Redefining the business of business

COVID-19 has been a wake-up call for business, shining an unsparing spotlight on the vulnerabilities of many organizations and pulling forward changes in working practices that were expected to take years into a matter of weeks.

The disruption unleashed by the worst health crisis in more than a century has ricocheted through every sector of the economy, from financial services giants on Wall Street to small shops and restaurants on main street. The after-shocks will have a profound impact on many aspects of commerce far into the future.

Importantly, coronavirus has also accelerated significant shifts in the complex relations between business and society, underscoring the need for a transformation towards a more inclusive form of capitalism.

Coming on top of the existing challenges of climate crisis and growing inequality, the threat posed by a runaway disease has forced business leaders to question fundamental aspects of how they operate. One conclusion is already plain: a return to “business as usual” is not an option.

Instead, businesses will be expected to re-engineer the way they operate to build trust, create value for society at large and mitigate long-term risks. Customers, financial markets and governments will punish companies that fall short in terms of their social and environmental impact. Those that provide transparent benefits will be rewarded.

The implication for company boards and their investors is that for a business to succeed in the long term, it must provide profitable solutions that positively affect all stakeholders. That means the previous primacy of the shareholder in the life of corporations is set to decline as other voices come to the fore.

The changes, however, do not stop there. Two other cornerstones of modern business – the presumption of continued globalization and a limited role for government in the economy – have also been severely shaken by COVID-19. Lockdowns, travel restrictions and other disruptions have crippled many global supply chains, while governments and central banks have intervened in an unprecedented manner to provide some $20 trillion in bailouts to keep the world economy afloat.

The full ramifications of this have yet to play out. But in an age of stagnating globalization and greater government involvement in economic activity, multinational companies are likely to come under pressure to operate more nationally in future, while the long-term price of mammoth stimulus packages may be higher levels of taxation and regulation.

The fallout of COVID-19, of course, varies substantially from sector to sector. A few industries, notably technology and healthcare, have benefited significantly from strong tailwinds, as demand has soared for products ranging from online conference calls and home entertainment to face masks and vaccines.

For other sectors, such as travel and hospitality, there has been a catastrophic slump in demand, making a return to the pre-pandemic environment unimaginable for the foreseeable future.

In between these extremes are vast swathes of the world’s manufacturing and service industries where the task now is to adjust to the shock of the past year and find novel ways to thrive in the post-pandemic era.

For many manufacturers, the key challenge is to adapt fast enough to keep up with the pace of technological advances that will shape the factories of the tomorrow. This includes incorporating artificial intelligence into operations, sharing data and developing the digital traceability systems needed to build comprehensive resilience.

The World Economic Forum’s Global Lighthouse Network has an important role to play here as a catalyst for accelerating the adoption of advanced technologies in manufacturing. So far, more than 50 manufacturing lighthouses have been identified from different industry sectors to help incubate new ideas.

Size also matters as companies chart an uncertain future course, since the pandemic has wreaked unequal havoc among businesses, just as it has throughout societies. Small and medium-sized enterprises (SMEs), which represent about 90% of businesses and more than 50% of employment worldwide, are likely to face greater difficulties recovering than their larger rivals, since they operate on smaller cash re­serves and thinner profit margins.

Nevertheless, despite these many differences, there are some common themes facing the leaders of all companies considering their paths back to sustainable growth. The challenges and uncertainties they must weigh up include the future of remote working and the acceleration of digital solutions.

The technologies allowing such advances bring great opportunities, but also significant threats, from protecting against cybercriminals to preserving the “soul” of a company if employees can no long meet in person over a coffee.

One standout lesson from 2020 is that the adoption of digitization and the switch to contactless operations can happen almost overnight. Online banking interactions, for example, jumped to 90% during the pandemic, from 10% before, with no drop-off in quality.

But true business transformation requires more dynamic changes than simply applying digital technologies to do faster and cheaper what companies have always done. Nowhere, perhaps, is this more relevant than when it comes to rethinking supply chains.

Long-simmering Sino-American trade tensions and the innate fragility of global supply lines means that arguments about shortening them have been brewing for several years. The pandemic, however, exposed the fatal flaw in the principle that companies should optimize supply chains based on individual component costs, thereby creating a “just-in-time” (JIT) model that favours economic efficiency over resilience.

The image of automotive manufacturers flying Chinese parts in suitcases to Europe to keep production going in the early days of the pandemic was arguably the final nail in the coffin for the JIT approach.

Instead, more and more companies are embracing “just-in-case” supply systems that put resilience and sustainability centre stage. This rebalancing is critical, but the adjustment is likely to be wrenching throughout large sections of the economy, given that today’s global value chains represent roughly three-quarters of all global trade.

Overarching the immediate lessons of COVID-19 is a recognition that environmental, social and governance (ESG) considerations – the yardstick for stakeholder capitalism – will be essential for corporate success in the future. And the stakes could not be higher.

The huge economic and societal disruptions of 2020 have been a potent litmus test for the idea of stakeholder capitalism, which received a fillip in 2019 when the US Business Roundtable redefined the purpose of a corporation as serving all stakeholders, not just shareholders. Some feared that the global crisis might have derailed the project, but in the event all the evidence suggests that the pandemic has pushed ESG issues further up the global agenda.

“I think 2021 will be a historic year in terms of changing the philosophy of business, moving from shareholder capitalism to stakeholder capitalism,” said Klaus Schwab, Founder and Executive Chairman of the World Economic Forum. He believes the concept is becoming truly mainstream in boardrooms around the world.

This is not to say that the profit motive and the capacity to create wealth by taking risks and pursuing innovation is redundant. The world still needs that fundamental growth engine, as well as the ability of markets to allocate resources efficiently. Yet far-sighted companies must also balance the need to run their operations in a sustainable way, not only to add value to society and to protect their licences to operate, but also to add greater long-term value for their shareholders.

