Last month the chief executives of 181 global corporations declared, in a statement through the Business Roundtable, a commitment to stakeholder capitalism – a belief that a corporation or business must exist not only to create value for shareholders, but also for stakeholders, including customers, suppliers, employees, and the communities in which they work.
It was front page news, in the US and abroad. Reactions ran the gamut, from applause to skepticism to outright derision.
Stakeholder capitalism is not a new idea. Thirty-five years ago, Ed Freeman argued that this approach was both practical and wise. Five years later, in On Becoming A Leader, leadership guru Warren Bennis asserted that “Leaders keep their eyes on the horizon – not just the bottom line.” And in 2009 Lawrence Susskind and I devoted a chapter of Built to Win to explaining how and why organizations that prioritize narrow short-term goals at the expense of long-term value end up losing out at the negotiating table over time. We described the actions taken by Jamie Houghton, the CEO of Corning, after its share price plummeted from $20 to $1 in 2001. Houghton didn’t panic. Instead, he gathered the top 200 leaders of the company, reiterated the company’s values, and emphasized that the company would continue to invest in long term R&D while taking prudent, but not drastic, measures to manage short term costs. The company remained focused on long term objectives. Today its stock is at $30.
Yet for leaders in a globally competitive environment, balancing competing objectives is anything but simple. There are enormous pressures to produce short-term profits in ways that put long-term success at risk. It’s one thing to talk about creating value for all stakeholders, and another to act as if it truly mattered. For publicly owned companies, in particular, there are numerous traps and dynamics that can overwhelm good intentions.
Take executive compensation, for example: too many CEOs are still rewarded for meeting or exceeding earnings estimates, no matter how results are achieved. The need for immediate profits ends up depleting longer-term business initiatives, partnerships, R&D, investments in suppliers and logistics, leadership development programs, and organizational stability. Incentives too often tilt deliberations toward what psychologists call “motivated reasoning” — the tendency to arrive at decisions that favor outcomes we prefer.
Farther down the ladder, incentives can also create deleterious effects: As Lisa Ordonez and her colleagues noted in 2009, the benefits of setting goals for sales teams must be considered in light of the harmful consequences, which include “a narrow focus that neglects non-goal areas, a rise in unethical behavior, distorted risk preferences, corrosion of organizational culture, and reduced intrinsic motivation.” On the buy side, procurement leaders too often focus on cutting spend without adequately accounting for increased risks, lost opportunities, operational disruptions or sidelined innovation and investment that might, in the long run, dwarf the savings achieved.
And while many global companies now have a corporate social responsibility officer, their influence at the CEO/CFO/COO decision table isn’t guaranteed. Indeed, for too many companies, CSR efforts are a decoration rather than a driver of strategic decisions.
Finally, the drive to please analysts on Wall Street too often lead to change initiatives and reorganizations that trim staff, technology or R&D to save money in the short-term, creating longer-term problems, losses, and decreased employee engagement.
To turn words into action, CEOs and Boards must take six steps to align measures and reward success criteria that reflect a focus on stakeholder value in the short- and long-term:
- Clarify what the company believes and how it will behave in its interactions with all stakeholders – even at moments of intense competition (i.e. commercial negotiations).
- Continually reinforce the message that everyone, including senior leadership, is accountable for making decisions and communicating in ways that reflect those values.
- Create explicit ‘balanced’ success criteria for strategic decisions and key negotiations (on the buy and sell side) that reflect not only short-term gains, but also stakeholder interests and outcomes, and behavioral norms.
- Ensure that performance measures and rewards are aligned to the success criteria.
- De-emphasize quarterly earnings guidance and educate institutional investors on the company’s values and long-term strategy.
- Recruit board members who understand what leadership guru Charles Handy does, that “The purpose of a business, in other words, is not to make a profit, full stop. It is to make a profit so that the business can do something more or better.”
The jury is out on whether and how quickly companies will make the transition from words to deeds. But no journey is more important in the coming decades, if we are going to create broader prosperity and a more politically and environmentally sustainable model for what it means to “do” business.
You can read more about this topic in Built To Win: Creating a World-Class Negotiating Organization (Harvard Business Press).
To learn how you can make negotiation a core bottom-line competitive advantage while upholding organizational values, visit us at www.moviusconsulting.com.