This book has presented a navigational guide for boards and management teams desiring to take a fully integrated approach to running their companies in order to capture the greatest possible synergy between shareholder and other stakeholder interests, which is to say between business and societal value creation, short- and long-term performance, and strong operational and financial performance, on the one hand, and diligent stewardship of environmental, social, governance and data (ESG&D) risks and opportunities, on the other. It is a handbook for turning the directional principles of stakeholder capitalism into the concrete practices that drive stronger sustainable enterprise value creation.
The book has presented an action agenda for implementing this more integrated approach to corporate governance and oversight, corporate strategy and implementation, corporate reporting and accountability, and corporate partnerships and systemic change. This is a business leadership agenda for the twenty-first century, a period in which profound changes in the technological, economic, environmental, social and political context in which firms operate are compelling such integration. In this concluding chapter, we look at what this implementation agenda means for the craft of business leadership itself.
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8.1 Integrated Thinking and Decision-Making
Creating sustainable enterprise value through the rigorous practice of stakeholder capitalism requires three principal additional aspects of leadership from C-suite executives and board directors, especially the CEO and chairperson. The first is organizational, how they institutionalize the integration of ESG&D considerations within the company. The second is systemic, how they understand, engage with and build effective external coalitions to achieve large-scale change in the broader system in which they operate. And the third, which underpins everything else, is personal, how they approach their individual decision-making responsibilities in an increasingly complex, disruptive and multi-stakeholder operating context.
First, creating stronger sustainable enterprise value through stakeholder capitalism requires the board and C-suite to institutionalize the integration of ESG&D considerations into their firm’s core governance, purpose, strategy, resource allocation, operations, performance metrics, reporting and corporate culture. This is the terrain covered by Chaps. 4, 5 and 6 in Part II of this book. Organizational leadership of this nature is needed to ensure the disciplined identification and balancing of financial and non-financial, shareholder and other stakeholder, short- and long-term considerations in decision-making at all levels of the organization. It requires leaders to establish or enhance relevant policies, processes and management systems, ranging from oversight and compliance mechanisms to incentive and accountability structures. These need to be robust enough that changes will endure after the current leaders have left, while also being capable of adaptation to changes in external trends, risks, opportunities and societal expectations of business.
Second, creating sustainable enterprise value through stakeholder capitalism requires systems leadership. As illustrated throughout the book, companies are part of a complex ecosystem of stakeholders who need to be engaged, balanced and aligned with the firm’s strategic direction. Firms are also stakeholders themselves in the vitality and resilience of their operating context. Company executives, especially the Chair and CEO, have a key role to play in this regard in partnership with leaders of other companies, governments and civil society organizations to help overcome some of the governance gaps, market failures and norms that impede progress towards more inclusive and sustainable growth. As such, they increasingly need to be coalition-builders, ambassadors and open collaborators who are capable of inspiring and achieving system-level change beyond their own companies’ operations and value chains.1 As outlined in Chap. 7, effective systems leadership requires individual leaders and their institutions to be able to cultivate a shared vision for change, empower widespread innovation and action, and enable mutual accountability for progress, through regular stakeholder engagement, metrics and credible governance structures.2
Third, underpinning both organizational and systems leadership is the crucial importance of personal leadership and good judgement. Leading a company in today’s increasingly complex, multi-issue and multi-stakeholder operating context is massively challenging. So-called win-win choices and opportunities to effectively manage shared risks to the company and its stakeholders or create shared value for the company and its stakeholders are not always the reality that leaders face. Trade-offs between financial and non- or pre-financial considerations or between different stakeholder interests will inevitably arise that are not resolved by the governance processes, policies and management systems that have been installed. These trade-offs will require personal judgements and decisions to be made at the C-suite and board levels. If full integration of ESG&D considerations through the institutionalization of governance processes and management systems represents the science of business leadership for sustainable enterprise value creation, then how CEOs, executive teams and boards approach these difficult, complex decisions represents its art. An art that must be based fundamentally on leaders having and living by a clear set of values, a sense of purpose, and good judgement.
