Putting Employees, Customers, and Community First Leads to More Growth

Based on a recent McKinsey Global Institute study, companies that take a long-term view, with stakeholder capitalism in mind, perform better than their counterparts.

In its study, McKinsey identified five principles for businesses to make stakeholder engagement a reality.

Principle 1: Get the board on board

For stakeholder engagement to become real, commitment needs to start from the top — that is, the board. Boards are responsible for the long-term interest of the company; it is their role to define its mission and purpose. It’s easy for CEOs to make soothing pledges; however, in the absence of support from the board, nothing will change, as it is the board that sets and governs strategy.

In this regard, there are two distinct but complementary approaches to consider. One is to appoint new board members with a diversity of experience, skills, and interests who can reflect the concerns and priorities of a wider range of stakeholders, rather than shareholders alone. That might mean inviting in nonprofit leaders, local government officials, or consumer groups. An educational charity with which one of us is involved has done exactly this and seen impressive stability over the past 15 years. That is essential for the group to serve its purpose — and also for businesses that want to take a longer-term view.

The other approach is to change corporate governance guidelines to clearly assert stakeholder, rather than explicitly shareholder, priority. In some jurisdictions, this may not be legally possible. Where it is, however, there can be no stronger signal. And without it, it is fair to question the depth of a company’s convictions.

Changing corporate governance guidelines is no easy task. As an interim step, it should at least be possible for boards to institute “listening sessions” to hear from employees, community leaders, and outside experts.

Principle 2: Set and track environmental goals

A core principle of business is that what gets measured, gets managed. So companies with a stakeholder ethos should commit to putting their principles into practice by publishing concrete, achievable, and measurable goals. This approach is particularly apt in relation to the environment, where there are clear and readily measurable metrics to track; factors such as “community engagement” may be important but are also less empirical.

So far, the record shows that in many cases, companies that have made environmental sustainability a priority have found that it is also good for the bottom line, by reducing energy costs, for example, or by cutting the cost of packaging. Improving environmental performance is a marathon; it requires training and commitment. Publishing specific targets is a way for companies to show that they are committed to putting in the miles.

While the conventional oil and gas industry is not particularly well regarded by many green groups, a number of the majors show how setting and tracking environmental goals can be done. At BP, the publicly-stated ambition is to be a net-zero-emissions company by 2050 or sooner. It has set out ten specific carbon aims, with incentives to employees to reach them. There are intermediate targets to watch, such as installing methane measurement tools at all sites by 2023 — and BP regularly publishes its data.

Principle 3: Work with suppliers, old and new, to build capabilities and skills

Even companies that are sincere in their efforts can play a powerful, if indirect, role in social or environmental damage via their supply chain. One way to limit such damage is to leverage their expertise and economic clout to improve the practices of subcontractors and suppliers. The principle is clear — a company’s sense of responsibility must go beyond its direct operations — not only in economic and environmental terms, but also regarding its impact on consumers, contractors, and their employees. Starbucks, for example, checks that its suppliers are paying their workers the minimum wage, do not employ children, and conserve biodiversity. During the COVID-19 outbreak, a number of companies have been paying their suppliers early, or extending credit, to keep them going.

In 2017, Walmart established Project Gigaton, with the goal of avoiding a billion metric tons of greenhouse gases from its supply chain by 2030. To get there, it has pursued a wide variety of initiatives, such as participating with some US-based suppliers on power-purchase agreements from renewable sources, bringing economies of scale to cut costs. The effort has engaged more than 2,000 suppliers around the world, and progress is tracked, both collectively and individually. Three years in, the retailer is almost a quarter of the way toward the goal. It also trains and monitors suppliers to ensure fair labor practices, and has cut off dozens that have systematically failed to comply with its standards.

Principle 4: Serve consumers’ long-term needs

The internet spreads culture and information, but also vile lies. Paint can be used to daub insults as well as to make great art. Cars move goods and people — and can crash. The point is that almost any product can do harm through poor use, malign intentions, or sheer bad luck. And while business does not want to overstep its bounds, it also does not want to be indifferent to predictably bad outcomes. Recognizing how goods and products affect consumers and then taking action to reduce the negative consequences is part of stakeholder capitalism.

Take food, for example. Eating is something people enjoy, and it is also, obviously, a necessity. But people do not always think about what they eat — which is one of the reasons that global obesity rates almost tripled between 1975 and 2016, according to the World Health Organization, portending all the health consequences that implies. In response, a number of major companies have made changes in how they formulate their food. For example, the Swiss food giant Nestle has reduced the amount of sugar used in its breakfast cereals and also added whole grains and vitamins.

Principle 5: Treat your employees with respect and invest in their futures

Labor is not just a cost to be managed. Employees are human beings and on that basis alone, should be treated with dignity. In business terms, they are also an incredibly valuable resource, well worth tending to in the present and investing in for the future. Companies that do so could benefit in the long term, by being more attractive to possible hires, and inspiring greater loyalty and productivity among those they already employ.

With about 50,000 employees, California-based Salesforce is the world’s largest customer relationship management company. It regularly appears on lists of “best companies to work for” because of its high level of commitment to its staff. For example, it offers them seven paid days off per year to volunteer in their communities. In the office (virtual or physical), employees can use specially developed tools to resolve internal queries. As befits a tech company — Salesforce uses data to improve on the employee experience. At every stage of an employee’s career, data points are used to make better, faster talent decisions. Additionally, the company invests heavily in workforce development. Employees clearly are buying in: more than half of new hires come from internal referrals. And there is more to come: in September Salesforce announced that it would hire 12,000 new employees in the next year.

According to McKinsey, a company is more than a balance sheet. It is an expression of human bonds, a living entity that is sown and grown and whose harvest is lives and livelihoods. Stakeholder capitalism is a way to plant those seeds.

Source: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-stakeholder-capitalism

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