder Capitalism, against which companies would measure, and be measured, in their progress towards meeting environmental, social and governance (ESG) goals. 

Fast-forward to this week’s World Economic Forum in Davos, Switzerland. 

The Covid-19 pandemic and Ukraine war have combined to collapse demand, 

sky-rocket inflation and interest rates and to critically damage global supply chains. They question whether corporate commitment to stakeholder interests has been and can possibly be realised. 

Nevertheless, the Stakeholder Capitalism session in Davos presented an optimistic view of progress. Two hundred companies reporting, according to the Forum’s stakeholder metrics, with 50 doing so for the third year in a row. Put together with emerging global standards for ESG disclosure being developed by the International Sustainability Standards Board, these are described as providing a baseline for companies to be transparent on ESG performance.  

“If you are below it, we shouldn’t be doing business with you,” was forcefully said by one of the initiative’s key backers, Brian Moynihan, CEO at the Bank of America.  

ESG Backlash 

However, the whole concept of Stakeholder Capitalism has also come under attack in the past year, with some on the political right, especially in the U.S., advocating that ESG is inconsistent with fiduciary duty. Meanwhile, there are cries from the political left but also from regulators, that too much of the new disclosure represents no better than ‘greenwashing’ by business.  

Moynihan was dismissive of the ESG ‘backlash’ in the political arena. “We’ve been around for 240 years and are used to the ebbs and flows. We pursue long-term value and that won’t be derailed by politics,” he said. 

“It’s much more in America than in Europe,” commented Nicolai Tangen, CEO of the Norwegian Sovereign Wealth Fund, “Where investors lose money, ESG drops down the priority list. The oil and gas companies became more vocal because prices went up. They made it a political question. I just don’t get it. It’s not politics but pure common sense.  

“ESG goes hand in hand with running a good business. If you are polluting and don’t have a plan, no one is going to want to work for you, nobody’s going to want to buy your products, banks won’t lend you money, your insurance company won’t insure you. You won’t have a viable business.” 

Meanwhile a later session ‘Don’t let greenwashing fears stall credible action” was strong on ideas for action, but strangely quiet on the issue of greenwashing itself.  

From Disclosure to Action 

There was, however, a big emphasis in Davos of moving from disclosure to action and perhaps this should be the real test of the authenticity of stakeholder capitalism itself? 

“The theory of change is that disclosure drives insight and insight drives action. Action is what investors want to see,” Katherine Garrett-Cox, UK CEO of the Gulf International Bank told the Forum.  

Recent evidence is inconclusive about how far this is really happening. 

Just Capital, which ranks U.S. companies on their stakeholder performance, reports that companies who are signatories to the Business Round Table (BRT) statement are consistently higher in the rankings than their Russell Group 1000 peers. They have a remarkable 66% lower direct and indirect greenhouse gas emissions per dollar in revenue. 

A study by Harvard academics Lucian Bebchuk and Roberto Tallarita published last year concludes with the bald finding that “the BRT Statement did not represent a meaningful commitment and was not planned or expected to bring about meaningful improvements in the treatment of stakeholders.” 

Both the American Economic Liberties Project and the Financial Times say stakeholder capitalism has failed to impact mergers and acquisitions, to address monopolies and corporate power.  

It was also notable that there was little discussion in Davos on whether investors are really using the new disclosures to allocate capital, which is the key rationale for ESG standardisation. They ensure that company ESG information is both comparable and investor-grade in quality and that capital markets drive sustainability goals. 

Nevertheless, there were clear indications that a new focus on moving from saying to doing should be the emphasis going ahead. 

“We need to go beyond the report to actually want companies are doing,” said Geraldine Matchett, CEO at Royal DSM. “The biggest credibility gap is long-term targets versus short-term action–companies have to have internal targets linked to incentives for three years ahead. Embed the micro steps to commit to the long-term action.” 

Indeed, moving companies to time-bound practical action to demonstrate their genuine ability to meet sustainability goals, may well be the way to convince sceptics on both sides.  

Making a visible difference which can be understood and valued in its own right as well as in the broader context. This may be the best next step. 

A Role for Boards 

Matchett insisted this is not just a matter for companies but must be part of the governance of the company. 

This was amplified in the later session when Nicolai Tangen warned company Directors to “sharpen up”, saying company boards are currently “failing on climate. Only 17% of companies in our portfolio have credible climate transition plans. Executive pay is out of proportion. It is the worst time to show corporate greed. Boards do not have enough women. 

“Increasingly we are voting against board members and voting against boards,” he added.  

This is telling criticism of board performance on ESG, especially given current debates in Europe on whether to act on directors’ duties.  

Biodiversity 

It is now over three decades since the game-changing Montreal Protocol on ozone. Last December’s landmark agreement of a Global Biodiversity Framework agreed in the same city, led to much talk in Davos on turning the agreement in to–that word again– action.  

Here too, the test for Stakeholder Capitalism is whether businesses take different decisions, that there is an acceptance that business models will change.  

“We pulled out of projects in which we hadn’t got verified ESG data,” Suzanne DiBianca, EVP & Chief Impact Officer at Salesforce told the Forum.  

In a separate session on Business Action in Nature, CEO of chemicals company Yara International, Svein Tore Holsether, was challenged that action on land degradation would involve his company in fewer sales.  “Yes, it’s not about selling more fertilisers, but better fertilisers,” was his refreshingly unapologetic reply. 

Priorities 

Other priorities to advance the Stakeholder Capitalism agenda discussed at the Forum included: 

• Larger companies leading efforts towards ‘net zero’ with small and medium-sized enterprises in their supply chain. 

• Ensuring efforts towards stakeholder capitalism metrics are fully embedded across the accountancy system. 

• Seeking consensus, especially between Europe and the United States, on whether sustainability metrics are subject to single (financial) or double (financial plus impact) materiality tests. 

• Ensuring efforts are not restricted to climate action but extend to social and human rights issues too. 

• Making companies aware that they must engage and be prepared now, not “wait and complain later”. 

I confess to having been personally part of the work in the World Economic Forum which produced the “ESG: Advancing the Reporting Ecosystem” report, which was a direct precursor to formation of the metrics for Stakeholder Capitalism. 

Whilst not a perfect process, I freely admit, we could not foresee the accelerated progress which has been made towards sustainability reporting standardisation, even four years ago. However, the clear promise of Stakeholder Capitalism is that companies are managed to maximise returns to stakeholders not simply shareholders.  

It is a radical thesis which it is fair to suggest many stakeholders would still question, if this a credible commitment by business? 

It is the question which every senior executive should be asking for his or her company. But this year’s World Economic Forum suggested that it is a commitment from which businesses would not retreat.  

As Anish Shah, CEO of India’s Mahindra Group said, “Investors like the fact that we’re a purpose-driven company. Purpose is even more important in tough times. Purpose will always come first.”