For nearly five decades, CEOs viewed their primary responsibility as delivering shareholder returns, and subsequently acted in service of that goal. That has changed.
Over the past several years, societal expectations of corporations have evolved significantly, and with it, the role of the CEO.
Historically, returns to shareholders and corporate “purpose” were distinct subjects that rarely coexisted in the same conversation. The latter was often the domain of corporate social responsibility (“CSR”) departments, and largely peripheral to the core businesses of most companies. CEOs would engage in CSR activities – some with great commitment and passion toward causes that their company supported – but it was rare for senior leaders to view these efforts as central to their businesses, and only a relatively small cohort of investors consistently evaluated companies by this measure.
Today, there is an increasing awareness of the need to align purpose, long-term business strategy, and the interests of shareholders. A confluence of macro-economic and political factors, changes in the demographics of the workforce, and the increasing influence of corporations as societal institutions has brought us to this point.
This evolution hit a milestone in August 2019 when the Business Roundtable (BRT) – which comprises 200 of America’s most prominent companies – revised its “Statement on the Purpose of the Corporation.” Since 1997, the BRT has declared that, “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
In contrast, the 2019 revised purpose acknowledges the role of business in driving broader economic growth and opportunity for all, and pledges of commitment to all stakeholders, including customers, employees, suppliers and partners, surrounding communities and the environment, and lastly, shareholders.
In this new era, leaders grapple with effectively balancing the expectations of a confluence of stakeholders – beyond just shareholders – who are both impacted by, and influencers of, corporate behavior and success. While often erroneously labelled as CEO profile building or advocacy of personal political or social beliefs, for this essay ‘CEO activism’ is defined as the engagement of CEOs on issues that are not limited solely to the delivery of shareholder value, but are nonetheless still accretive to the long-term health, competitiveness and success of their companies.
Increased Scrutiny
At the heart of this shift is a heightened, more analytical focus by a wider group of stakeholders on a company’s role and actions when it comes to these various issues; this coupled with the growing influence and power of this wider group is redefining the role of the corporation and, concurrently the role of the CEOs who run such organizations. For a CEO, understanding these dynamics is vital for the success of the modern corporation.
Ten years after the global financial crisis, and despite sustained macroeconomic growth in most developed economies, political polarization has increased in many countries as a result of growing inequality and continued job displacement. Many individuals feel increasingly powerless, subject to economic and political forces beyond their control and influence. Add to this the crisis of personal privacy, and the reaction among many people has been profound disenfranchisement.
At the same time, power has become increasingly concentrated among large companies. This dynamic has triggered intense scrutiny from regulators, politicians and media. ‘Supra-sovereign’ companies – those with vast global employee populations and market values that exceed the GDP of some countries – are especially vulnerable to this trend. These companies wield extraordinary influence over economic and societal well-being, as well as consumer behavior. Due to the size and influence of these firms, their CEOs are often (and many times unwillingly) drawn into political and social issues, and feel intense pressure to take positions on issues that concern their customers, employees and the local communities in which they operate.
As has been the case throughout history, governments are closely monitoring the impact of these powerful companies on their constituents and CEOs find themselves caught in the middle of not only domestic political priorities, but also geopolitical transitions and tensions.
Finally, as awareness of the consequences of environmental degradation becomes increasingly commonplace, climate change and the environmental impact of corporate decisions are also central concerns among a wide array of stakeholders, from employees, to customers, policymakers and investors. Well-established business models are being upended in recognition that sustainability is becoming a matter of existential survival for many companies.
Expanded Role for CEOs
These issues increasingly require that leaders of large multinational companies also act as diplomats – representing and balancing varied stakeholder concerns across geographies – in interactions with government officials or in fielding press.
And there are myriad recent examples of CEOs harnessing their stature, and their authority to advance corporate policies or advocate on behalf of the corporation and its stakeholders. Patagonia Chairman Yvon Chouinard serves as such an example (alongside Patagonia CEO, Rose Marcario) building upon his founder’s story rooted in adventure and the outdoors, to incorporate environmental activism at the core of the company’s values. This is realized across employee policies, which encourage enjoyment of the outdoors, to policy advocacy – as a vocal critic of defunding the National Parks and rolling back endangered species protections, to product development incorporating recycled materials and limited ecological impacts, and philanthropic and volunteer efforts dedicated to environmental protection.
Even if CEOs choose initially not to take a position on an issue, they may be pressured to do so by their stakeholders. Frequently, employees demand that CEOs lead as a spokesperson – and advocate – for the internal body politic. Third-party stakeholders, such as unions and NGOs, are labelling CEOs based on their policies, or lack thereof, around issues such as workforce re-training, human rights, and climate change.
