Calls for action on responsible capitalism provide WEF backdrop

If 2019 was a big year for talking about responsible corporate capitalism, then 2020 needs to be one of action, according to those who wish companies to move beyond a narrow focus on shareholder value.

Last year’s highest profile declaration came from the US Business Roundtable. The organisation declared in August that shareholders were only one group among multiple stakeholders to which companies should pay attention. Others included workers, customers, suppliers and communities.

But, with the World Economic Forum meeting this week in Davos for its 50th annual gathering, the statement has also invited suspicion — and cynicism.

Marga Hoek, author of the book The Trillion Dollar Shift, which explores how businesses are implementing the UN’s sustainable development goals, warns that while the roundtable statement helped to fuel the debate, it “won’t have any effect because it’s such a low bar and is so vague”.

David Blood co-founded Generation Investment Management with former US vice-president Al Gore in 2004 to pursue a sustainable investing policy. “You could feel smug about where we are in ESG [environmental, social and governance issues] and sustainability,” he says. “But as ideas mainstream — particularly a complicated idea like ESG — suddenly you could find yourself dumbed down to the lowest common denominator and get mediocre insights.” In 2020, Generation will focus on “driving rigour on ESG and sustainability”, Mr Blood adds.

Today, company owners and executives find themselves besieged by invitations to sign up to charters, checklists, principles and benchmarks on purpose.

Yet purpose is hard to define. It is also prone to different interpretations by stakeholders.

The British Academy, the UK body for the study of the humanities and social sciences, launched its Principles for Purposeful Business in 2019 as part of its Future of the Corporate programme. The programme’s academic lead, Colin Mayer of Oxford’s Saïd Business School, said he wanted to encourage companies to compete not only “in terms of corporate profits but in terms of corporate purpose”. Improved measurement of “impacts and investment by companies in their workers, societies and natural assets” is central to the academy’s proposed reforms.

Numerous efforts are under way to gauge companies’ non-financial commitments with the same accuracy, and consistency, as accounting standards measure financial performance. This will be a key to benchmarking performance across sectors and countries.

“You have to articulate how the purpose creates value and helps you drive value,” says Hywel Ball of professional services firm EY. Mr Ball has been coordinating the Embankment Project for Inclusive Capitalism, a project with asset owners, asset managers and companies to develop better measures.

The focus is also shifting, particularly in public markets, to the behaviour of investors themselves. The heads of big asset management groups such as BlackRock and Vanguard have made public calls for businesses to make a positive long-term impact on society. But their individual fund managers are often accused of continuing to pursue a short-term profit agenda.

Ms Hoek believes that a stakeholder approach and shareholder returns are not mutually exclusive. She points to the work done by Feike Sijbesma, chief executive of DSM, the Dutch group that has shifted over its long lifetime from coal mining, via petrochemicals, to nutrition, life sciences and materials. During DSM’s most recent phase of transformation, Mr Sijbesma had to convince shareholders to back his more sustainable strategy.

Privately held companies have more leeway to serve long-term stakeholder interests. At the same time, they cannot afford to neglect short-term success.

Mark Preston is executive trustee overseeing the Grosvenor Estate, the Duke of Westminster’s portfolio of financial and business interests. It has the advantage of more than three centuries of history, family backing, and a long-term purpose that it calls its “common thread”. “There’s no trade-off between commercial and social benefit if you have a long-term view,” he says.

There’s no trade-off between commercial and social benefit if you have a long-term view

This allows Grosvenor to set some demanding long-term targets. Its UK and Ireland estate, for instance, last year committed to end net carbon emissions from its buildings by 2030. But Mr Preston says the business also uses short-term metrics, to avoid becoming complacent. Meanwhile, the company is insistent on new investments being “common thread-compliant”.

That can mean taking tough decisions to wind up some investments or reject new opportunities. This highlights another likely trend in 2020: the need for companies — and investors — to understand the often complex trade-offs and sacrifices involved in pursuing a purpose-led approach.

Ms Hoek predicts that companies will have to start thinking about whether to take a radical or an incremental path towards responsible capitalism.

It may take a while to dispel suspicion of “purpose-washing” — namely, presenting an acceptable public face while pursuing environmentally and socially unfriendly business policies. “Transparency builds trust as long you do what you said on the tin,” says Mr Ball. Companies not doing that, he adds, “are going to encourage cynicism”.

But dodging commitments to ESG principles will become harder, says Mr Blood. Increasingly, investors will not put up with companies that use wider purpose merely as a marketing tool.

Mr Blood also notes that there is a harder-nosed justification for the setting of ESG goals: “The business case is very, very compelling. If this were just a branding exercise and didn’t have the rigour of facts behind it, we would have a whole different conversation.”