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CEOs, executive teams and boards need to demonstrate, day in and day out, that their company’s values and purpose statements are not simply words on paper. They must demonstrate by their own behaviours, actions and decisions that the how of sustainable enterprise value creation is as important as the what, that it’s not only important what a company does with the profits it generates, but how it makes them in the first place. They must be willing to take decisive action and hold individuals to account, for example, when one of their number or other managers in the firm do not adhere to these values, even if the person in question is a top financial or operational performer. They must be prepared to take responsibility, both internally and externally, when things go wrong, especially when poor decisions or a crisis negatively affect the resilience and reputation of the company and people’s lives or the planet.
Some of the greatest and most understandable mistrust and cynicism among employees and other internal and external stakeholders results from CEOs, senior managers and directors failing to “walk the talk” on the values they espouse and the public commitments they make. Having rigorous compliance systems in place and integrating ESG&D considerations into performance metrics and incentive structures are essential, but they can only go so far. To achieve widespread integrity beyond compliance and a fully integrated approach to business leadership requires influencing behaviours and corporate culture more broadly. It requires business leaders who will not compromise on their responsibility as role models for integrity and integrated approaches, who recognize the challenges of cognitive bias and the importance of including and listening to diverse perspectives, and who are well prepared to be held personally accountable for delivering a more integrated approach to performance and value creation.
Of course, judgement and decision-making are the essence of leadership. CEOs, executive teams and boards are routinely called upon to balance short- and long-term considerations in business strategy and financial planning. The art of business leadership as it relates to sustainable enterprise value creation begins with recognizing that difficult decisions weighing financial against non- or pre-financial considerations and shareholder versus other stakeholder interests, while often more complex, are no different in principle from traditional business decisions that require balancing long- and short-term considerations, for example, whether to approve a big investment in a new plant, major acquisition, promising new technology or novel marketing campaign to establish or strengthen a brand. All of these decisions require estimating and balancing the prospects of higher immediate profitability versus stronger medium- to long-term enterprise value.
That said, the practice of stakeholder capitalism—the careful weighing of diverse stakeholder interests and of financial priorities with material and salient ESG&D considerations—may often require judgements to be made regarding the relative value of preserving or strengthening certain of the firm’s intangible assets—for example, its reputation with customers, standing with regulators and communities, the rights, capabilities, well-being and loyalty of its employees or the basic social and environmental viability of its enabling environment, upon which business continuity ultimately rests. These intangible considerations are often difficult to reduce to numbers—to discounted cash flows—and thus to an apples-to-apples comparison with the near-term financial cost and opportunity of the other side of the decision. However, they are no less material or significant for it. There is no getting around weighing them in a rigorous fashion against more immediate and financially quantifiable considerations and taking such an integrated approach to decision-making.
Integrated thinking means that a CEO, executive team and board always and simultaneously conceptualize their firm’s plans and decisions for creating value in tangible and intangible, financial and non- or pre-financial, short term and long term, and shareholder and other stakeholder dimensions. Integrated decision-making means not only institutionalizing governance processes and management systems that routinely and rigorously mediate such potential trade-offs but also creating a decision-making culture at the top that embraces complexity and diverse perspectives and that makes debate and considered judgements about ESG&D-related trade-offs a core part of the C-suite’s and board’s duties, carving out the necessary time in their agendas to do so when such matters are referred to them. As chief stewards of the company’s values and value protection and creation, the CEO, executive team and board must fully internalize these matters in their own thinking and decision-making agendas. They cannot be segmented from “core business” decisions and subordinated through their delegation to communications, stakeholder relations and other functional officers. At the same time, these officers need to be engaged directly in the thinking and decision-making of chief executive, financial and operating officers.
