ESG-Disclosure Using The Economist as a Proxy (2)

The second installment in an effort to distill relevant ESG-topics from The Economist has notable differences from the first effort (see here). Digging through the second series of four months of articles (May to August), I found that:

  • climate change remains the number one topic;
  • green technology is in firm second place;
  • governance more or less keeps the same spot in the matrix;
  • pollution gets a lot less attention but remains important in terms of impact on a firm’s profitability;
  • environmental laws are a new category with potentially big impacts on business models (not including climate policies, which I include in the climate change category);
  • new these last months, is the coverage of ecology, conservation and environmentalism (which I grouped under ‘ecology’); although important from a stakeholder’s perspective, I opted to put ecology to the left of all other categories since the subjects at hand still need to find their way into the mainstream; on top of that, laws and regulations on these topics seem further away then the ones on, for example, climate change and governance.

The picture above follows, again, the format of a Materiality Matrix, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, you should, in addition to the topics that were already present in last month’s Materiality Matrix (i.e. climate climate change, green technology, pollution and governance) consider disclosing information on your efforts towards a healthy ecology. As far as new environmental laws are concerned, these were of course already included in your risk management approach.

Below, some interesting snippets taken from the articles can be found, grouped per topic. (Most quotes are adopted directly from The Economist).

Climate Change

Interesting facts taken from all articles in the group ‘climate change’:

  • Businesses are overvalued because of a “carbon bubble” and could suffer if the climate threat is tackled resolutely. A study at Oxford University found that electricity producers would have to retire a fifth of capacity, and cancel all planned projects, if the Paris goals are to be met.
  • What is the single most effective way to reduce greenhouse-gas emissions? Go vegetarian? Replant the Amazon? Cycle to work? None of the above. The answer is: make air-conditioners radically better. On one calculation, replacing refrigerants that damage the atmosphere would reduce total greenhouse gases by the equivalent of 90bn tonnes of CO2 by 2050. Making the units more energy-efficient could double that. By contrast, if half the world’s population were to give up meat, it would save 66bn tonnes of CO2. Replanting two-thirds of degraded tropical forests would save 61bn tonnes. A one-third increase in global bicycle journeys would save just 2.3bn tonnes.
  • Scientists have laid out steps that Arab countries could take to adapt to climate change. Agricultural production could be shifted to heat-resilient crops. Israel uses drip irrigation, which saves water and could be copied. Cities would be modified to reduce the “urban heat-island effect”, by which heat from buildings and cars makes cities warmer than nearby rural areas. Few of these efforts have been tried by Arab governments, which are often preoccupied with other problems.
  • Virtually all simulations which chart paths toward meeting the Paris climate agreement – to keep temperature rise “well below” 2°C relative to pre-industrial levels – assume not just a sharp reduction in actual emissions but also the removal of carbon dioxide from the atmosphere on a massive scale.
  • In Canada, provinces can control emissions in their own way. British Columbia has already introduced a carbon tax (now C$35 a tonne). Alberta charges C$30 a tonne. Ontario’s cap-and-trade scheme would have qualified. If a province fails to tax or cap emissions, the federal government will impose a tax.
  • Three years after countries vowed in Paris to keep warming “well below” 2°C relative to pre-industrial levels, greenhouse-gas emissions are up again. So are investments in oil and gas. In 2017, for the first time in four years, demand for coal rose. Subsidies for renewables, such as wind and solar power, are dwindling in many places and investment has stalled; climate-friendly nuclear power is expensive and unpopular. It is tempting to think these are temporary setbacks and that mankind, with its instinct for self-preservation, will muddle through to a victory over global warming. In fact, it is losing the war.
  • Two social psychologists have found that Republican voters will back carbon taxes if they are told Republicans favour such a policy.
  • The number of Europeans who can expect to witness a temperature above the current record, wherever they happen to live, would double from 45m today to 90m if the planet warmed by another 0.5°C or so on top of the 1°C since the 1880s. If, instead of 0.5°C, it warmed by 1°C, the figure would rise to 163m.This looks even more alarming if you factor in humidity. Human beings can tolerate heat with sweat, which evaporates and cools the skin. That is why a dry 50°C can feel less stifling than a muggy 30°C. If the wet-bulb temperature (equivalent to that recorded by a thermometer wrapped in a moist towel) exceeds 35°C, even a fit, healthy youngster lounging naked in the shade next to a fan could die in six hours.
  • A report published on August 6th by Sarasin & Partners, an asset manager in London, suggests that oil firms are assuming that decarbonisation will be limited and are thus overstating their assets. Sarasin notes that eight European oil giants all used long-term oil price assumptions of $70-80 a barrel, rising by 2% a year with inflation to $127-145 by 2050, to price their assets. But that does not appear to assume any drop in demand. The International Energy Agency predicts a price of just $60 by 2060; Oil Change International, an activist think-tank, estimates one as low as $35. Oil firms could face a sticky mess of forced writedowns.
  • A new IMF working paper finds that taxes raise around twice as much revenue as today’s cap-and-trade schemes, and are roughly 50% better at cutting emissions.

