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Business leadership in society

Beyond ESG – Collaborative Governance the Next Challenge to Business

By October 21, 2021No Comments

The pandemic and growing climate crisis have thrown into sharp relief the critical role large firms now play in society, not just as economic entities, but as key social institutions expected to work with and alongside government to address the myriad of systemic challenges now facing us, from climate change to inequality. In his 2018 letter to CEOs, Larry Fink, CEO of BlackRock, the world’s largest institutional investor globally, summarized this new role for business well: “We… see many governments failing to prepare for the future…As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have

never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

The 2021 Edelman survey of 33,000 people in 28 countries confirmed this new expectation environment, with 68% of respondents saying CEOs should step in when the government does not fix social problems and 65% saying CEOs should hold themselves accountable to the public and not just to the board of directors or stockholders.

Earlier this year, HMI launched the Corporate Responsibility Research Project to further explore the key challenges that this new environment poses to business and business leaders. In Beyond ESG: The Role of Business in Collaborative Governance, we identify four key challenges for today’s business leaders.

Moral Leadership

If business is now viewed as the most trusted and competent institution and CEOs are expected to take leadership on social challenges, what does that mean for the role of business leaders as moral leaders, both within their firms and beyond? Within their fence line, CEOs are now challenged to mobilize their employees around a clear social purpose that serves all of the firm’s stakeholders and to champion the values the firm stands for. They are also expected to take leadership outside the firm and speak out in the public square on social issues and systemic challenges, from racial justice to climate change, and publicly affirm their commitment to ensuring that the firms they lead serve all stakeholders, not simply shareholders.

Self-Regulation

The corollary to moral leadership is self-regulation, setting the rules for responsible operation of the business. For most of the 20th century, government could be relied on to impose regulation that set a framework for corporate responsibility and ensured a company’s license to operate. We now live in a global economy in which there are few international regulatory standards and in which technological innovation is driving the development of new industries faster than public policy and regulation can keep pace. If governments alone can no longer be relied on to provide a license to operate, firms now must proactively engage with their stakeholders to do this. Companies must increasingly work with their industry peers and civil organizations to create voluntary “soft law” codes and meet ESG standards for their industries if they are to maintain trust and their license to operate with their key stakeholders and customers. Today, there are few large firms that are not part of one or more of these standard-setting initiatives. Industry and multistakeholder initiatives such as the Responsible Business Alliance (electronic industry), Responsible Care (chemical industry) and the Forest Stewardship Council offer certification to their members to assure customers and stakeholders of compliance with their standards.

Delivery of Public Goods and Services

While responsibly managing the impact of a firm on society is a key starting place for today’s business leaders, they are also being looked toward to mobilize the resources of their firms to work with government and civil society to ensure social welfare and the health of the operating environment on which their business depends. This is about more than championing corporate philanthropy; it is about taking leadership in working with government and others in creating social partnerships that align the full spectrum of the firm’s capabilities and strengths in helping address systemic challenges. As companies work to meet this challenge, as in the “self-regulation” field, we have seen a dramatic increase in corporate engagement with multistakeholder and industry initiatives. In recent research, HMI identified over 150 business-led or supported initiatives in this field, working on issues ranging from climate change to human rights and poverty alleviation, most of which have been established within the last two decades. We also see growing support for the Sustainable Development Goals (SDGs), established in 2015 by the UN General Assembly, as an overarching framework to shape and report on their social engagement work.

Business Model Transformation

As they do more to partner with government and others to address systemic issues, business leaders now face an even greater challenge: developing new business models that are sustainable for the long term. Much of the focus in this discussion centers on the role of business in building a regenerative economy. For business leaders, this means moving beyond the conventional business model, where many of the impacts of the business on society are not accounted for, to a full-cost accounting model in which the business takes into account all those it impacts and works to creates a net-positive impact.

This is, of course, a bold challenge but we are starting to see significant actors making a commitment in this direction. Doug McMillon, chair of the Business Roundtable and CEO of Walmart, the country’s largest retailer, put it this way in his announcement last fall committing Walmart to becoming a regenerative company: “The work ahead requires learning and commitment from each of us. We have created an astonishing moment of truth. The crises we face are not a science problem. They are a human problem. Technologies are important, but the ultimate power to change the world does not reside in them alone. It relies first and foremost on reverence, respect and compassion—for us, all people and the natural environment that sustains us all. This is regeneration. And this is what I commit Walmart to.”

We believe that addressing these challenges will require a much more robust approach to corporate governance and leadership than is currently in place and will take us well beyond ESG, with its focus on responsible management within the corporate fence line. It will require business leaders who have a good grasp of the systemic policy issues of the day. It will require corporate boards with policy experience capable of providing oversight not only of ESG but also of the increasingly activist positions on social issues that corporate leaders of large firms are now expected to take. At HMI, we are working to encourage conversation and action to meet these challenges, working with business leaders and others. We welcome your thoughts. Further resources can be found here.