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Shareholder alert: Stakeholder capitalism is about to get some teeth

Shareholder alert: Stakeholder capitalism is about to get some teeth
(Illustration: AdobeStock)

The World Economic Forum is a grand font of glib, feel-good slogans. ‘Inclusivity’, ‘passion’, ‘cohesiveness’ abound. Perhaps one of the most overused terms is ‘stakeholder capitalism’, a perennial catch-all for general corporate goodness. But what does it mean? A new report produced by the world’s big four auditing firms in conjunction with the WEF  is tentatively suggesting some specifics, and what it contains may require shareholders and executives to knock back a stiff shot of the hard stuff.

For employees, the news is good. In the words of the Financial Times, the workers of the world have been rebranded as “stakeholders”. For managers, the world is about to become a much more complicated place, if such a thing is possible.

The era of “stakeholder capitalism” is upon us. The theme of the World Economic Forum’s 50th annual meeting is “stakeholders for a cohesive and sustainable world”. The idea is not new. The very first Davos Manifesto in 1973 included “A Code of Ethics for Business Leaders” which said, “the purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonise the different interests of the stakeholders”.

In 2001, the WEF’s Board of Trustees established the International Business Council (IBC), a community of concerned and committed business leaders. Over the past three years, the IBC has conducted the CEOs’ “Modern Dilemma” series, a dialogue on the leadership challenges of balancing short- and long-term business pressures.

The discussions contributed to the World Economic Forum Compact for Responsive and Responsible Leadership 4, which was issued in January 2017 in Davos and has been signed by more than 140 global business leaders. Of course, the WEF was not alone in these discussions. Only a few months ago, the Business Roundtable in Washington endorsed the growing shift in corporate responsibilities away from shareholders and in favour of employees, suppliers, society, and of course the environment.

 The idea is catching fire — and not a moment too soon, employees would argue. But what does it actually mean?

In its discussions, the IBC identified the lack of a generally accepted international framework for the reporting of material aspects of environmental, social and governance (ESG) aspects of business performance and risk. That gap has now been filled, and this is where managers and shareholders should be sitting up and taking notice.

The WEF, working in collaboration with the four largest accounting firms – Deloitte, EY, KPMG and PwC – has now prepared a proposal for consideration in four pillars: Principles of governance, Planet, People and Prosperity.  The full report is here: Toward Common Metrics and Consistent Reporting of Sustainable Value Creation.

The suggestions massively expand what companies should report on. Under principles of governance, for example, in the ethical behaviour section, companies will now have to report the “total number and nature of incidents of corruption confirmed during the current year but related to previous years, and total number and nature of incidents of corruption confirmed during the current year, related to this year.”

“The Planet” section includes what you might expect, emissions levels and so on, but also land use and water use. Under “People”, companies will have to compile ratios of standard entry-level wage by gender, compared with the local minimum wage for specific categories of workers, employees payment by gender, injury rates, and training provided. Under “prosperity”, companies will have to account for the number of jobs created, the net economic contribution and investment levels.

The Financial Times article mentioned above points to why this may be necessary: too many at the top seem incurious about the realities of life for people lower down their org charts. YPO, a global network of 28,000 CEOs, found this month that fewer than 40% of its members had ever measured employee trust within their businesses.

“As they recalibrate their priorities, the executives in Davos need to reflect on whether they are putting as much effort into hearing their employees’ voices as they are into engaging with investors,” the article suggests.

The question is whether they will and whether employees trust them enough to believe the changes will be real. For executives, this might be a hard pill to swallow. But in the long term, it could well build confidence in the system, something sorely lacking currently, and, as it happens, better returns. BM

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