At the February 2020 World Economic Forum in Davos, the founder and president of the Forum criticized the economic theory and business practice that view shareholders as the clients of a business organization, the ones for whom the organization exists to provide returns on their investments. He believes this is an outdated theory. Organizations should have more than one entity to satisfy: community needs, worker welfare, and social responsibility should all be goals as well.
This is not a new idea; there has been an awakening in the population at large that sees profit, exclusive profit growth, as evil. Organizations should act responsibly toward the environment and society, which could mean agreeing to limit profits that the company produces if they are at the expense of those interests.
I believe that these emerging theories and statements are valid and legitimate, but they will remain theories. Condoning profit orientation per se will not work. The existent power structure of the system will continue to direct behavior toward profit orientation, albeit with some philanthropic contributions and lip service to social responsibility.
If you want to change the course of a motor boat, it is not enough to stand on the deck, look at the map, and point in a new direction. Nothing will happen until you change the relative power of the left engine versus the right engine. I believe these new eco-political theories of social responsibility will remain on paper because the power structure—the dynamics of the economic system—has not changed.
I have known many CEOs who are truly socially responsible souls. They are concerned about the environment. They are worried about what is happening to society and would like to see change. As leaders of public multinational companies, however, they have to satisfy Wall Street or risk being replaced by their board of directors and shareholders.
Shareholders in the public market are loyal to nothing but to the return on their investment. If the earnings per share are below what is expected, the stock price will go down. In the blink of an eye, shareholders will sell their shares and buy into a company that shows better earnings. Thus, even if the CEO intends to limit profits to be more socially and environmentally responsible, they will not stay in power if a competitor performs better financially. They will be replaced.
In privately owned companies pride plays a significant role especially in small companies. They are part of the community. The founder will not take actions that will make them lose face in the community. The community will not support their business. As a member of the community, they want to be appreciated and respected. So they are community-oriented, philanthropic, and supportive of their clients to assure themselves that the quality of the product they provide does not shame them within their community.
I suggest that this does not apply to large, multinational companies where the CEO might live in Scottsdale, New York, but the companies they manage are in India, Australia, or scattered throughout the US. If top management of those companies pollutes, they are not polluting their own backyard. They do not pollute the water, air, and earth where their children live. They are polluting far away places, where their sense of loyalty to the local community is questionable. I believe that they don’t feel any limitation to pursue earnings per share and shine in the stock market. But there is a catch. The executive in India, suffering pollution from an American company, may be polluting the living space of a community in Europe. The company stationed in Europe polluting communities in Australia, and Australian companies polluting the US, and so on.
The global spread of business interests diminishes the pressure on CEOs and their boards to be community-oriented and environmentally responsible and the pressure to earn money is more permissible. So even if CEOs intend on being responsible, they cannot because they must pay attention to Wall Street expectations.
For socially responsible behavior to take hold, all businesses would have to agree not to pollute one another’s countries, and investors would have to change why they buy stock in the market.
The zeal to make companies socially responsible will not work until we change the orientation and the rules by which businesses operate—rules that indicate that the stock price and profitability are the measurements for promotion and rewards.
True, there are investors who invest exclusively in companies called Impact Enterprises, which are socially responsible, but this is too little and too late to make a difference; Climate change and the pollution of society will destroy our civilization as we know it. If we want to change business’ behavior to correspond to their declared intentions and do it in timely, we need to change the power structure of how capital is mobilized, used, and returned to investors. We have to rethink the role of Wall Street and stock exchanges. We have to rethink the composition of boards of directors. Boards should not exclusively be representatives for the owners. I have been recommending for years to put artists on boards of directors because true artists, by and large, are socially conscious and not materialistically oriented. They can represent the global interest of the community in which the enterprise operates. I would put religious leaders and intellectuals on the board to balance the power structure that currently favors stockholders exclusively. That is just one example of what I mean when I say that we must change the reward and power systems before we can change behavior. Changing goals is fine, but it in its self is like trying to lose weight without changing our eating habits.
Ichak Kalderon Adizes