- Doing good indiscriminately is a pitfall, because it’s not effective enough.
- A company cannot maximize its profits and minimize its environmental damage at the same time.
- Calculating how social value leads to profits makes it a means, instead of an end.
Author, speaker and consultant
Professor, ESCP Business School
Professor Klaus Schwab, the founder of the World Economic Forum, has called for the abandonment of both “shareholder capitalism” and “state capitalism”, which have proven to be incapable of meeting the world’s challenges. He suggests that a “stakeholder capitalism” – a term he coined in the early 1970s – would enable a “Great Reset” of the global economy.
In recent decades, a series of approaches that adhere to the model of stakeholder capitalism have been proposed for companies, such as the Triple Bottom Line (TBL), B Corp, Benefit Corporation, and most recently, the Business RoundTable declaration on the purpose of the corporation or McKinsey’s 5Ps. This is a sign that society’s expectations towards business are rising and that companies are increasingly aware of them. The bad news is that the number of different approaches is confusing. For a leader who sincerely wants to adopt stakeholder capitalism, the transformational path to making it actually work is not clear.
Three key pitfalls preventing companies from implementing stakeholder capitalism
For the last five years, we have been studying several dozen exceptional companies on three continents, of all types, sizes, and industries, which have managed to make it work. Conceptualizing their collective experience has brought to light three key pitfalls, which they avoided and which prevent other companies from implementing stakeholder capitalism.
In 2018, TBL inventor John Elkington recognized that over the last 25 years businesses had failed to serve all their stakeholders equally, instead putting the shareholder first. He asked for a recall of the TBL concept. More recently, during the 2020 pandemic, the New York Times reported that Business RoundTable companies have not served their non-financial stakeholders well. Other versions of stakeholder capitalism have also come in for criticism.
Aside from some companies more interested in their reputation than in making stakeholder capitalism actually work, most sincerely want to adopt it – but can’t. They can’t because they have not been able to avoid the following three pitfalls.
- Doing good indiscriminately
Doing good indiscriminately is a pitfall, because it’s not effective enough for others. Corporate philanthropy and CSR are surely positive and without them many projects would not see the light of day. Yet, they don’t leverage the company’s core competences and they don’t turn it into what Salesforce CEO Marc Benioff calls the “greatest platform for change”.
What we found through our research is that only when companies transform their core business processes to generate social value will radical benefits to society be generated; and only then will these companies fully align with their “better world” purposes. Put differently, they will steadily walk the walk, instead of tiptoeing and sometimes stumbling.
- Chasing more than one rabbit
The second pitfall current approaches are suffering from is what we call “chasing more than one rabbit”. Indeed, it is impossible to maximize several distinct and separate variables at the same time. We know this from the linear programming discipline and we also know it out of common sense. A company cannot maximize its profits and minimize its environmental damage at the same time.
Paradoxically, in his famous 1970 article, Milton Friedman got it right when he said that businesses have to chase only one rabbit. The problem is that Friedman suggested the wrong one: profit maximization.
- Calculating how to do well by doing good
Even if a company decides to focus on social value and expects profit to follow, it may encounter the third pitfall: calculating how the former leads to the latter. The problem is that such a calculation will make social value a means, instead of an end. This pitfall is perhaps the hardest to overcome because it arises from the deeply ingrained mindset of business leaders, which views companies mechanistically.
The road map to the altruistic enterprise
The companies we have been studying avoided these three pitfalls. They decided to take care of all of their ecosystem members – their customers, their suppliers and their local communities – through all of their core business processes and to do so unconditionally. We call them “altruistic enterprises” – a word from the Latin alter, “the other”.
Amazingly – as a consequence, not as a goal – they have enjoyed great economic success. Instead of calculating, they bet that unconditional care for their ecosystem members would organically lead to fair profits and it has worked for these altruistic companies for decades, including during the COVID pandemic.
Here’s just one example among the many we studied. Uno-X is the petrol stations division of the Norwegian retailer Reitan Group. Although it is not required to do so by any regulation, it decided to invest in – as-yet unprofitable – hydrogen stations and biofuels, and to ban palm-oil derivatives from the latter.
All these companies followed the virtuous spiral of the transformed leader.
And what about profits? Uno-X’s Finance Director told us: “In our meetings, we hardly ever talk about Ebitda or [key performance indicators]. In the executive team, we are more interested in leadership issues.” By this he means the issues of building a culture of trust and responsibility, where each employee is free to act in order to create social value unconditionally. And Uno-X has a track record to prove that such a culture has indeed resulted in great economic performance.
All these companies followed the virtuous spiral of the transformed leader, one whose single-minded purpose of social value creation for the company’s ecosystem attracts employees to share it; who then invites them to transform their business activities to attain this purpose; and who finally enjoys – together with employees – the results of the ecosystem taking care of them.
To sum up, the road to the altruistic enterprise avoids three pitfalls and offers companies engaged in diverse stakeholder capitalism approaches a way for the Great Reset to work.
While COVID-19 made the Great Reset even more urgent, it demands that we transform the very model that has been driving businesses for decades. This is not easy but one fact may help.
Every business was created in the first place to serve society, to provide it with a useful product or service. Evidence shows that profit is not a driver for most entrepreneurs, but rather the consequence of their creation of a service for others via their start-up. So, in a way, the road to the altruistic enterprise is a return to businesses’ DNA, to what they should never have ceased to be: a means to build prosperous and harmonious societies, all the while enjoying the profits needed to sustain themselves.
This article was originally published by the World Economic Forum under the Creative Commons licence CC BY-NC-ND 2.0.
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