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21st century governance challengeBusiness leadership in society

Pandemic and political crises reveal new role and challenges for business

By February 2, 2021No Comments

The current pandemic and growing climate crises have thrown into sharp relief the critical role large firms now play in society, not just as economic entities, but as key social institutions and political actors. A decade ago, would we have imagined a scenario where business organizations are on the front lines of the fight to preserve democracy and to remove a president from office? (“This is chaos,” a statement from the conservative American Manufacturers Association read. “This is sedition and should be treated as such. The outgoing president incited violence in an attempt to retain power.”) Would we have anticipated leading social media platforms taking responsibility for “moderating” the content on their sites and banning the President from using their platforms, citing the risk that he would incite further violence? Would we have foreseen that large institutional investors would be at the forefront of action on climate change and social justice, pushing the companies they invest in to reduce their greenhouse gas emissions and commit to a goal for carbon neutrality, while also setting diversity targets and addressing the issues of inequality and injustice on which the pandemic has focused attention?

Each of these illustrates the increasing role and responsibility of business in society. Pivoting 180 degrees from the Milton Friedman doctrine that the only social responsibility of business leaders is to maximize returns to shareholders, leaders of large firms in particular now find themselves as leaders of “social” institutions taking on “political” and statesmen roles and sharing responsibility for the health and “governance” of the society on which their economic success depends.

Does the public support this new role for business? The answer is clearly yes. In a 2021 Edelman survey of 33,000 people in 28 countries, 61% said they “trust” businesses more than government or media, which are now only trusted by 53% and 51% of people, respectively. Business was also the only institution seen as both ethical and competent and, not surprisingly, is now looked toward to take leadership, 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. These expectations for leadership are even greater among employees, with 86% saying it is important for the CEOs of the companies they work for to speak out on issues like climate change, diversity and immigration.

These expectations and the changing role of business in society pose four key challenges for 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. In his 2018 letter to CEOs, Larry Fink, CEO of BlackRock, the world’s largest institutional investor globally, summarized this challenge 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. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”


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. That is no longer the case. 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. The clearest example of this is the social media industry. In the absence of regulation and with mounting public concern, large social media players are now forced to set the rules themselves, “moderating” the content on their platforms to ensure that they are not used to promote hate, violence and division, as we see in the banishment of then-President Trump.

To address this challenge, companies are increasingly engaging with their industry peers and civil organizations to create “voluntary” soft law codes and standards for their industries that can increase trust and ensure their license to operate with their key stakeholders and customers. We are seeing a rapid increase in these types of initiatives in recent decades and today there are few large firms that are not part of one or more of these standard-setting initiatives. They range from industry standards such as Responsible Business Alliance (electronic industry), Responsible Care (chemical industry) and the Better Cotton Initiative (apparel industry) to multi-stakeholder negotiated standards on supply chain practices such as Fair Trade and the Forest Stewardship Council, which offer certification to their members to assure customers and stakeholders of compliance with their standards.

More recently, we are seeing the growth of these types of initiatives in the capital markets, as institutional investors work to meet growing customer interest and societal pressure on financial institutions to ensure that the companies they invest in operate sustainably and responsibly. The Sustainability Accounting Standards Board, Integrated Reporting and Climate Action 100+ are some of the key initiatives institutional investors are participating in as they seek to responsibly “steward” their investments and ensure the companies they invest in are operating sustainably and in the long-term interests of the beneficiaries for which they are fiduciaries.

Going forward, as technology-driven innovation continues to accelerate in many fields, e.g., fintech, and regulators fall further behind, we can expect the importance of these types of “soft law” initiatives to increase.

As David Vogel, the former Professor of Business Ethics at the Haas School of Business and leading commentator on the emerging civil regulation field, observes, “On balance, global civil regulations have had an impact roughly comparable to that of many international treaties, which also make extensive use of ‘soft’ law.” In sum, civil regulations and initiatives have partially reduced the governance deficits that affect many global firms and markets. Moreover, many initiatives have been established relatively recently, which means their impact and effectiveness could increase, especially as some codes become more developed, stringent, comprehensive and better-enforced.

Social Engagement

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 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 multi-stakeholder 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 circular and 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 beyond the reach of many, 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. It doesn’t mean being right in a way that makes others wrong. It means listening intently and respectfully, stitching together differences that separate us from each other. It doesn’t mean either hope or despair; it is action that is courageous and fearless. 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.”

At HMI, we are working with business leaders on these challenges and look forward to your thoughts on how business leaders can most effectively address them.