In the latter half of 2019, two influential organizations codified a significant shift in expectations for corporate priorities. The first came from the Business Roundtable in August, when the vast majority of its membership—including Apple, Amazon, and JPMorgan—endorsed an amended Statement on the Purpose of a Corporation. The second, in early December, came from the World Economic Forum in the form of a revised Davos Manifesto (the first since its original release in 1973).
Both declarations point to the same mandate—that companies should shift from satisfying just shareholders toward a more holistic approach that incorporates an array of voices and priorities (e.g., customers, employees, and society at large)—otherwise referred to as stakeholder capitalism. Each document is underpinned by an understanding that the decades-long focus on maximizing financial value for shareholders is no longer a viable or prudent approach to managing a company and overseeing risk.
This revived theory of stakeholder capitalism is the result of tremendous pressure from the world's largest institutional investors. They have increasingly come to realize that their passive investments are permanent capital, and that divesting from certain environmental, social and governance risks is no longer possible in standard index vehicles. For them, ESG has become a proxy for good risk management and long-termism, two primary concerns today, particularly evident during the coronavirus pandemic.
Moreover, companies are beginning to realize that considering such ESG risks (and, importantly, their opportunities) is good business. Unilever is the classic example of an issuer that's taken this approach for over a decade. In its 2019 20-F submission, Unilever stated that its purpose, supported by a Sustainable Living Plan, was crafted after gathering the views and priorities of “approximately 300 stakeholders, including more than 130 external experts” and “over 40,000 employees through a ‘Have Your Say’ survey.”
It has become abundantly clear that investors are asking management and directors to expand their scope of duties. This expectation goes beyond the Milton Friedman philosophy of simply maximizing shareholder profits (barring mergers and acquisitions or change-in-control situations). Companies now aim to improve the ways they capture (and measure) risks and opportunities related to a broader group of stakeholders. In fact, many institutional investors posit that ESG risks and opportunities are part of the board's fiduciary duty that directors are expected to oversee.
A New Era of ESG
For some, the mere mention of ‘ESG’ and concept of stakeholder capitalism can trigger anathema or aversion. Some on the financial side of the house believe ESG concerns can be “squishy”; likewise, legal may believe that they already solve for these concerns in existing enterprise risk management systems. Both can be true.
What is important for management is this: If the world's largest institutional investors believe that a stakeholder-driven approach and proper ESG management is linked to the long-term wellbeing of a corporation, then boards have an inherent fiduciary duty to provide oversight of those matters. Accordingly, it would behoove management to inform the board of this changing landscape as soon as possible, propose sensible adaptations, and filter material ESG risks and opportunities into management and board oversight processes.
The movement that has culminated in the surge of current ESG initiatives and disclosure of data will likely mean an increase in the reach of stakeholder capitalism in the 2020s. Investors will inevitably call on companies to include disclosure of unique material ESG risks and opportunities specific to not just their industry, but to their company. The stakeholder-driven approach undoubtedly enhances a company's ability to better identify what those may be.
Moreover, the societal consequences and expectations of a more human-centered form of capitalism—something stakeholder capitalism promises—is likely to emerge from the coronavirus pandemic of 2020. In other words, this era of leveraging a stakeholder approach to better identify, manage, and disclose ESG risk and opportunity is here to stay.