Among investors, ESG is increasingly viewed as a risk management tool to benchmark the underlying strength of the companies that they finance. In a post-COVID-19 world, it will clearly pay to invest in businesses that are resilient, which means finding companies that track “externalities” – or the consequences of industrial activities that are not reflected in market prices – whether that is the impact on climate change or income inequality or diversity.

For management teams within companies, this changes the debate about the nature of resilience. "In the past, it was just a cost. Increasingly it’s going to be looked at as asset. We're going to have to build a flexible and agile organization that can respond to these things, and climate change is chief among these large-scale risks," said John Haley, Chief Executive Officer, Willis Towers Watson.

Financial infrastructure resilience matters just as much as manufacturing resilience in an era when all countries rely on the global investment system to foster the efficient allocation of capital. The growing investor focus on ESG issues is therefore to be welcomed, although there is clearly room for improvement. Far too often, investment decisions are still driven excessively by short-term pressures – resulting, for example, in companies concentrating on quarterly returns – making the system ineffective in responding to unprecedented economic, environmental or social challenges.

All of which hammers home the need to bring ESG measurements into the mainstream and to ensure a consistent reporting system that comes close to the common metrics found in financial statements.

That endeavour has now moved an important step forward with leaders representing 61 global businesses signing up this week to a new set of Stakeholder Capitalism Metrics produced by the WEF and its International Business Council. These metrics include a core set of 21 universal, comparable disclosures focused on people, planet, prosperity and principles of governance that companies can report on regardless of industry or region.

The benchmarking system was developed with Bank of America, Deloitte, EY, KPMG and PwC, and it offers a common language to measure what is material for non-financial performance. It elevates ESG from a corporate box-ticking exercise to a process in which businesses demonstrate their long-term value creation and contributions to the Sustainable Development Goals (SDGs).

Alan Jope, Chief Executive Officer of Unilever, believes the approach will form the foundation of increased corporate involvement in tackling problems like climate change, environmental degradation and social inequality.

“Companies’ annual reports and accounts might not be the first mechanism for change that would spring to mind, but standardized and mandatory non-financial reporting is critical to creating a new form of capitalism that tackles these problems,” he said.

Unilever is among the initial line-up of signatories to the Stakeholder Capitalism Metrics, which also includes bp, Dow, Nestlé, PayPal, Reliance Industries, Royal Dutch Shell, Siemens and Sony. This is, however, just the start. The leadership shown by the first companies is expected to inspire many others.

The inequalities, social unrest and racial injustice exacerbated by the pandemic mean that the need for businesses to build trust among all their stakeholders has never been greater. More and more companies are now waking up to this imperative, with some 86% of executives surveyed by the Forum agreeing that reporting on a set of universal ESG disclosures was important and would be useful for financial markets and the economy.

This major initiative by the Forum and it partners echoes moves by other organizations to make business more sustainable in future, including, for example, Prince Charles’ new Terra Carta or Earth Charter project that asks businesses to take nearly 100 actions, including a commitment to achieving net zero emissions by 2050 or sooner.

The readiness of company boards to embrace these projects speaks to a growing awareness that global threats can no longer to ignored as problems for tomorrow, and that building trust among customers, staff and wider society is crucial.

“Trust has become an incredibly important commodity,” said Kirsty Graham, Chief Executive Officer of Edelman Public Affairs, whose company publishes an annual barometer of trust. “It is how you bring people with you, it is your licence to operate if you are a business, it drives your commercial success. It is also your reputation.”

Over the past year, there has been a sharp decline in trust around the world as people have struggled to know where to turn amid of blizzard of misinformation. Significantly, however, the latest Edelman Trust Barometer offers a glimmer of hope for business, which has emerged from the turmoil of 2020 as the most-trusted institution, ahead of government, NGOs and media. That means the pressure is now on meet the expectations of people who are looking to companies to step in and fill the gap in addressing societal problems.

Nowhere is the challenge greater than with climate. Those commentators who early in 2020 thought the pandemic would put climate change on the back burner have been proved wrong. If anything, climate concerns have intensified as devastating forest fires and freak weather events in the past year have shown the urgency of a threat that could make COVID-19 look like a temporary blip in human progress.

The failure of governments so far to bend the curve on global emissions is shifting the debate to the steps that individual companies can play to address the problem. This involves not only cutting their direct emissions but also ensuring a net-zero supply chain. For companies in most customer-facing sectors, end-to-end emissions involved in getting products to customers are much higher than the CO2 released by their own operations.

Overall, an estimated 55% of the solution to the climate crisis will come from better energy systems and the remaining 45% from applying circular economy mechanisms to production and design. That makes collaboration across the industrial continuum essential.

Encouragingly, there are signs of progress with the launch of new commitments by leading companies to reduce their footprint. Just this week, more than 30 electronics companies, including some of the largest consumer brands, have joined with the Forum to launch the Circular Electronics Partnership, which will create a circular economy for electronics by 2030. Currently, only 20% of e-waste is dealt with appropriately, with the majority going to landfills.

Similarly, the Forum’s Global Battery Alliance is establishing a circular value chain for batteries in electric vehicles, with plans for a fully operational Battery Passport by the end of 2022, offering customers full ESG transparency for their product.

Delivering the message that stakeholder capitalism, not shareholder capitalism, offers the best opportunity to tackle the world's environmental and social challenges has been a long haul.

The original Davos Manifesto first established the stakeholder concept back in 1973, although for decades the response to the idea was muted. Things finally started to change in the wake of the 2008 financial crash. With luck, history will look back on 2020 as the greatest inflection point yet.

A collection of initiatives relevant to the day has been created for those with access to the Forum’s online tool, TopLink.