Global collective problems need global collective solutions. This is what is now driving large firms to move beyond the "shareholder first" mantra.
By last month, 183 corporate CEOs signed on to a statement affirming their commitment to move beyond the “shareholder first” mantra to account for the interests of all stakeholders, including employees, customers, suppliers, and communities. The statement by the US Business Roundtable recognize the fierce headwinds businesses are facing – and their proven capacity for adaptation.
Since the advent of the modern firm, businesses have had to contend with a fundamental paradox: society needs large organizations to solve complex collective problems, but also fears centralized authority and decision-making.
Yet public opinion surveys rank large companies among the least trusted institutions (above only television news and the US Congress), with small businesses among the most trusted.
If the beginning of the twentieth century was shaped by the modern multiunit enterprise, the century’s latter half was all about the multinational. The shift began after World War I and picked up steam after the end of the Cold War, when the integration of markets and the vast expansion of corporate bureaucracies enabled companies to take advantage of global economies of scale.
The so-called Davos Manifesto was born in 1973 at the World Economic Forum’s annual meeting in Davos, when WEF founder Klaus Schwab asserted that “the purpose of professional management” is to serve all stakeholders, and to harmonize their different interests.
At the same meeting corporate focus was also urged to shift to a more responsible “corporate citizenship” – the idea that a corporation, like any citizen, had to align its self-interest with the shared interests of society. But, though participants at that year’s WEF meeting unanimously endorsed the manifesto, corporate citizenship has remained a radical idea – one that is only now, nearly a half-century later, becoming mainstream.
Today the catalyst of corporate change is Global Warming and the Fourth Industrial Revolution, characterized by business expansion into the domain of data and algorithms. In a sense, smaller firms may lead this new phase of business activity. As Jack Ma, the founder of the Chinese tech giant Alibaba, told Davos attendees this year, “In the last 20 years, globalization was controlled by 60,000 companies worldwide. Imagine if we could expand that to 60 million businesses.”
But this would not be a return to the past, with individual small and medium-size enterprises driving the economy. In fact, Ma was touting a platform he has built to allow SMEs to build globalized businesses.
Therein lies the fundamental difference between modern markets and those Adam Smith envisioned back in 1776: to compete today, SMEs need to be able to store, process, and analyze massive amounts of data – capabilities that are provided by giants like Alibaba, Amazon, Facebook, and Google.
Similarly, while the rise of the “gig economy” means that more people are operating as one-person firms, these workers rely on multinational platforms to get “gigs.” It is this tension between unprecedented bigness – Apple and Amazon recently became the first privately owned trillion-dollar companies – and pre-industrial smallness that lies at the heart of the trust paradox today.
As a result, large corporations are more than stakeholders; they often govern the platforms upon which all stakeholders intersect. To avoid another public backlash, they must make these platforms serve us not only as consumers, but also as entrepreneurs, workers, and citizens.
At a time of unprecedented global challenges – including climate change and high levels of inequality – this must include using the unprecedented power of platform leadership to catalyze global-scale solutions.
This is propelling the latest transition in corporate stakeholdership, focused not just on scaling more wisely, but also on becoming wiser about what to scale. Business leaders know what happens when the tide of public opinion turns against them, and therefore they now shift focus of their leadership from “shareholders first” to a more responsible “corporate citizenship”.