Business For Good

Leaders tackled the globe’s biggest challenges at the World Economic Forum in Davos under the theme “Creating a Shared Future in a Fractured World.”

With an emphasis on corporate leadership and accountability, the meeting amplified increasing stakeholder and investor calls for the private sector to assume greater responsibility in society.

Entrepreneurship for Good

Traditionally, this space was occupied by bold social entrepreneurs, innovators, and philanthropists who have dared to think big to improve the state of the world, oftentimes in isolation and without much interaction with other types of stakeholders. But we are seeing a wider group of global stakeholders converging to seek entrepreneurial avenues towards societal impact.

There’s marked shift in thinking amongst the more traditional capitalist players - corporations, banks, and investment funds - as they reconsider business’ role beyond financial returns as defined by economist Milton Friedman and consider their overall impact.

As these two worlds come together, unique partnerships are developing across industries and types of organizations, tapping into technology, innovation and entrepreneurship to tackle some of society’s most difficult problems. As a result, we are seeing unique opportunities for multi-stakeholder cross-learning and collaboration.

In a nod to this drive towards inclusivity, the World Economic Forum nominated seven women to co-chair the event: IMF CEO Christine Lagarde, IBM CEO Ginni Rometty, Isabelle Kocher, chief executive of French energy supplier ENGIE; Fabiola Gianotti, director-general of the Switzerland-based European Organization for Nuclear Research (CERN); and Chetna Sinha, founder and chair of India's Mann Deshi Foundation, which supports female entrepreneurs.

The women "represent both the public and private sectors, international organizations, organized labour, academia and science, as well as civil society and social entrepreneurship," the WEF announced. They “lend a strong voice to all parts of society, ensuring a multi-stakeholder approach."

Stakeholders Drive Accountability

Corporate stakeholders are driving the expansion of the corporate role in public affairs. On the one hand, shareholders, employees, and consumers are increasingly scrutinizing corporate behaviour, asking for evidence that they are not only ‘doing no harm’ (a CSR approach) but also improving society, as evidenced by their impact on broader challenges such as gender or income inequality. Participation by the private sector is seen as crucial to meeting society’s biggest challenges, represented by the ambitious 17 UN Sustainable Development Goals, which aim to eradicate poverty and hunger, foster safe and inclusive societies, and combat climate change by 2030.

There is a growing concern that individual governments are not capable of addressing today’s broad international challenges on their own, as they are subject to short political cycles and faced with weakening international cooperation. For example, 64% surveyed by the 2018 Edelman Trust Barometer said CEOs should take the lead on change rather than wait for the government.

Investors Require Impact Metrics

On the other hand, greater transparency and access to data is laying corporate behaviour bare and raising red flags with investors. When assessing corporate viability, investors are increasingly analysing corporate Environmental, Social, and Governance (ESG) performance, heeding the old adage “what gets measured, gets managed”.  That’s because purpose-driven companies that rank high on ESG indexes outperform their peers in the long term, recent research shows. US investors seeking ESG data on companies more than quadrupled in the first half of 2017, according to Morningstar. They are fuelling demand for more sophisticated ESG data and impact measurement methodologies.

In a strong signal in support of ESG measurement, the biggest investor in the world, Laurence D. Fink, founder and CEO of Blackrock, sent a letter to the world’s largest companies in January warning he would withdraw his support without evidence they are contributing to society. Blackrock manages more than $6 trillion in investments through 401(k) plans, exchange-traded funds and mutual funds.

If a company doesn’t engage with the community and have a sense of purpose “it will ultimately lose the license to operate from key stakeholders,” Fink warned.

Another US asset management giant, Vanguard, released a public letter in September calling on all public companies to improve their climate disclosures and other factors such as gender diversity on corporate boards. The investment company described climate change under its risk-oversight category, calling it “an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance.”

One of Europe’s biggest insurers, Swiss Re, plans to move its $130 bn investment portfolio to ethically-based benchmark indices. The insurer will use MSCI’s ESG indices instead of traditional benchmarks. The insurer AXA also said it will sell all of its tobacco investments.

Peter Vogel
Vogel
is IMD Professor of Family Business and Entrepreneurship and Debiopharm Chair of Family Philanthropy. He is an alumni of the World Economic Forum (WEF) Global Shapers Community. Natalia Olynec is Senior Writer and Researcher at the IMD CEO Learning Center.

Governments Boost Pressure

Both national and local governments are also examining corporate behaviour more closely. Canada is creating an independent watchdog to monitor and investigate claims of human rights abuses by its companies operating abroad.

