The Visionary CEO’s Guide to Sustainability
Most people will readily agree that the first responsibility of business leaders is to grow the long-term value of their companies. Then debate begins: What is value, and how should it be measured and managed? Is a company’s value maximized by being shareholder-centric, customer-centric, employee-centric, or some-other-stakeholder-centric? In a complex system where every stakeholder influences other stakeholders’ outcomes—highly engaged employees improve customer satisfaction and growth, and so on—is it safe to neglect any stakeholder?
A decade’s worth of data shows us that the companies that create the greatest total value across all dimensions of performance don’t sacrifice shareholder value. For example, over the past decade the 100 companies included in the S&P/Drucker Institute Corporate Effectiveness Index, those that are best at creating value through “excellence in employee engagement and development, customer satisfaction, social responsibility, innovation, and high-quality earnings,” delivered total shareholder returns more than 200 basis points higher per year, on average, than those of the broader S&P 500.
Increasingly accessible and rigorous, data now grounds once theoretical discussions of stakeholder value, helping companies craft and implement effective growth strategies by illuminating the complex interdependencies among stakeholders, helping create mutual benefits, and, in turn, increasing the net value generated collectively for their constituents.
A three-step process for building a successful stakeholder strategy
Companies can most effectively harness this data to build strong stakeholder strategies by taking three steps:
1. Explore outside perspectives.
There is now a plethora of organizations that track the total stakeholder value that companies produce and the value that they generate for individual stakeholder groups. Independent rating agencies such as the Drucker Institute, Just Capital, and the Embankment Project for Inclusive Capitalism offer sophisticated analyses of the complex relationships among stakeholder interests.
2. Move beyond third-party rankings.
These outside organizations assign the same weight to all stakeholders of all companies and rely only on publicly available data. Since one size does not fit all, you need to bolster such external data with insider insights and gain an understanding of the interdependencies among your company’s particular mix of stakeholders.
Armed with that information, develop a clear stakeholder strategy. Clarify the purpose of your company, establish criteria for evaluating progress toward achieving it, set priorities among stakeholders, and develop action plans that recognize the complex interdependencies among them. The strategy should aim to create mutual benefits for all stakeholders and increase the net value of the collective system.
Your stakeholder priorities should reinforce your strategic strengths. Consider Costco, for example, whose cofounder and former CEO, Jim Sinegal, faced constant pressure to reduce value for his customers and employees and transfer more to shareholders. He refused, famously explaining the company’s strategy to The Motley Fool this way: “We’ve got essentially four things to do in our business: We have to obey the law, we’ve got to take care of our customers, take care of our people, and respect our suppliers. We think if we do those four things, pretty much in that order, that we’re going to do what we have to do in the long term, which is to reward our shareholders. We think it’s possible to reward them without paying attention to those four things in the short term, but if you don’t pay attention to them in the long term, we think you stub your toe somewhere along the line.” That prioritization is explicitly spelled out in Costco’s code of ethics on its website to this day. Virgin Group’s founder, Richard Branson, shared a different point of view with Inc. magazine: “If you can put staff first, your customer second, and shareholders third, effectively, in the end the shareholders do well, the customers do better, and [you] yourself are happy.”
The lesson is not that every company should be like Costco or Virgin but rather that there is no single “right” stakeholder strategy.
3. Sustain the new strategy.
Now that your company has developed a stakeholder strategy, here are some actions leaders can take to nurture it.
Build a culture that embraces the stakeholder strategy.
Educate the board and perhaps change its makeup so it better represents different stakeholder groups. Consider changing metrics and rewards for managers.
Design new organizational structures and processes.
Establish a small center of excellence to help guide the stakeholder strategy and track results. Launch cross-functional agile teams to pursue ways to generate mutual benefits for different stakeholder groups. For example, engage technology experts to improve products for customers while also reducing tedious or dangerous tasks for employees.
Possible new processes include requiring business units to begin their quarterly business reviews with descriptions of their value creation trends and targets; mandating that investment proposals include projections of the impact on different stakeholder groups; developing better ways to collect feedback about stakeholders’ needs, satisfaction, and frustrations; and changing the communication strategy to attract the right stakeholder segments.
Executives are finding that stakeholder strategies are neither altruistic nor unrealistically complex. They can be designed and implemented in ways that increase value for all stakeholders, including shareholders.
Even hardcore profit maximizers are migrating toward stakeholder strategies. British retailer Next, for example, is pursuing a joint goal: maximizing shareholder value while also increasing value for its non-financial stakeholders. Some call this an enlightened shareholder strategy, but a stakeholder strategy by any other name is still a purposeful step in the right direction. And each step builds greater evidence and confidence that stakeholder strategies aren’t simply worthy aspirations; they make solid business sense.