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Failing to recognise business must serve all stakeholders, as well as shareholders, is a bigger risk in the long term. Just ask Boeing

  • Gone are the days of ignoring flaws in the current model. It will be a challenge, but pushing the stakeholder agenda forward isn’t just wise – it’s a necessity

  • Chuka Umunna

“Stakeholders for a cohesive and sustainable world” is the theme of the annual meeting of the World Economic Forum, taking place in Davos this week. Topics the summit will focus on include “better business”, “fairer economies” and “how to save the planet”. WEF proudly lays claim to having promoted stakeholder capitalism since its first gathering in 1971. Its founder, Professor Klaus Schwab, is a long-term advocate for businesses serving all stakeholders – customers, employees, communities, as well as shareholders. So on Friday Schwab sent a letter to all the company leaders asking them to commit to achieving net-zero carbon emissions by 2050 or earlier.

More than 3,000 participants will be attending to hear speakers including Donald Trump, the US president, Angela Merkel, the German chancellor, and Greta Thunberg, the green activist. Sajid Javid, the UK’s chancellor of the exchequer, will also be attending. Among those backing the event is BlackRock, one of the biggest fund managers in the world, handling $7 trillion (£5.4 trillion) of assets. BlackRock’s CEO Larry Fink made big news last week with his annual letter to CEOs.

Not only did he reiterate the argument he made in his 2018 letter that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders”, but he said that, going forward, BlackRock will adopt a number of measures to play its part in reducing climate change, including selling its holdings of companies that derive more than 25 per cent of their revenue from thermal coal.

Fink said that “given growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” This is pretty radical stuff relative to previous practices in many big businesses.

The move by BlackRock follows the declaration signed last summer by more than 180 CEOs and released by the Business Roundtable (an association of the leaders of the US’ biggest companies), which explicitly sought to move away from shareholder primacy to a more inclusive commitment to all stakeholders.

Its chair, Jamie Dimon, who also leads US investment banking giant JP Morgan, was clear: “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernised principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all.” It seems that every business leader is now talking about how important “ESG” – economic, social and governance – issues are to their decision making.

Some will say this is nothing new, but this was not where the debate was centred at the beginning of the last decade. On the contrary – there was active resistance to the need to change and move towards a broader, more inclusive definition of value creation.

The first major speech I gave as HM opposition’s shadow business secretary at Bloomberg’s London HQ in the autumn of 2011 was all about the merits of businesses taking account of other stakeholders, in addition to shareholders, not just because it is the right thing to do but because it adds to shareholder value in the long term.

Harvard University’s Mark Kramer and Michael Porter had written a seminal piece in the Harvard Business Review earlier that year setting out the core argument, which I championed. They said that “at a very basic level, the competitiveness of a company and the health of the communities around it are closely intertwined. A business needs a successful community, not only to create demand for its products but also to provide critical public assets and a supportive environment. A community needs successful businesses to provide jobs and wealth creation opportunities for its citizens.”

This core proposition is uncontroversial now but we were denounced at the time by political opponents and a significant number of business figures for engaging in “anti-business” rhetoric simply for making the stakeholder argument, despite the fact many of those making the case for it were other business people.

I remember speaking alongside Ed Miliband (then the leader of the opposition) at a private dinner of senior business folk who headed up companies and financial institutions that are household names – both of us (Ed in particular) were given a very rough ride by those attending. The general attitude was to ignore the flaws in the current model of doing business, which had only recently been exposed in awful technicolour by the global financial crash of 2008/09. It was only when the 2016 EU referendum came along that I think real momentum built behind the need for a new approach in the UK. The referendum served as a wake-up call for so many business leaders – a lot of them told me it brought them face to face for the first time with the growing public anger there wa,s and still is, towards a form of capitalism that many of their firms’ customers and employees believe is broken.

There has been a welcome sea change since then. In the UK new think tanks have emerged dedicated to the agenda, including New FinancialRadix, and the Centre for Progressive Policy. The challenge now will be to make the commitment to all stakeholders a concrete reality – that won’t be easy. 

First, it requires the buy-in and engagement of shareholders, not only managers, and there is a perennial problem of the absent and disengaged shareholder. As the ONS figures illustrated last week, a lot of those who hold UK stock don’t even live here – the proportion of UK-domiciled companies’ quoted shares by value owned by investors outside the UK has increased from 36 per cent in 2000 to around 55 per cent today.

Second, though changes have been made to the Companies Act enabling directors legally to pay due regard to other stakeholders, they are under huge pressure to maximise returns in the short term to investors and shareholders – in many cases if they fail to deliver the financial returns rapidly for shareholders in the short term they still face the threat of being removed.

Thirdly, there will be the inevitable contradictions between the grand promises made and the behaviour of businesses, which will need to be addressed. These contradictions will provide great copy for a firm’s detractors in the media and lead to charges of hypocrisy – particularly when controversial CEO remuneration packages that reward firm performance seemingly run counter to ESG concerns and are brought to light. For example, at the WEF summit itself, reporters will be watching closely to see which company leaders are quoted as saying action is needed on climate change, having arrived at the summit by private jet or helicopter. The list goes on.

However, none of this should stand in the way of firms taking action on pushing the stakeholder agenda forward – the bigger risk in the long term is that they don’t. Just ask aircraft manufacturer Boeing, which stands accused of putting profits and short-term shareholder returns over safety following the crashes of two of its 737 Max planes, which killed more than 300 people.

US senators have accused Boeing of building “flying coffins” and a “pattern of deliberate concealment” as it sought to secure approval for the planes to fly. This is backed up by internal emails released earlier this month showing Boeing employees boasting about bullying regulators to approve the plane. And it has hit the bottom line hard – Boeing’s share price has lost more than a quarter of its value over the last 12 months, with the estimated total cost of the fallout coming in at around $20bn according to analysts at the Bank of America Merrill Lynch. A salutary lesson for all.