In August 2019, the CEOs of 181 large US corporations signed the Business Roundtable statement redefining the purpose of a corporation. The statement indicated that businesses have a broader role to play in society, with responsibilities to multiple stakeholders, including employees, communities and the environment, not just shareholders. While the statement was a first step toward more inclusive and sustainable capitalism, the pandemic has increased society-wide focus on these commitments, accelerating demands for new ways of doing business that creates value for all stakeholders over the long-term.
By committing to a redefined vision for capitalism, with a more broadly defined corporate purpose, signatories signaled support to change the way their businesses distribute risks and rewards. However, a recent Harvard Law School review found most businesses did not consult their boards before signing. This suggests while there is an appetite to shift focus from CEOs, the governance structures required to ensure purpose-led objectives are achieved may not be in place. And in the year that followed, the economic impacts of the COVID-19 pandemic, meant many organizations had to make difficult trade-offs – and, in some cases, were challenged to meet their stakeholder expectations.
To meet continually rising expectations, boards are obliged to strengthen governance around new purpose-led commitments to consider all stakeholders. Every business has a “stakeholder stack,” typically an implicit prioritization of claims on firm resources. Corporate actions can reveal the stack, sometimes exposing when businesses fall short of intentions. To illustrate: a firm that pays dividends while shedding staff makes clear shareholder claims might be senior to some employees. Similarly, a firm that pays management bonuses despite abandoning environmental standards might signal that climate change is subordinated as a priority.
It may be useful for boards to frame discussions around the stakeholder stack by asking three key questions:
- Who are your stakeholders?
- What are their needs or expectations?
- How do you prioritize those expectations?
In this article, we highlight three major organizations who have successfully balanced shareholder and stakeholder needs through the pandemic. Next, we highlight potential new approaches to link to executive compensation, helping ensure purpose and principles drive practice. Finally, it is suggested boards might consider making their stakeholder stack explicit, helping ensure transparency and translating purpose into action.