CEOs often face difficult dilemmas, such as placating one set of stakeholders at the expense of the priorities of another constituency or core business interests. The two-year evolution of the firearms retailing policy of Dick’s Sporting Goods is an illustrative example. Following the February 2017 mass school shooting in Parkland, Florida, Dick’s raised the purchasing age for firearms and ceased selling assault weapons, high-capacity magazines and bump stocks across all their stores, and destroyed all remaining assault weapon inventory instead of selling it to another retailer. While the move challenged some customer loyalty, it did not go against the company’s core sporting proposition, as they continued to sell hunting firearms and accessories. At the same time, the company began a pilot program to remove all firearms and ammunition from 10 stores, replacing the stock with local sports teams’ merchandise and other inventory. The program proved successful in sales performance across the pilot stores and was expanded to a further 125 stores in early 2019. While the company experienced a 3.1% decline in sales in 2018 fiscal year, which was attributed to the policy change, CEO Ed Stack nonetheless continued to advocate for gun control measures and sales rose 3.2% in the second quarter of 2019.
As the Dick’s case demonstrates, while the choices CEOs face are not always binary, they are undoubtedly complex and often require a balancing of stakeholder interests. However, by taking an ad hoc or reactionary approach, and not having a clear governing philosophy and strategic framework through which to engage stakeholders on these issues, CEOs face great risks to both their and their companies’ reputations.
A Framework for Action
Changing expectations and the potential risks to the value of the company and its ability to operate demand a rigorous approach to decision-making on social and political issues.
[#1] Broaden the Definition of Stakeholder Interests
The confluence of factors outlined above not only encourages traditional stakeholders to consider a broader range of challenges and interests, but also activates unconsidered additional stakeholders. The modern CEO must therefore review the company’s stakeholders in a more purposeful and intentional way.
Stakeholders should be assessed by their evolving priorities and expectations of a company – for example, examining whether the company’s employees, customers and shareholders will be negatively affected if a specific issue is not addressed and effectively managed. Assessments should map issues which stakeholders are not only affected by, but about which they also care or may be influenced by as a result of emerging trends.
The exercise of mapping out stakeholders and outlining their main priorities should also take into consideration the interconnectedness of these varying stakeholder priorities.
[#2] Assess Your Current Position
A CEO should also understand the company’s own track record on the set of core issues identified, as well as existing policies regarding such issues – if they exist. For example, before taking a stand on political action surrounding gender rights, a company should assess its track record on gender and LGBTQ workforce diversity and existing employee benefits and policies. Leadership should ask not only if an issue materially impacts or potentially contradicts the company’s stated culture and values, but also examine company actions and potentially related issues which might surface as a result. In addition, through benchmarking, a CEO can understand the company’s position relative to peers and competitors to identify changing expectations and emerging standards by which stakeholders may judge a position.
[#3] Re-prioritize
Alongside the board, a CEO should use the new assessments to decide how to prioritize issues and stakeholders through multiple lenses – essentially employing a 3-D matrix approach to examine the impact, likelihood and outlook of issues on both company operations and stakeholders. This exercise will achieve several objectives: understand the importance of issues to the company; understand the importance of the issue to stakeholders; understand the importance of the stakeholder to the company; and, understand the outlook of the issue and how that will affect both the company and stakeholders. In turn, a board and CEO will be well positioned to prioritize issues according to stakeholders while keeping central the impact on the company.
[#4] Identify and Address Vulnerabilities
Having assessed and newly prioritized the broader array of issues that ultimately matter to the company and existing positions, the next step is to identify potential vulnerabilities and determine if and how to address them. In addition to drawing from the assessment of the company’s existing positions and policies, this may involve an internal organizational review of suppliers and partners, as well as operational practices. When assessing any potential vulnerabilities, and possible action to address them, a cost-benefit analysis should examine not only company objectives and financial imperatives, but also impacts to stakeholders – ensuring a holistic view which also incorporates the negative outcomes for different stakeholders; what potential impact might be created with key stakeholders if the CEO does or does not engage on said issue?
[#5] Define Your Positions
Armed with a clear understanding of how issues affect the company, how they matter to which stakeholders, and what action the company will or will not take to address them, the company is now prepared to define its positions. Depending on the issue and how it is prioritized according to strategic objectives and stakeholders, this may mean building a strategy to take a public position or focusing primarily on internal organization and preparedness or perhaps, remaining neutral.
[#6/Ongoing] Build Resiliency: Review and Adapt
Companies should consistently monitor changing external dynamics. The modern CEO must take an expansive view to an external assessment and commit resources to monitoring developments outside of the traditional purview of an operating landscape assessment, anticipating potential events and scenarios, and translating them into potential implications for both the company and its stakeholders. This process of revisiting priorities and prior assessments will support in identifying core parameters for a company’s individual framework – consistently referring to company and stakeholder priorities – while also building resiliency by ensuring adjustments which adapt to changing times.
Conclusion
In this new normal, corporate purpose exists in service of business strategy and enhanced shareholder value. The role of the CEO is to drive the alignment of these principles by proactively engaging with this wider set of stakeholders, always keeping in mind the long-term viability and health of the company they lead. Adopting this philosophy will safeguard the company’s license to operate and prepare it as new dynamics develop in external and internal environments.