In some cases, governments are applying financial pressure in addition to political levers. New York City announced it is suing the largest listed energy companies saying they were aware of their contribution to climate change in public while minimizing the link in public. The city also plans to divest its government employee pension funds, which have $189 bn in assets, of holdings in fossil fuel companies. New York’s five pension funds hold $5 bn in 190 fossil fuel companies.

Corporate leaders are taking note of the shift in sentiment. They are setting aside their often piecemeal, philanthropic CSR efforts in search of a broader strategy that integrates their core business with measurable societal impact. The number of companies directing corporate citizenship from the C-Suite has increased nearly 75 percent compared with five years ago, according to Boston College Center for Corporate Citizenship (BCCCC).

An increasing number of CEOs are discussing corporate purpose as part of their strategy setting and dialogue with stakeholders, a study by the EY Beacon Institute and Oxford University shows. Public discourse about corporate purpose has grown five fold since 1994, the study notes. The conversation is converging around value creation for and with a broader set of stakeholders.

Businesses should shift from maximizing Total Shareholder Return to a new strategic focus on Total Societal Impact (TSI), the total benefit to society from a company’s products, services, operations, core capabilities, and activities, a Boston Consulting Group recommends. The strategy requires leveraging a company’s core business to create scalable and sustainable impact.

Lessons from Social Entrepreneurs

As corporate leaders struggle to make sense of how these new expectations could translate to action, they should draw lessons from the experiences of social entrepreneurs, the pioneers in applying a business approach to societal problems.

· Harness Tech for Good

Digitization and Artificial Intelligence are the latest business buzz words feeding concerns of growing inequality and job insecurity. But digital technology has also facilitated the development of unique platforms to provide timely information, health care, education, and jobs for hard to reach small scale suppliers. It also allows companies know their audience, measure their impact and to track their products deep into their supply chain. For example Unilever has already begun a one-year pilot using blockchain technology to trace is tea from Malawi to the UK and reward farmers with finance via major banks for those that adopt and maintain sustainable practices.

· Reject Poor Solutions for the Poor

Davos Co Chair Chetna Sinha created a bank and business education by and for rural poor women, when no financial institution would serve them. After 10 years Mann Desi Bank is now serving 90,000 women with 400,000 women receiving business education boosting their income generating capacity.  Simply because they are illiterate or subsistence farmers doesn’t mean they don’t expect quality.  “The poor don’t want poor solutions,” she said.

· Join Partnerships to Shape and Scale Impact

Collaborating with likeminded companies creates an ecosystem that help maintain standards, trigger collective action, and help realize corporate values. The UN Global Compact has provided a framework for business coalitions across a spectrum of sustainability principles.

One example is the Sustainable Apparel Coalition, which was formed by 175 companies, such as Walmart and Patagonia, after the collapse of unsafe garment factories in Bangladesh. The coalition, representing 40% of the global apparel industry is working to increase transparency around responsible business practices down the supply chain by applying an index and online tools. The increased scrutiny has also inspired individual initiatives such as Nike’s efforts to use less material and H&M’s work on increasing the safety of dyes and encouraging consumer clothes recycling.

· Cultivate Paradoxical Leadership Skills

Adding a second bottom line that focuses on longer term goals in the face of short term uncertainty is a daunting challenge.  Crucial to success are an integrated strategy, clear communication, and inclusion of specific KPIs throughout the organization. To succeed, leaders need to balance the conflicting, and seemingly paradoxical, demands that come from the dual commitments of commercial success and social impact. This shift may require an emphasis on different critical leadership skills. When executed well, awareness of inconsistencies in the business can often lead to creative and beneficial alternative solutions that benefit a broader set of stakeholders. The ability to manage these competing demands can become a source of success. For example, Fair Trade organizations tackled the challenge of volatile commodity prices for products like cocoa and coffee by creating local farming cooperatives, ensuring famers fair prices over time and extending credit. [1]

To be sure, the debates over the best models and the measurement of private sector impact are unlikely to be resolved soon, but it is clear there is a shift in expectations of private sector contributions to societal change. New frameworks and solutions will require unconventional partnerships, innovation, fresh perspectives and collaboration across sectors.

Text: Peter Vogel and Natalia Olynec

[1] Smith, W., Besharov, M., Wessels, A. and Chertok, M. (2012). A Paradoxical Leadership Model for Social Entrepreneurs: Challenges, Leadership Skills, and Pedagogical Tools for Managing Social and Commercial Demands. Academy of Management Learning & Education, 11(3), pp.463-478.

Opinions expressed by Forbes Contributors are their own.

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