Green Tech

Interesting facts taken from all articles in the group ‘green tech’:

  • Plastic production has tripled over the past 25 years, and the mess it causes has risen commensurately. Recycling is an option. Another is biology. At Stanford University, they found that bacteria in the guts of mealworms can break down polymers faster than fungi and bacteria can.
  • Six of the top ten producers of solar-panels are Chinese.
  • Though solar was the world’s biggest source of new power-generating capacity last year, it still generates a paltry 2% of global electricity.
  • Materials-science researchers are finding that plant fibres can add durability and strength to substances already used in the construction of buildings and in goods that range from toys and furniture to cars and aircraft. A big bonus is, because plants lock up carbon in their structure, using their fibres to make things should mean less carbon dioxide emitted. The production of concrete alone represents some 5% of man-made global CO2 emissions, and making 1kg of plastic from oil produces 6kg of the greenhouse gas.
  • In the bike-mad Netherlands nearly one in three newly bought bikes last year was electric.
  • Acid rain damages crops. In particular, it damages rice. I can be cleaned with water but it is not always obvious when it needs to be cleaned. A cheap method now has been found: rice plants sprayed with artificial acid rain, cut the release into the soil of three relevant bacterial food stuffs. The electric current the bacteria in the ground generate consequently drops. This is easily measurable using cheap electrodes.
  • India has plans for alternative means of generating electricity. Even before the Paris summit, Narendra Modi, the prime minister, aimed to install 175 gigawatts (GW) of renewable-energy capacity by 2022, a vast increase from today. That has now risen to 227GW. In the meantime, prices of wind and solar power have tumbled. Recent auctions have led to a 50% drop in the cost of solar power in the past two years, to about three rupees ($0.05) per kilowatt hour, about the same as wind. This can make both sources cheaper than building new coal-fired capacity. An excise tax on production and imports makes coal ever less attractive. After a massive spree of building coal-fired power plants in recent years, investment slumped last year, while that in alternatives surged.
  • A view prevails that the blockchain will guzzle too much electricity for energy applications to make sense. But this assumes that projects will use a public blockchain such as bitcoin, which anyone can access with the right software, requiring lots of computing power and time to verify each transaction and protect the blockchain. Energy firms could in fact employ blockchains in which only trusted participants can join, making the process of maintaining the blockchain faster and less energy-hungry.
  • America’s Forest Service uses a model to assess fire risk. This model feeds on data on the distribution and types of trees, bushes and other vegetable ground cover, and on construction materials used in an area. Such intelligence will be needed increasingly in the future. Predictions based on the likely effects of climate change suggest that, by the middle of the century, fires will burn twice as much acreage as they do today.