In summary, the integrated thinking that is inherent in sustainable enterprise value creation requires an expanded set of skills in business leaders and a more complex approach to their preparation and execution of decisions. ESG&D-related priorities and trade-offs presented to the CEO, executive team or board for decision may often hinge on a judgement about the relative value of intangible and more tangible assets and investments. The science of valuing intangible assets, particularly those related to ESG&D factors, is in its infancy. Initiatives like the Value Balancing Alliance3 and the Impact-Weighted Accounts Project4 at Harvard Business School, and the Impact Management Project,5 are doing important but still early stage work in this area. Thus, for the time being, integrated decision-making is mainly concerned with drawing qualitative—which is to say human—judgements rather than making quantitative calculations.
8.2 Developing Future Business Leaders
As outlined in the previous section, stakeholder capitalism places a special premium on the ability of business leaders to integrate the financial and non- or pre-financial, the short and long term, the tangible and intangible, and the shareholder and stakeholder dimensions of a decision. As such, the art of sustainable enterprise value creation is the art of integrated thinking and decision-making, as well as systems leadership.
The education, training and development of business leaders must therefore expose students and young executives far more to ESG&D business issues and the transformational trends and human, social and political contexts that give rise to them. Examples include the intersection of climate change, water scarcity and enterprise value creation; the intersection of workers’ rights, protections and voice and enterprise value creation; the intersection of anti-corruption and enterprise value creation; the intersection of algorithmic bias and transparency and enterprise value creation, and so on. Similarly, experiences of students and young executives need to incorporate opportunities to cultivate the craft of facilitating dialogue, debate and decisions involving the types of trade-off that are outlined above.
This cultivation of integrated thinking and decision-making and systems leadership in the next generation of business leaders requires three practical changes:
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First, exposure to ESG&D issues, business-and-society dilemmas and stakeholder relations must begin well before ascension to the C-suite, starting with vocational, academic or professional education and training, and continuing in the journey through the company ranks. This is currently the exception rather than the rule in many contemporary training and education institutions and business cultures.
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Second, the type of stakeholder mapping and engagement discussed in Part II must become routine and interactive for current and aspiring managers and business leaders. Since ESG&D matters often cannot be reduced to quantitative, like-for-like comparisons with the financial data of profit and loss projections, the quality of information about them will depend on the depth of not only desk analysis but also stakeholder conversations. On particularly strategic or sensitive matters, these conversations will need to be direct, that is, conducted face to face by top executives and board members themselves. All future business leaders must be equipped with the tools for effective multi-stakeholder mapping and engagement.
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Third, since such decisions can have major direct and indirect implications for people’s rights and dignity and the quality of their lives and livelihoods, they may evoke an unusually strong personal sense of investment in them by colleagues within the firm and by external stakeholders. Effective leadership in such circumstances means not only arriving at a considered judgement by allocating sufficient time for analysis, discussion and debate ex ante but also creating adequate space for explanation, ongoing feedback and possible adjustment, ex post. As such, future business leaders also require training and experiential exposure to understand how their decisions might impact people, for better or worse, and how to develop appropriate institutional and personal accountability mechanisms.
In summary, the rigorous practice of stakeholder capitalism requires an integrated form of business leadership—what we’ve referred to as integrated thinking and decision-making—to achieve the integrated approach to corporate governance, strategy, reporting and partnerships outlined in Part II. These are the essential raw ingredients of sustainable enterprise value creation. They are the means through which stakeholder capitalism is expressed by firms. As such, they should be a core component of business education, training and talent development processes as well as a key requirement in vocational, academic and professional qualifications. Above all, they should be gained through on-the-ground experiential learning and feedback, and as such, they should be an essential element of job assignments and assessments, and of mentoring and championing high potential managers at all levels of an organization.
What does this leadership and integration of sustainable enterprise value creation look like in firms that are in the vanguard of implementing stakeholder capitalism? We conclude with a summary of some of the priority ESG&D issues that all companies should consider and a summary of the practical leadership actions that were outlined in Part II and are relevant for any company.
