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Governance
Sustainable capitalism requires boards with courage
Despite the 2019 Business Roundtable pledge to redefine capitalism for the benefit of all stakeholders, progress by companies still lags behind the rhetoric. To move the dial, we need more courageous boards.Â
Capitalism is only sustainable if it serves and supports its critical stakeholders. It will not survive if nature or society collapses. To avoid such a collapse, privately held companies – the engines of entrepreneurship and wealth creation in the Western world – must play an outsized role in nurturing nature and society.
This is easier said than done. Companies still have a long way to go to fulfil the 2019 pledge of the Business Roundtable to serve not just shareholders’ interests, but those of all stakeholders. The recent evidence is discouraging. While the pandemic should have served as an opportunity for companies to pay greater attention to their employees’ physical, emotional, and social needs, a highly respected study of corporate behavior found that they did the opposite. And, as evidenced by a deal-making frenzy between US oil majors, as the climate crisis intensifies, energy companies have announced acquisitions that will vastly increase their oil reserves instead of pulling back. So how can we rewire the corporate model so that firms create value in a way that is sustainable in the long run, especially with respect to nature and society?
To avoid business as usual, the impetus needs to come from the top with courageous boards that are committed to tackling the financial and competitive pressures of implementing sustainable capitalism.
In particular, boards must have the courage to act in four key areas:
- Block value extractors, especially short-term ones inside at the top and outside the company.
- Lobby for a change in the rules of the game to make it financially feasible to implement sustainable business models.
- Identify large sustainable opportunities to transform the core business and justify exiting profitable but unsustainable legacy business.
- Keep the board wide awake with risk management that’s in touch with the frontline and financial accountability.
They turn a blind eye to evidence of their harm to society or the environment, choosing instead to extract value for themselves while mounting an aggressive campaign to discredit their detractors.
1 – Block value extractors inside and outside
Fundamental questions boards must ask themselves: Are we serious about sustainable capitalism or merely talking about it, using it as window dressing while extracting value from society and the natural environment?
Too many executives still believe they can boost their company’s societal image by publishing sustainability reports that highlight initiatives without really committing to action. They turn a blind eye to evidence of their harm to society or the environment, choosing instead to extract value for themselves while mounting an aggressive campaign to discredit their detractors. The classic case is the response of the tobacco industry when presented with evidence that smoking was likely cancerous – they quietly funded numerous studies to prove the opposite. Today, tech companies, faced with evidence that their management of information is undermining society, vigorously oppose any attempts at regulation or make token gestures – such as Mark Zuckerberg’s creation of the supposedly independent Facebook Oversight Board.
If your organization is truly committed to sustainable capitalism, you must cut ties with those inside and outside the company who extract value for themselves despite its impact on either the long-term sustainability of the company or society and the environment. This includes internal free riders like overpaid executives, who, in their own self-interests, campaign to maintain unsustainable activities, or predators, such as shareholder activists and external advisors who seek short-term payouts. The board of Dutch biotech champion DSM, for example, consistently rejected activist investor and consultant proposals to increase dividend payouts by restructuring, as well as bankers’ advice to increase shareholder returns by taking on more debt, stating incompatibility with its long-term sustainability objectives. Instead, in a deal that involved exiting its industrial materials and engineering plastics businesses, the company agreed to a merger in 2022 with Swiss fragrance and flavors maker Firmenich.
“This pursuit led to the infamous Deep Water Horizon explosion in the Gulf of Mexico, resulting in one of the biggest oil spills ever and costing the company over $65bn in direct expenses.”
2 – Lobby for sustainable rules of the game
Avoid the long-term risk of exploiting vulnerable natural or societal stakeholders. The consequences of such actions can be severe – as BP discovered. For years, despite projecting a green image, adopting a green logo, and emphasizing safety, it cut costs and sacrificed safety to chase market dominance through risky deep-water exploration. This pursuit led to the infamous Deep Water Horizon explosion in the Gulf of Mexico, resulting in one of the biggest oil spills ever and costing the company over $65bn in direct expenses.
When competition or financial survival makes it impossible to avoid exploiting weak stakeholders, the best approach is to either exit the industry or lobby to change the rules of the game. DSM is a good example of a firm that has put the interests of workers and other stakeholders at the heart of its strategic decision-making. The company started as an independent mining company owned by the Dutch state, operating under a statute that allowed the company to exploit local coal deposits – and later gas fields – as long as it didn’t exploit workers or local communities in the process.
After the European Coal and Steel Community was set up in 1953, DSM realized it could not compete with suppliers from other countries without sacrificing these social protections. So, it closed its coal mines in the 1960s and moved into bulk chemicals, later privatizing but maintaining social protections. Facing a glut in the market when environmental protection became more critical in the 1980s, DSM sold its bulk chemical operations and gradually moved into biotech, where it has become a nutrition, health, and sustainability leader with outstanding financial performance.