Pollution

Interesting facts taken from all articles in the group ‘pollution’:

  • Two books have been reviewed that have the Flint water pollution disaster as a subject: Had the dirty river water been treated with the right chemicals, thousands of people would not have been poisoned by lead and bacteria, including one that causes Legionnaires’ disease. But to save more cash, the city declined to add anti-corrosion agents that would have stopped the water eating away at the lining of the pipes, thus preventing lead from leaching out. That might have cost around $100 a day—peanuts compared with the hundreds of millions that the state and federal governments are now forking out to repair some of the damage. These two books both show how an austerity drive with racial undertones led to the mass poisoning of mostly poor and black residents, and how officials tried to cover it up, attempting to discredit anyone who came up with proof that the water was tainted.
  • Also on Flint: to almost everyone’s surprise, the citizens of Flint prevailed in March 2017, when the government agreed to an expensive settlement in the first type of lawsuit. The state of Michigan agreed to spend at least $87m to replace lead-contaminated water pipes in Flint within three years. The settlement also required the city to run at least two centres where residents could pick up free bottled water and tap-water filters until September 2017, and beyond that if tests continued to show that Flint’s water was contaminated. The government stopped the giveaway in April this year, saying the city’s water passed the test; Karen Weaver, the mayor of Flint, retorts that many of her constituents still do not trust it.
  • Kapuas, Indonesia’s longest river, is murky because of deforestation. Since the 1970s, logging has enriched locals while stripping away the vegetation that held the soil in place. The Centre for International Forestry Research (CIFOR) found that between 1973 and 2010 over 100,000 square kilometres of forest was lost on Kalimantan, or a third of the original coverage. A national moratorium that began in 2011 has done little to still the axes. As a result, torrential tropical rains wash lots of loose earth into the Kapuas.

Governance

Interesting facts taken from all articles in the group ‘governance’:

  • Plato argued that the richest members of society should earn no more than four times the pay of the poorest. John Pierpont Morgan, a banker, reckoned that bosses should earn at most 20 times the pay of their underlings. Investors today hold chief executives in vastly higher esteem: America’s largest publicly listed firms on average paid their CEO 130 times more than their typical workers in 2017.
  • “I fear that we may be at a peak of anti-bribery efforts”, says a spokesperson of Transparency International. Western firms in the mining and oil-and-gas industry grumble that rivals from China, Russia or elsewhere have “advantages” bidding for contracts in say, parts of Africa, as they face few limits on bribe-paying. If such complaints grow loud, pressure not just to stand still on anti-bribery standards but actually to lower them could return.
  • In India, women are less likely to work than they are in any country in the G20, except for Saudi Arabia. They contribute one-sixth of economic output, among the lowest share in the world and half the global average. The unrealized contribution of women is one reason India remains so poor.
  • On Danone: The latest effort is to win certification as a “B Corporation”, a label meant to reflect a firm’s ethical, social, environmental practices. Smaller outfits, such as Patagonia, a clothing firm, or Ben and Jerry’s ice-cream (now part of Unilever) were early B Corps. Some 2,500 have been certified in the past decade or so.

Ecology

Interesting facts taken from all articles in the group ‘ecology’:

  • Humans have had a profound impact on the prevalence of other species: the biomass of wild mammals has decreased to a sixth of its previous value. Meanwhile, the carbon count of domesticated poultry grew to three times higher than that of every species of wild bird combined.
  • Columbia BIO is a huge project to survey Columbia’s biological assets. The government’s aspiration is that biodiversity itself might be harnessed as an economic resource, and that this might contribute as much as 2.5% of Columbia’s GDP by 2030.
  • The Great Barrier Reef has died and then been reborn (with rising and falling sea levels) five times during the past 30,000 years. Bleaching is now threatening the reef for the sixth time. In the short term, global warming really does look like a serious threat.
  • Sudan, the last male northern white rhinoceros on Earth, died in March. He is survived by two females. IVF seems the last hope for the northern white rhino.
  • Around 40% of bee species globally are in decline or threatened with extinction. Beekeepers in North America and Europe are losing hives at an abnormally high rate. Why? Diana Cox-Foster, an entomologist, offers the theory of the four Ps: parasites, poor nutrition, pesticides and pathogens.