8.3 Summary of Leadership Actions for Creating Sustainable Enterprise Value
As we have outlined throughout the book, there are now countless research studies, management frameworks, reporting guidelines and “agendas for action” that are available for companies to draw on in their journey towards creating sustainable enterprise value. Some of these are broad, generic guidelines, and others are focused on specific industry sectors, countries or ESG&D issues.
Despite industry and geographic differences, it is increasingly clear that every chairperson, CEO, board and executive team should set targets for their company to address climate change mitigation and adaptation priorities as well as goals to manage other major environmental risks and opportunities, establish policies and due diligence processes to respect human rights, including core and other labour standards, and support for diversity, equity and inclusion, and engage transparently with stakeholders on their progress against these. Appendices A, B and C provide more in-depth guidance on some of the specific ESG&D risks and opportunities that have been identified for cross-industry reporting by the Measuring Stakeholder Capitalism initiative, industry-specific reporting by the Sustainability Accounting Standards Board (SASB) Materiality Map and climate change reporting by the preliminary prototype of a climate-related financial disclosure standard developed by a group of leading voluntary standard-setting organizations.
The following table summarizes the leadership actions that we identified in Part II of the book as being important for any company aiming to create sustainable enterprise value, regardless of industry sector, geography or ownership structure. They provide a set of leadership criteria that all boards and executive teams can assess themselves against in the areas of corporate governance and oversight, corporate strategy and implementation, corporate reporting and accountability, and corporate partnerships and systemic change.
Box 8.1 Summary of Leadership Actions for Creating Sustainable Enterprise Value
Corporate governance and oversight
| |
|---|---|
Revise governance principles and guidelines to include stakeholders and ESG&D priorities
| • Explicitly recognize the board’s responsibility for oversight of management in determining corporate purpose and strategy for creating long-term value for stakeholders, including but not only shareholders • Provide language on the board’s responsibility for oversight of ESG&D risks, opportunities and performance in addition to financial and operational risks, opportunities and performance |
Enhance board oversight on aligning the company’s purpose, strategy and capital allocation with creating sustainable enterprise value
| • Support management as stewards of corporate purpose • Provide robust and regular guidance on corporate strategy (spend more time on strategy; align strategy with corporate purpose; integrate the company’s sustainability and other stakeholder-oriented strategies with corporate strategy) • Review ESG&D implications of capital allocation and investment decisions |
Expand oversight of risks to include material and salient ESG&D risks
| • Ensure oversight of material and salient ESG&D risks • Strengthen preparedness for and resilience to systemic shocks and crises (improve preparedness; support crisis management and response; strengthen recovery and future resilience) |
Focus on diverse succession planning, talent development and an inclusive culture
| • Integrate ESG&D into oversight of CEO and executive performance, compensation and succession • Provide guidance on corporate culture • Serve as champions of inclusion and diversity • Review and support long-term talent development |
Integrate ESG&D priorities into oversight of executive performance, incentives and accountability
| • Integrate ESG&D priorities into business planning and performance oversight • Align incentives to corporate purpose and hold executives accountable • Commit to integrated reporting of the company’s performance and prospects |
Enhance board organization, composition and engagement
| • Integrate ESG&D into board organization and structure (at the full board and in board committee charters) • Ensure board composition is fit for the complex operating environment • Enhance board engagement with internal and external stakeholders |
Corporate strategy and implementation
| |
Embed purpose, values and ESG&D priorities into corporate strategy and operations
| • Ensure stakeholder consultation, especially with employees in defining or revising purpose and identifying priorities • Identify and prioritize the social and environmental issues most material to the company’s core business and salient to its stakeholders • Communicate purpose and ESG&D priorities clearly and consistently, accompanied by measurable goals and targets and supported by policies, standards and incentives • Commit to measuring and accounting for performance on a regular and consistent basis |
Strengthen management of material and salient ESG&D risks