But selling a business doesn’t safeguard the vulnerable stakeholders left behind; it merely shifts the problem to another firm that may operate unsustainably. Raising overall standards requires advocating for a more sustainable competitive landscape. The board of Interface, a $1.3bn global supplier of carpet tiles and other flooring products, actively engages in public advocacy with policymakers, industry stakeholders, and customers to promote environmentally responsible competition. The firm provides expertise, data, and case studies to support evidence-based policymaking and regulation while championing initiatives that promote disclosure and compliance. The company has engaged with government agencies in the US, EU, UK, Australia, and Japan in consultations, forums, and working groups pushing for sustainable standards and guidelines that include environmental criteria, responsible sourcing, and principles like energy efficiency and the circular use of raw materials.
Interface has further shaped competition in the industry with its sustainability objectives. A pioneer of biophilic design, its products are based on natural colors and textures, including nature in interior and architectural design, and bringing the outdoors into the constructed world. Interface’s financial performance recovered sharply after the COVID pandemic, while it continues to advance towards Mission Zero to avoid and reduce carbon emissions to zero and Climate Take Back aimed at storing more carbon than it emits.
3 – Find a large sustainable opportunity for the core business
Peripheral moves on sustainability should not detract the board from the objective of making the core business model sustainable. Both BHP and Anglo-American have converted old coal mines into green hydrogen energy hotspots, but this hasn’t made their core mining model any more sustainable.
The test of sustainable board leadership is committing to opportunities that will truly transform the core of the company rather than just creating positive value on the margins. To make the fundamental business model sustainable, you need to be aware of how it affects nature and society. Real asset-heavy business models extract value mainly from the natural environment. Real asset-light business models extract value mainly from societal stakeholders.
Focusing on a large value-creating opportunity for the core business, either in the natural environment or the societal ecosystem, is key to creating a strong enough business case to financially justify exiting an unsustainable but profitable legacy business.
The Finnish company Neste was a traditional oil-refining company exploiting the natural environment but with a research and innovation focus. In the early 1990s, management identified biofuels as a big growth opportunity. The company had well-developed capabilities on the customer, refining, and distribution sides of the business. When Matti Lievonen became CEO, he focused the change agents on reconfiguring the rest of the business model around renewable fuels derived from organic waste. Today, Neste is the world’s largest producer of renewable diesel made from organic waste which reduces GHG emissions by 90% compared with fossil fuels.
Nordic telco Telenor identified the UN’s 2030 Agenda for Sustainable Development and the Global Compact Principles as a big growth opportunity to shift from mature voice networks to data- and internet-based services. Telenor describes how its global business strategy deploys the empowering features of mobile phones to contribute to reduced social inequality (one of the UN’s Social Development Goals). To accelerate the switch from voice to data, Telenor reinvented its approach to talent management to “nurture and appreciate the risk-takers and innovators.” It mobilized these change agents to transform relations with its customers by offering them completely new value propositions.
Crucially, quality governance for sustainable capitalism can only succeed if it incorporates financial performance.
4 – Keep the board wide awake with in-touch risk management and accountability
Sustainable capitalism will only work if governance practices monitor value creation for nature and society and for long-term shareholders who provide the risk capital for investment in entrepreneurial initiatives and societal wealth creation, which requires a focus on in-touch risk management and financial accountability.
Telenor’s commitment to quality governance came under scrutiny when two of its executives resigned over the company’s ownership stake in Amsterdam-based VimpelCom, which admitted to bribing an Uzbek official. This led to a more unified and consistent compliance function and performance reviews with a stronger focus on non-financial performance, ethical business performance, and sustainability. In addition to financial performance, a sustainability and compliance committee assesses how the company serves society. The stock price has gone up dramatically since the company’s IPO in 2001.
Crucially, quality governance for sustainable capitalism can only succeed if it incorporates financial performance. In June 2020, at the behest of Chair and CEO Emmanuel Faber, Danone’s shareholders agreed to alter its bylaws and declare the sustainability champion an “enterprise Ă mission”, a purpose-driven company. Nine months later, Danone’s board fired Faber after a marathon meeting. The board agreed with two dissatisfied shareholders that Danone was suffering from chronic financial underperformance. An advisor commented: “It is all well and good to topple the statue of Milton Friedman (as Faber said when he put purpose above profits). You can do that (only) when your financial performance is better than competitors and your governance is above reproach.”
Shifting from a model of short-term shareholder primacy to capitalism that works in the interest of nature and society as well as long-term shareholders is a tall order that will require visionary and courageous leadership from those overseeing the companies that create wealth in our world. By following these four steps to block value extractors, lobby for more sustainable rules, identify the biggest sustainable value-creation opportunities, and maintain vigilant risk management and accountability, boards can ensure that their companies advance sustainable capitalism.
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