Environmental Laws

Interesting facts taken from all articles in the group ‘environmental laws’:

  • Since the 1970s enormous farms growing irrigated crops such as cotton and nuts spread across the Murray-Darling basin in Australia. Illegal extraction of water is a problem. Farmers are meant to use meters to monitor how much they pump. But last year, cotton irrigators were accused of tampering. Wide-scale abuse has been possible because states and local governments have failed to enforce the rules.
  • Shipping accounts for only around 2% of global carbon emissions, but is quite dirty. Burning heavy oil, the industry produces 13% of the world’s sulphur emissions and 15% of its nitrogen oxides. And by 2050 ships will be producing 17% of all carbon emissions if left unregulated.
  • The International Maritime Organisation agreed to halve the industry’s carbon emissions by 2050.
  • The Trump administration is committed to undoing the Clean Power Plan —which sought to reduce carbon-dioxide emissions from power plants by 32% from their levels in 2005 by 2030—before it comes into effect. Its new proposal, the Affordable Clean Energy (ACE) rule, is much less ambitious because it would let states decide their emissions-reductions targets (including having none at all). Its name is Orwellian. The EPA’s own analysis shows that retail electricity prices would be reduced by a mere 0.1%-0.2% by 2035—but that use of coal, a pollution-belching fuel, would shoot up by as much as 9.5%.
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What every manager should know about (2/5): Human Rights

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As your organization is getting ready for the implementation of EU guideline 2014/95/EU on the disclosure of non-financial information, I hand you a series of blog posts on non-financial topics that business managers might be less familiar with. My aim for this series of posts is twofold. First, to give you insight into concepts that are integral to non-financial frameworks on reporting, such as the Global Reporting Initiative (GRI) framework. Second, to show why and how you should integrate these specific non-financial disclosures into your overall business and risk management strategy.

The first blog in this series discussed climate change. You can read it by following this link.

The second blog of the series will discuss the aspects of human rights you should be familiar with as a business manager. I will discuss what human rights are, what the key drivers for respecting human rights are and, finally, how you can build a supply chain that respects human rights.

Defining Human Rights

What should the relationship between business and human rights be? The United Nations (UN) defines the role of business as respecting human rights; as opposed to states, that must protect human rights. Paragraph 12 of the UN Guiding Principles on Business and Human Rights (UNGP) states:

The responsibility of business enterprises to respect human rights refers to internationally recognized human rights – understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning fundamental rights set out in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

Both the International Bill of Human Rights and the International Labour Organization (ILO) are part of the broader human rights movement that arguably started with the Enlightenment. In the table below, the Bill of Human Rights and the ILO are put into historical perspective. I highlight the texts which are referred to in this post (i.e. Bill of Human Rights, ILO, and UNGP) in blue:

table-complete

As we can see from this non-exhaustive timeline, human rights are ever evolving and expanding. In the words of Andrew Clapham in Human Rights: A very Short Introduction:

The human rights catalogue will continue to expand as new challenges emerge and new constituencies find it helpful to frame their claims as issues of human rights.

To list all articles in both frameworks (International Bill of Human Rights and in the ILO’s Declaration on Fundamental Principles and Rights at Work) will not be very helpful for managers to develop a first understanding of business and human rights.  Instead, I use clusters of human rights introduced by The Economist Intelligent Unit (EIU) in a report on the ‘challenges for business in respecting human rights’ (ranked in the order in which companies scored them as relevant to their activities):

clusters-of-rights

Not all rights are the same explains Clapham. We distinguish between:

  • Absolute rights: genocide, crimes against humanity, slavery, and torture are international crimes which are prohibited at all times.
  • Rights limited through legal restrictions designed to protect a defined legitimate objective: rights to liberty, fair trial, freedom of expression, belief, assembly, association, and property; any restriction on these rights has to be justified as proportionate to the aims pursued by the restrictions.
  • Rights that have built-in limitations: free speech and privacy.
  • Social, economic and cultural rights (sometimes called ‘aspirations’ instead of rights): food, education, health, housing and work.

