There are two kinds of companies–those that strengthen democratic capitalism and those that undermine it
Corporate boards have a lot on their plates–and new priorities seem to pop up every day. What can be done about climate change? How can diversity, equity, and inclusion initiatives strengthen corporate culture? Is it necessary to comment on the latest global atrocity? Why is CEO pay so high compared to that of the average worker?
In a recent report on the health of the market economy and society, Georgetown Law’s Denny Center for Democratic Capitalism identified a new question boards should be asking to better integrate long-term strategy and broader stakeholder interests: “What is our company doing to support or undermine the health of the market economy and society more generally?”
Though it may sound like an altruistic diversion, it’s not: A company’s long-term financial success depends on a strong economy and a stable societal context.
The case for factoring market and societal well-being into long-term strategy rests on two convictions: that creating value for shareholders and strengthening democratic capitalism are not zero-sum tradeoffs when considered over longer strategic time horizons, and that corporate actions that impact society more broadly should be fully integrated into long-term strategy, not delegated to a public relations or human resources organizational silo.
Both/And
In 2005, Ian Davis, then Managing Director of McKinsey & Company, made a strong case for the “both/and” view of creating value and doing good in his Economist essay, The Biggest Contract: “Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attack on business are turning a blind eye to pending forces that have the potential to alter their strategic future. […] It is time for CEOs of big companies to recast this debate and recapture the intellectual and moral high ground.”
Societal trends and pressures can provide important inputs to corporate profitability including implications for public policy, trends in consumer preferences, and insights on employee expectations. Corporate profitability and actions that support healthy markets and societies go together, and when tradeoffs arise, they usually work themselves out over longer timeframes.
Integrated vs. One-off.
As new challenges and societal issues make their way to the boardroom, boards, and CEOs often find it expedient to address them individually and to the side of overall corporate strategy. It’s easy to understand the temptation of this one-off approach, but as a result, boards miss the opportunity to develop a more integrated strategic perspective. For example, boards may feel pressure to address the level of CEO compensation compared to that of the average worker. In some cases, the approach to CEO pay does need to be fixed. However, by focusing only on the CEO (or other senior officers), the board might miss the chance to revisit how the rank and file are compensated. An integrated approach would catch this and prioritize setting the right level of compensation across the company. Though short-term payroll expenses will increase, longer-term benefits should result in solid returns driven by improved productivity and culture, savings related to better employee retention, and higher quality outputs for customers.
While voluntary coalitions among investment managers or new public policies are important ingredients in addressing complex tradeoffs companies face, action from the business itself is also essential. Boards can begin by asking how their companies are strengthening or weakening democratic capitalism. Both business and society can benefit, and the time to start is now.
Bruce Shaw is the executive director of The Denny Center for Democratic Capitalism at Georgetown Law in Washington, D.C.
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