There is a drumbeat growing in support of the idea that investing in employees, the community and all stakeholders, as the Business Roundtable (BRT) chairman Jamie Dimon has said, “is the only way to be successful over the long term.”
Last fall, BRT announced that a corporation is to broaden its purpose from an exclusive focus on shareholders to one that addresses the interests of all stakeholders. In January, the consulting firm Gehrson Lehman Group surveyed more than 100 North American CEOs and found that 90% of them agreed with the BRT’s statement.
It is time for boards to operationalize the idea so that it can be carried out.
To help boards create a set of stakeholder management practices, I propose an action plan based on the following guidelines:
The board must play an active role in selecting the company’s purpose. The decision cannot be left exclusively to the CEO to determine because CEOs come and go, while the board has a long tenure. The board will need to evaluate the plan, set goals and allocate resources, then review the stakeholder engagement programs and evaluate their performance on a regular basis.
The company’s financial health is still critical. A company has to be able to deliver robust shareholder value to be in a position to fund and sustain the projects that increase stakeholder value.
Choose your purpose as strategically as you choose any new business initiative. There are hundreds of societal issues and no one company can take on everything. Rather, choose societal issues that can be executed with the company’s core capabilities.
AT&T, for example, a company that has long operated with a view toward investing in communities that use its telecom services, developed community engagement initiatives that include AT&T Believes, which contributes to revitalizing neighborhoods and helping the underserved find employment in 12 U.S. cities.
Focus first on societal issues that are a direct outcome of your business. Blackrock CEO Larry Fink’s 2020 letter to clients makes it clear that a company’s impact on society is going to be increasingly under scrutiny, not just at the hands of activist groups, but also from the world’s largest asset manager. “With the impact of sustainability on investment returns increasing, we believe that sustainable investment will be a critical foundation for client portfolios going forward,” he wrote.
A business that truly engages its stakeholders is proactive in recognizing how its products can serve society better. If, for example, a company that makes plastic products starts investing in research to develop biodegradable alternative substances with a plan to use those materials, the company can then present statistics showing the extent to which it has reduced its own carbon footprint while doing something about lessening plastic waste. Toy companies Mattel and Lego have made a stab in this direction, announcing that they will replace all of their petroleum-based plastic products with recyclable or plant-based material by 2030.
In India, Tata Chemicals has integrated biodiversity conservation into its business process. In the state of Gujarat, where the company’s salt and soda ash production units are located, a pernicious weed threatens the region’s marine and forest life, so in 2004 Tata Chemicals set up a biodiversity park to preserve animal and plant species.
Next, if the company wants to address broader societal issues, do it in a way that will enhance its competencies and resources. Once the company has addressed its immediate stakeholder needs it can turn to developing additional social impact programs. But to help assure that these efforts will be sustainable, invest in projects that the business itself can tap into for new resources.
The most readily apparent example is worker training. At a time when the need for knowledge workers is growing, every corporation can help society by contributing to education of the global workforce — and thereby help create a reskilled or upskilled pool of talent for the corporate world. The digital technology and IT services provider UST Global is building such a workforce with its Step IT Up America program, which provides STEM, cybersecurity and agile project management training for underrepresented groups — particularly women, people of color and veterans. Graduates of the training programs are placed in jobs in their communities either with UST itself or with partnering organizations.
The company should be highly communicative about its purpose. An effective stakeholder plan is intertwined with innovation, growth and competitive advantage, so it is to the company’s advantage to give it a high profile. In addition to publicity, the annual report should discuss the company’s stakeholder engagements, showing the progress that has been made over the year in terms of business outcomes, societal impact and relevance to the company’s chosen purpose.
A board committee should review the progress in achieving purpose. The board should appoint a committee to oversee how the company is doing when it comes to purpose and conduct an annual review. My recommendation is to make it a role for the audit committee, because the review should consist of both an internal audit of the company’s progress and an external audit by a third-party firm. The third-party firm can conduct a cultural survey providing industry comparisons, qualitative feedback and recommendations.
Even though measurements of success are not going to be as precise as balance-sheet and share-performance figures, the reviews can use algorithms such as the IRIS standards and the Global Impact Investing Rating System, which are designed to measure the success of impact investing. Systems like these can factor in some quantifiable results, such as how many jobs were created, how much reduction in greenhouse gas emissions resulted, or how many lives have improved.
Increasingly, directors are going to be called upon to show stakeholders, in transparent and measurable terms, how the company is doing in terms of investing in society and delivering the desired outcomes.
Boards that are proactive in addressing all of their stakeholders will enhance the company’s relevance in some of the most important ways. These include reputation, brand value, and talent recruiting and retention, especially among the young generation that has made their interest in purposeful companies abundantly clear.
Ram Charan is a business advisor, author and speaker who has spent the past 35 years working with many top companies, CEOs and boards.