Now that we have an understanding of the historical background of human rights, relevant clusters of human rights for business, and awareness that rights can have limits; we turn to the business drivers of respect human rights that go beyond mere compliance.

Drivers for Implementing Human Rights Policies

Besides compliance (a primary driver), there are a number of reasons why your company should have proper human rights policies in place. These include the protection of the company brand and reputation. Reputational risk is especially high if a firm has complicated supply chains. A 2015 article in the Journal of Business Ethics explains:

Social issues become relevant in supply chains because of the involvement of multiple suppliers who directly affect the reputation of the buying firm. Additionally, an enlightened stakeholder (both internal and external) holding the firm accountable for social issues in supply chains forces the firm to take responsible supply chain actions.

Two examples that are known throughout the business and human rights community are the Rana Plaza disaster and the Rohingya case in Thai fisheries.

In the Rana Plaza disaster in 2013, over a 1,000 garment workers died in the collapse of a factory building in Bangladesh. The EIU report rightfully links it to a failure of respecting human rights:

Spectacular failures of human rights protection still claim headlines. To cite just one of several recent examples, the tragic collapse of the Rana Plaza commercial building in April 2013 led to renewed questions about the quality of companies’ oversight of their suppliers’ human rights practices as well as the role of government in protecting such rights.

How events like these can hurt your companies’ reputation was shown by the bad news coverage Primark, a low cost British garment label, received when it was linked to the disaster (see for example the article Disaster at Rana Plaza in The Economist).

Another example that shocked the world in 2015, was the enslavement of Rohingya (an ethnic people from Myanmar) aboard Thai fishing boats. The Guardian reports:

Rohingya migrants trafficked through deadly jungle camps have been sold to Thai fishing vessels as slaves to produce seafood sold across the world, the Guardian has established.

The seafood was traced to individual leading supermarkets worldwide that had to take immediate action to manage their reputation.

External and internal stakeholder pressure is often mentioned as another driver to implement human rights policies. NGO’s, local communities, investors, and employees can all pressure the corporation into doing more on human rights topics. Risk management might be a fourth driver for implementing human rights policies and procedures. Risks to manage are, apart from the reputational risk already mentioned, risks that stem from disruptions in the supply chain because of issues with human rights (e.g. strikes, bad quality of products, or drops in productivity, etc.). A final driver, which is sometimes overlooked when it comes to human rights policies, is performance improvement. Workers that are well taken care of tend to perform better, which will, in turn, lead to higher output or higher quality of products in your supply chain.

With these five sets of drivers (i.e. compliance, protecting the company reputation, external and internal stakeholder pressure, risk management, and performance improvement) there is surely a business case for implementing human rights policies in your supply chain. We will now discuss how to do just that.

Implementing Human Rights Policy in Your Supply Chain

From all the ESG-topics that firms try to grasp, human rights might prove to be the most difficult one. The head of government relations at Anglo American, a mining corporation, says (in the EIU report):

the notion of human rights abuses is an alien and scary one among technical functions who are more used to ‘impacts’ and structured, technical processes to address them, as opposed to legal ones.

John Ruggie (who drafted the UN Guiding Principles), also in the EIU report, agrees:

It takes time. It takes training. Things have to be translated into operations-speak if they are going to be effectively internalised by people on the ground.

Concluding that implementing human rights policies is not easy, one of the key strategies in implementing those policies is to team-up: involve NGO’s and maybe academia and regulators. In the words of a study published in the Notre Dame Journal of Law, Ethics and Policy:

Human rights are ever evolving so there is a need for open dialogue with government, social groups, NGOs and other stakeholders.

