Will the 2020s produce businesses that serve all stakeholders?
As we edge into the new decade will the talk of fairer economies, better business, saving the planet and tech for good turn into action?
2020 has already been hailed as the decade of delivery and in many ways, it needs to be. These themes formed the basis for discussion at the 2020 Economic Forum last month and some have been on the agenda since the first meeting 50 years ago, most notably the idea put forward by Professor Klaus Schwab at the Forum’s inauguration in 1971 that business should serve all stakeholders – customers, employees, communities as well as shareholders.
Much of what was discussed at Davos builds on themes that gained significant prominence during 2019 and which will undoubtedly shape business thinking as we move into the 2020s.
The idea that business should move away from shareholder primacy to serve all stakeholders hit the headlines in 2019 when the Business Roundtable published a new statement on the purpose of a corporation. The new statement was signed by over 180 CEOs who committed to lead their companies for the benefit of customers, employees, suppliers, communities and shareholders.
According to Jamie Dimon, Chairman of JP Morgan Chase & Co. and the Business Roundtable, major employers recognise that investing in workers and communities is the only way to be successful over the long term. This, in turn, will deliver an economy that serves society at large.
Such moves reflect the wider geopolitical situation and a recognition of the instability caused by inequality. While governmental decisions will clearly be instrumental in addressing these issues, business has a major role to play and the agenda has been set. GoodCorporation has been assessing its clients’ impacts on stakeholders for almost 20 years and promoting the logic that there is a clear virtuous circle which arises from treating stakeholders well. It is encouraging to see that interest in this type of analysis is really starting to gather pace.
The refocusing of corporate purpose chimes with the changes made to the UK Corporate Governance code which places greater emphasis on the relationships between companies, shareholders and stakeholders.
As we move into 2020, the issue will be whether the rhetoric turns to reality. The first reports under the new Code will be published later this year and we will be watching to see how businesses choose to report on these matters, in particular the alignment between corporate culture with company purpose and business strategy. The aim of these changes is to ensure properly sustainable business, but the danger is that we will see lots of PR puff about purpose, with little true analysis of the underlying culture and the real treatment of stakeholders.
We also expect to see a continued focus on pay ratios, the gender pay gap and board diversity, as well as on issues such as human rights and data protection. Legislation is starting to drive change, in particular France’s Duty of Vigilance Law. Under this law, businesses are required to undertake a thorough assessment of human rights risks throughout their operations, implementing appropriate mitigation actions and monitoring schemes. Human rights risk mapping and mitigation are rapidly becoming the focus of our human rights works and this looks set to continue. It is also likely that there will be international moves towards mandatory human rights due diligence which has also formed a key part of our human rights work to date.
In addition, we are seeing a real convergence between human rights and the fight against corruption. It has long been understood that the rights of individuals living in corrupt societies are compromised by the impact of bribery whether it be the need to pay a bribe to access a service or, more seriously, being at risk from collapsing infrastructure built to substandard regulations signed off with a bribe. This convergence and how to address it will be the focus of The United Nations Working Group on Human Rights in 2020 with a report on its recommendations due to be published in June 2020.
While there are clear links between corruption and human rights, it is important that businesses recognise that addressing the two issues can not easily be done with a single approach. The reality is that businesses will need to take a distinct approach to the mitigation of both problems.
All of the above have an impact on business sustainability and this is playing out in the investment community. 2019 was seen as the year when ESG came of age. The assets flowing into ESG funds are rising rapidly. Morningstar data on UK flows showed that £4.4bn was invested in ESG funds in the first 10 months of 2019, up 53% on the previous year. Over the past five years, assets flowing into ESG funds have risen by nearly 2500%.
Despite the significant increase in ESG funds, some key challenges remain and will need to be addressed if the potential impact on sustainability is to be delivered. Mixed messages from the investor community make it unclear what investors really want from companies wishing to evidence ESG. As was said at Davos, sustainable investment decisions require data that is independent, measurable and comparable. Establishing this will be the next step on the ESG journey.
We have been measuring non-financial performance for almost 20 years. Using our GoodCorporation framework we have developed a solid and dependable way of measuring the full range of ESG issues using a scale which can be used to compare one company to another and to measure performance over time. Crucially this method incorporates stakeholder feedback on performance and is therefore almost impossible to ‘fake’. Given the increasing interest in credible measurement of non-financial performance, we expect this area of our work to grow strongly.
Saving the planet
No talk about sustainability would be complete without reference to climate. Melting glaciers, earthquakes and raging fires make it abundantly that the crisis needs to be addressed now, not some time in the future.
This message is resonating with populations globally, encouraged by the actions of Greta Thunberg and Extinction Rebellion. Businesses, particularly those in fossil fuels, are already feeling the impact with the UK’s National Theatre ending its partnership with Shell, NGOs bringing cases against other oil majors in France and some charities and investors announcing plans to divest from certain fossil fuels.
It seems likely that truly sustainable businesses will need strong and clearly evidenced green credentials; the days of lip service and greenwashing are long gone.
Tech for good
Technological progress in recent decades has been staggering. However, while the benefits for societies and individuals can be enormous, the potential for harm is equally great, particularly with the rapid growth in artificial intelligence (AI). Businesses operating in and at the vanguard of these developments have a duty to ensure that new and existing technologies are both developed and deployed ethically and responsibly.
Much has been written about governance and ethical codes for AI, including here on our blog. With the recent debate over Huawei underlining the global reach of tech, the need for internationally recognised codes and standards has never been higher and we expect more will be added to the debate in the coming months.
With ten years to go for signatories to deliver on the UN Sustainable Development Goals it is hoped that 2020 will be the start of a real decade of change. Society at large has both an appetite and a need for such a change. Much is being written about what needs to be done, but actions speak louder than words. In June, the PRI will begin to expel signatories who do not meet certain sustainable investment standards.
We know from the work we do with companies to assess, develop and embed responsible management practices that the best businesses can be a force for good. The evidence now suggests they are also the most sustainable.