| • Invest time to engage stakeholders in rigorous materiality analysis and due diligence • Integrate ESG&D risks into enterprise risk management and risk appetite frameworks • Commit to dynamic reviews and stress-testing of risks • Leverage technology to improve risk management—and manage the tech risk • Address both acute risks and broader business model or systemic risks • Combine quantifiable metrics and science-based targets with qualitative insights and stakeholder surveys |
Invest in innovation to drive inclusive and sustainable growth
| • Invest in breakthrough technologies, products and services to deliver scalable and/or “leap-frog” solutions to global challenges such as improving access to more affordable and sustainable energy, food, health and financial inclusion • Develop innovative business models (inclusive business models; circular economy and regenerative models; shared use and omni-channel models) and innovative financing mechanisms, such as internal venture capital funds and innovation award programmes as well as external partnerships or joint, blended funding mechanisms with other private or public sector financiers • Participate in innovation coalitions and accelerator platforms |
Promote employee well-being, talent, diversity and inclusion
| • Invest in employee health, safety and well-being • Make diversity and inclusion a priority • Invest in employees’ future skills and opportunities • Enable employee engagement and participation |
Establish robust and accountable mechanisms for external stakeholder engagement
| • Understand and map key stakeholders and issues • Establish external advisory councils |
Corporate reporting and accountability
| |
Implement integrated reporting in the firm
| • Embrace ESG&D materiality and design it into the annual report, including by reporting against the IFRS climate change standard; the 21 WEF/IBC measuring stakeholder capitalism cross-industry core metrics and recommended disclosures, which are a baseline best-practice composite of GRI, CDSB, TCFD and SASB elements; and the SASB industry-specific metrics that pertain to the firm’s main business lines as per its materiality map • Assemble the building blocks of the integrated annual report • Review, assure and approve for issuance |
Accelerate the creation of an international reporting standard through collective business leadership
| • Support the International Organization of Securities Commissions (IOSCO) and the International Financial Reporting Standards Foundation (IFRS) initiatives to develop a baseline global sustainability reporting standard • Encourage national regulators to adopt this standard outright or build on top of it, in order to ensure the global comparability of a substantial base of such reporting |
Corporate partnerships and systemic change
| |
Develop a holistic, multi-level strategy for engaging in partnerships
| • Empower numerous project-level, financing and operational partnerships • Strategically leverage key industry-level, pre-competitive business alliances • Prioritize a small number of multi-stakeholder institutions, platforms and networks |
Support pre-competitive business alliances to scale industry-wide progress
| • Leverage the reach and influence of representative business organizations • Establish targeted corporate responsibility leadership coalitions within specific countries, locations, industries or focus on specific challenges |
Participate in multi-stakeholder platforms to drive system-wide change
| • Mobilize resources to make essential systems work better for people and the planet • Establish shared rules and standards to spread responsible business practices • Advocate and campaign for changes in public policies and attitudes |
Be a corporate champion for partnerships, even when they are difficult
| • Assess the value of each partnership in terms of its leverage, ability to “level the playing field,” legitimacy and leadership impact • Ask the right questions—do we have a shared purpose and understanding of the ecosystem and its stakeholders; have we developed rigorous processes and operational alignment; have we established good governance and mutual accountability for progress |
As we have outlined throughout the book, disruptive and often transformational changes in the operating environment for most companies and industry sectors continue to accelerate and gather momentum in terms of their complexity and their materiality to business risks and opportunities. No business is immune from these changes. In this dynamic new operating context, no firm’s ability to create and sustain value can be taken for granted. There is simply no room for complacency or insularity in management teams and boards. The boards, executives and companies that will lead in the twenty-first century will be those that are integrating priority ESG&D issues and stakeholder interests into their corporate governance, strategy, reporting and partnerships, through the set of actions described in this book. These are the companies that will help to shape the pathway towards sustainable enterprise value creation and, ultimately, towards stakeholder capitalism and more just, inclusive and sustainable growth.
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