Taking all this into considerations, I propose an eight step approach to implementing human rights policies in your supply chain. This approach borrows insights from the Canadian Network for Business Sustainability, William Bradford’s comprehensive article Beyond Good and Evil: The Commensurability Of Corporate Profits and Human Rights, and Yawar and Seuring’s literature review Management of Social Issues in Supply Chains.

Step 1: Analyze and prioritize. First, perform a risk analysis and determine where your priorities need to be. An example from the EIU report:

Coca Cola conducted a human rights risk analysis of its entire value chain, which identified seven priority risks, ranging from employment and health and safety issues, through to land rights, compliance with transparency and due diligence requirements.

Bradford advises along the same lines:

Corporations should independently perform a rigorous “social audit” to ascertain the current status of their human rights protective practices, the threats to human rights within their spheres of operation, and the internal procedures available to respond to change and rapidly emergent threats.

Step 2: Engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme that has the support of your stakeholders. Prioritize. Depending on the size of your operations, it might very well be impossible to implement ‘everything everywhere’. On engaging stakeholders, Bradford argues:

With the inputs from NGOs, corporations will be able to further refine their practices and enhance their capacities for compliance while reducing the risks of litigation and injury to reputation.

Step 3: Select suppliers. Select suppliers that are willing to work on respecting human rights. An implementation of virtually anything in your firm can never be just about ‘ticking the box’. Select suppliers that understand what you are trying to achieve and that will work with you in a longer term relationship.

Step 4: Develop KPIs. Develop KPIs together with suppliers and other stakeholders. Again, use the knowledge of your stakeholders. But do not forget to design processes and systems that can actually deliver on your KPIs.

Step 5: Evaluate. Evaluate your suppliers on a regular basis. Since you are implementing something that is also challenging for your firm, you should follow-up frequently to see if expectations are being met and evaluate progress.

Step 6: Enhance performance. Use supplier development strategies to enhance performance. Implement collaboration and training programs at the supplier, invest in assets, or offer technical and financial assistance. Informal evaluations and audits could encourage suppliers to take initiative.

Step 7: Report. Communicate your efforts and results according to the compliance strategy you chose in step 2 or integrate the results in your current ESG-report. Reach out to all stakeholders involved in step 2 and get their feedback.

Step 8:  Review. Set-up a quarterly review board. Make sure it is composed of in-house professionals and external academic, NGO expertise, and worker unions. Review performance evidence quarterly to identify patterns and explore possible solutions. Such formal review sessions might prove invaluable to organizations according to Bradford:

Over the last decade, formal and ongoing dialogues have developed wherein corporations, NGOs, government officials, academics, labour representatives, and community leaders meet to discuss issues of common concern, including monitoring of, and compliance with, CCCs [Corporate Codes of Conduct] governing the protection of human rights. Such dialogues afford corporations valuable and low cost information as to the social expectations of important stakeholders in a setting that enables the ongoing (re)negotiation of the details of broadly-based norms and principles that constitute civil partnerships. In exchange, NGOs acquire additional social status, wealth, prestige, and access. Through dialogues, corporations can calibrate their practices, learn how best to uphold their agreements, and retain the material advantages of identification by NGOs as socially responsible.

As I already argued in my blog post The Business Case for Non-Financial Reporting, disclosing non-financial information can lead to insights on how to update your business strategy or improve stakeholder relations. The discussion on implementing human rights policy – as part of the discussion on disclosure of non-financial information – has shown again that implementing sound ESG-strategies can boost your risk management, manage your reputation towards stakeholders, and enhance performance in your supply chain.

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Beyond Shareholder vs. Stakeholder Value

In a recent article in the Economist (Analyse This), shareholder value is still seen as ‘the governing principle of firms’. Despite increasing calls to start running firms for the sake of stakeholders, the influential newspaper sticks to running the firm for shareholders and thus to an idea that was described by Milton Friedman in his seminal Capitalism and Freedom in 1962:

 There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition, without deception or fraud.

