The Psychology of Shifting to Stakeholder Capitalism
As a result of COVID-19’s tumultuous impact on the economy, businesses fell over themselves to demonstrate a higher “purpose” and show that they care about the welfare of their employees and the environment. Influential organizations including the World Economic Forum, the Business Roundtable, and BlackRock have decisively called time on our exclusive focus on shareholder value, in favor of a more responsible, compassionate form of “stakeholder capitalism.” Compelling new evidence that there is a “business case” for corporate responsibility has led to the rise of the environmental, social, and governance (ESG) investing movement, which aims to demonstrate that companies which manage their ESG issues generate more shareholder value over the long term. 2020 saw enthusiasm for investing using these criteria reach an all time high. Capital flows continue to accelerate.
It is wonderful to see such progress for those of us who have worked on sustainability, human rights, and corporate responsibility issues for a long time. Still, there is a sense that changes are still far too incremental and performative. Behind the headlines, many executives remain unconvinced that there is a case for change. Others wish to capitalize on the current mood, but are unsure how to proceed. Responsible business practitioners are wondering how they can build on the momentum of the post-pandemic era to fundamentally shift how companies operate and make decisions in the long term. There are no easy answers. But ideas from behavioral science suggest a lot about how internal sustainability leaders can make a stronger case for ambitious organizational changes.
It can be risky, however tempting, to align responsible initiatives too closely to a particular political agenda.
For starters, they can go beyond the “business case” approach, which rests on identifying win-win initiatives that are good for both society and shareholders. The business case has its place: Companies still organize themselves around metrics related to profit and growth, so it is wise to meet them on their own terms.
Why isn’t this enough? We need quantitative criteria to design programs and measure progress, of course, but these, as I’ve written previously, are unlikely to be sufficient to win hearts and minds. That is partly because of the difficulty of translating intangible factors, such as a better reputation or employee motivation, into the short-term financial metrics businesses use. But that’s not the full story.
The human need for certainty biases us toward minimal-effort decisions. We seek out information that confirms what we already believe. If you have a preconception that shareholder value and corporate responsibility are incompatible, you likely won’t be persuaded by data and facts from your sustainability team, however compelling. Researchers call this motivated reasoning. Advice on managing cognitive biases usually aims at reducing their impact, but as a recent paper argues, it may be more effective to identify and work with biases to drive organizational acceptance of change. This has a number of implications for how we can make a stronger case for sustainability initiatives, such as reducing carbon emissions, building a diversity and inclusion program, or implementing human-rights commitments.
It matters a great deal who conveys an argument to us. If we’d like to persuade the CEO that sustainability initiatives are a worthwhile investment, it will be far more powerful if that argument comes from a major investor or the CFO, and not a sustainability practitioner. Larry Fink’s 2018 letter on the social responsibilities of business gained such traction precisely because this was a credible financial actor calling time on the shareholder-value model. Sustainability leaders will be far more likely to succeed if they can partner with core finance and operations teams, and convey evidence on the business case for ESG through senior members of these teams. Gathering evidence from Investor Relations about growing interest in ESG issues can be a good first step to get the attention of the Finance team.
Of course, no one likes being lectured. One reason that the responsible business movement avoids ethical arguments is that they can seem opposed to business. But in pivoting to instrumentalist, business-case arguments we may have gone too far. According to his own account, it was on a fishing trip to Alaska with friends in 2019 that Larry Fink became convinced of the urgency of tackling climate change and the need to convince CEOs to adopt more ambitious goals. Experiences are, for better or worse, far more persuasive than facts. The key driver for a shift toward stakeholder capitalism is, in other words, unlikely to be a presentation on the metrics, and far more likely to be the conversation an executive is having with his teenage children at the dinner table. Sustainability practitioners can take more account of this in their strategies. Visits to supplier operations, presentations on successful peer initiatives, and conversations with communities affected by a company’s decisions might also help build senior support.
