• Paul Stuart-Smith

Stakeholder capitalism: woke or wise?

Updated: Apr 9, 2021

Prince Harry’s recent appointment as ‘Chief Impact Officer’ at BetterUp has been red meat for those inclined to rail against ‘woke capitalism’.

Adding the former Royal to its payroll could be a highly astute commercial move for the San Francisco-based company which has the laudable but, arguably, ambitious mission ‘to help everyone live with clarity, purpose and passion’.

But critics see the Duke’s new title as nebulous and his appointment as symbolic of excessive corporate concern about environmental, social and governance (ESG) issues. According to this view, companies should stick to delivering value for customers and shareholders, not sacrifice profits for externalities to do with ‘people & planet’.

But this is a false dichotomy or, if you prefer, a red herring. Whatever the merits of Harry’s new title and role, the fact is that corporate performance is highly dependent on a whole range of issues beyond narrow commercial considerations but which nevertheless have an impact on the bottom line.

Despite accusations of being ‘woke’ (a term only recently hijacked and recast as pejorative) the current concern about ESG criteria in business and financial circles is not exactly new. Companies have always had to think - to a greater or lesser extent - about their purpose beyond simply creating shareholder value, including consideration of the way they treat their employees, and their impacts on the environment, the communities in which they operate and broader society.

What is perhaps new is the realisation that companies need to do more, in some cases much more, to address these issues. This, combined with a clearer understanding of the impact ESG can have on the bottom line, has led to increased demands for companies to demonstrate to investors and other stakeholders how they are managing the associated risks. As Larry Fink, CEO of BlackRock, the world’s largest asset manager wrote in his letter to CEOs in January, “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders”.

This is also enshrined in law. In the UK one of the key requirements is set out in section 172 of the Companies Act 2006. This is the clause that stipulates that directors have a duty to promote the success of the company and that in doing so they should take into account the interests of their stakeholders. It can be seen as one of the legal cornerstones of stakeholder capitalism, compelling companies to consider ‘other matters’, including the impacts on the community and environment, in their strategic decision making.

Many companies struggle to do this effectively. A FTSE 250 client recently asked for help with embedding ‘people & planet’ into their commercial decision making processes in order to help them ‘Bring section 172 to life’. This despite the fact that the company had for years been making seemingly sincere efforts to develop a wide-ranging sustainability strategy to bolster its ‘purpose’ credentials, enhance employee engagement and reduce its environmental footprint.

One area where companies particularly struggle to bridge the gap between good intentions and decisive action is climate change. More and more companies are setting net-zero targets but few have a well-thought through plan for how to achieve this that also makes commercial sense.

Pressure on companies to develop more explicit decarbonisation plans is likely to increase as national and international decarbonisation targets and trajectories are firmed up ahead of the UN climate conference, COP 26, to be held in Glasgow in November and as new regulatory measures begin to bite.

In the EU, for example, the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation should motivate companies to enhance their ‘green’ credentials, while in the UK, mandatory reporting of climate-related risks in line with the framework developed by the Taskforce on Climate-related Financial Disclosures (TCFD), will force companies to explain their approach. Expanded use of carbon pricing, such as through the EU Emission Trading System (ETS), where prices have doubled in the past year to over 40 Euros per tonne, should provide a particular focus for corporate planners.

Climate change is but one of many ESG issues for which it will be wise - not merely ‘woke’ - for companies to integrate ‘people and planet’ into their strategic decision making in order to bolster commercial resilience and reduce the risk of being left behind by the competition.