In contrast to Friedman’s (and The Economist’s) view, there’s an ever increasing movement that calls for running firms for the sake of its stakeholders (e.g. employees, local communities, public interest groups and financiers) instead of its shareholders. Frameworks are being developed that try to capture more than the financial value of a firm (e.g. the Integrated Reporting framework). Even arguably the most famous of the management scholars, Michael Porter, turns his back on shareholder value. In a 2011 Harvard Business Review article he argues:

A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?

I propose to move away from the confusing discussion about shareholders and stakeholders for two reasons.

First, shareholder value never seems to be properly defined in the general debate. And certainly not when it’s in the hands of stakeholder-theory proponents. It often gets twisted into something that makes the business world look immoral: businesses will do just anything to make a profit at the expense of everything else. This is, however, not the shareholder theory Friedman had in mind. I included his quote at the start of this text to show that the shareholder view actually calls for ‘free competition, without deception or fraud’ (italics mine). The important phrase ‘without deception or fraud’ seems to be left out of the discussion by stakeholder-theory supporters all together. Furthermore, the attack on shareholder value usually includes the argument that shareholders aim for short-term profits. Business valuation theory, however, actually teaches us that the valuation of a firm is an outcome of its long-term operating income (or cash-flow) and not short-term profit (or short-term rise in stock prices). I do not think it is possible to change the general public’s feelings about the shareholder value concept. It has a tarnished reputation that cannot be mended.

Second, the concept of running a firm in the interest of all its stakeholders is flawed. Stakeholders often have conflicting interests. You cannot shut down environmentally damaging operations without cutting jobs (in the short-run at least). Cheap raw materials or supplied goods can keep prices for consumers down, but might fuel bad ethical practices by suppliers. A firm might be able to balance those interests but can never acquiesce to all without hurting the bottom-line.

Some concepts to change the debate

If a stand-off between a stakeholder and a shareholder view is not the answer, what is? First, try to think of businesses as entities that maximize value to the economic system, i.e. long-term positive cashflow that secures jobs and tax income. Second, acknowledge that firms cannot possibly adhere to all stakeholders’ demands instantaneous and simultaneous. That would certainly hurt the long-term positive cashflow, and thus jobs and tax income. Instead, allow firms to balance the interests of stakeholders and their own long-term positive cashflow goal. In fact, firms are increasingly adopting materiality analysis in which the social and environmental impacts are weighed against the impact on the firm’s profitability.

In combining these two aspects – a firm balances the interests of all stakeholders whilst safeguarding long-term positive cashflow – a model arises where a firm can perform its task of providing maximal value to the economic system by adjusting to changing stakeholder pressures. The task of stakeholders (maybe society in general is an even better concept) is to guide behavior of all entities in society to behavior it deems beneficial. Firms can choose to be front-runners by using Environmental, Social and Governance topics (ESG-topics) to craft strategies to gain competitive advantage (maybe even working together with certain groups of stakeholders). Or firms can take a more defensive stance and wait until regulators or market conditions push them to include ESG-topics into their business practices. For most firms, especially SMEs, the latter strategy may seem the only viable option considering available resources anyway.

In other words, if society wants to push sustainable strategies in companies it should not put pressure on companies alone. Society should put pressure on governments and regulators to adopt rules and regulations to develop the world it wants. A model would arise in which society as a whole moves the world in a direction it wants to go, a world that ought to be. (The ultimate guiding principles in this respect could be the 17 Sustainable Development Goals, which were put forward by the United Nations recently.) The world that ought to be should be translated in rules and regulations. For citizens. But also for companies.

There will, of course, always be companies that shape the world that ought to be in accordance with stakeholder views. But this is not the corporate world’s main task. A firm’s main task is to create maximum value to the economic system by supplying jobs and generating tax income. It should do so in a context where the rules are set by others.

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