Values-based appeals should nevertheless be considered carefully. Politically liberal individuals, according to Jonathan Haidt’s moral foundations theory, tend to emphasize care and fairness, whereas conservatives place higher relative value on loyalty, authority, and sanctity. For example, studies have shown that conservatives are more likely to support environmental initiatives if they are framed more in terms of reducing pollution and maintaining sanctity, rather than by an overwhelming emphasis on social justice and care for future generations.
Given decisions by the Trump administration to withdraw from the Paris Climate Agreement, restrict immigration, and stymie ESG regulation, it is unsurprising that responsible business practitioners tend to be progressive and Democratic. But almost all companies have a mix of conservative and liberal employees, and it can be risky, however tempting, to align responsible initiatives too closely to a particular political agenda. You will lose traction and could alienate part of your management team, not to mention your employee and customer base.
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Research from Pew suggests that young people support action on climate change and believe in diversity across the political spectrum, so these are two areas where ambitious programs are likely to generate wide enthusiasm. Though the prospects for meaningful cross-party cooperation in Washington might be remote, responsible business practitioners should try to prioritize initiatives that could win support across the company, regardless of political views.
Another factor that can reduce the quality of discussion around these initiatives, and limit buy-in for shifts toward sustainability, is a lack of strategic knowledge. A recent study by NYU Center for Sustainable Business revealed a considerable knowledge gap on ESG issues among Boards—only 29 percent were found to have relevant expertise. Recruiting Board members with the right background can help, but a single, token appointment likely won’t.
As the famous Asch experiment shows, group conformity is powerful, and people often align with the majority opinion even when they believe it is wrong. A single Board (or C-Suite) member with ESG experience is likely to end up isolated and facing resistance, but two or more would improve diversity, decision-making, and creativity in the group, as well as ensure that support for programs is not solely reliant on one person. It’s also important to gather as much evidence as possible about how norms are shifting. We are more likely to adopt technology if our friends have already, and we are more likely to make sustainability commitments if our competitors are already doing so, and realizing the benefits.
We can’t escape the fact that our attitudes to organizational change are dominated by risk aversion and loss aversion. As Daniel Kahneman showed in Thinking, Fast and Slow, we tend to default to pre-set options, defaulting to the status quo or what we expect to happen, which means that new initiatives often face resistance. Sustainability leaders can reduce this resistance if they can demonstrate that the rewards of new programs will more than outweigh potential costs. They can also benefit by using judgement on the number of new initiatives they suggest. Companies today feel under pressure from the public and NGOs to take action on dozens of issues, but this can put companies in a reactive mode and undermine the credibility of a sustainability program.
It is far more important to focus on action and disclosure around a few material, strategic issues and try to drive deep change and become an industry leader. This can be tricky, because ESG disclosure frameworks are typically broad and comprehensive. But focusing on sustainable organizational change should be a higher priority than responding to ill-informed external pressure.
Take the recent example of companies scrambling to present appealing metrics on diversity and inclusion. This might help advance the conversation, but it is equally likely to lead to a backlash that won’t help with the thoughtful, long-term approach that we actually need to advance organizational diversity. I’ve even heard of attempts to reframe ESG as ESGDEIJ, as if we didn’t already have enough of an alphabet soup of acronyms in this field! More broadly, sustainability leaders should be wary of being seen as Chicken Littles within the organization, constantly claiming the sky is falling in, and losing credibility and momentum in the process.
More curiously considering how human beings actually behave is needed for any successful, sustainable organizational change, and a shift toward stakeholder capitalism is no exception. That’s why Ethical Systems is beginning a new research project on behavioral change and responsible business. We would love your ideas on how to confront the most pressing challenges as you see them. Future articles will consider how investors can influence companies more effectively and move, from making the case, to implementing change. If you’d like to discuss this, please do get in touch!
Alison Taylor is Ethical Systems’ Executive Director. Follow her on Twitter @FollowAlisonT.
Lead image: Tim Dennell / Flickr