In the last decade
There’s been trade
There’s been globalization
There’s been technology
It’s all good
Or not?
Companies are flush with funds, but real incomes of people have declined
Growth has not been equal; the richest 2000 own more than 4.6 billion others
Capitalism has flourished while people have been left behind
Capitalism has flourished while our environment has been severely degraded
It’s not all good
These are the debates and the discussions at the World Economic Forum at Davos where business leaders and experts are highlighting the need to redefine the current form of capitalism also called “shareholder capitalism” which is the dominant form of business the world over. This form of business maximizes profit over everything else. While this has yielded many benefits, unfettered capitalism at the expense of society has led to many ill effects. This form of capitalism has ignored that business is part of society, and the environment provides eco-system services to sustain life. We are in the midst of the biggest mass extinction of all species. We are seeing horrific climate events such as excessive rainfall, extreme temperatures and erratic weather patterns all through the globe. Further, the impact of trade and globalization has not been equal. Some have benefited, others have become poorer. Stock markets have gained in most countries, almost tripling in value while Inequality is at an all-time high in most countries. Most business leaders and experts seem to agree that capitalism in its current form is broken.
Something else is needed.
But what?
Then a group of American companies last August announced that the role of business needs to move away from “shareholder capitalism” to “stakeholder capitalism”. This means other stakeholders that were hitherto ignored employees, society, environment need to be equal stakeholders in business. A similar theme has now taken over Davos this year. The Asian presence as always, has not been centerstage. Notable though, have been the Chinese companies and experts who at various panels and forums have been talking about sustainability and business responsibility with remarkable ease. One thing though is certain, business responsibility is now getting the attention it deserves and Indian companies who have profited from the old form of capitalism are now going to need newer methodologies and newer thinking.
But no matter what name we give it, one thing is certain, things are certainly changing and the increasing clamor for sustainability at scale is reaching a crescendo. The implications of this on business as usual are profound. As Dipali Goenka Chief Executive Officer and Joint Managing Director, Welspun India said, “We cannot be complacent even for a day. The disruptive shifts are coming in from many directions. AI, Robotics and IOT which are transforming manufacturing. Customers and governments that are demanding sustainability and global trade trends that are shaking up the eco-system.”
There are 5 key takeaways from the deliberations on stakeholder capitalism
- You don’t need a sustainability report, you need sustainability inside
The focus on business responsibility has often been termed by the financial community as ESG i.e. environmental, social and governance issues. The focus on ESG has been picking up momentum in the last few years and companies have increasingly focused on generating sustainability reports and cause marketing campaigns to promote themselves.
Now though, we have reached a tipping point with global investors who are demanding action and this action should not just be local or limited. They want transformation at scale because nothing else will do in the state of a climate emergency. A compliance driven approach where you simply submit a sustainability report is passé. Indian companies will need to look at everything that forms the core of their business to drive value and consider their impact on the environment and society.
- ESG for companies and countries
The belief behind shareholder capitalism was that if companies maximise profits, they will pay taxes, which the government can then in turn allocate to achieving social goals. The challenge, of course, is that many governments have failed to live up to this promise. Many government policies allocate capital injustice and exclusionary ways. Now, when ESG becomes the cornerstone of investing in companies the impact on countries cannot be far behind. The country risk reports do cover several important facets, but overall the focus has ESG data is now going to be needed and mandated not just for companies, but for countries too. Further, GDP as the only measure of growth will therefore need a relook. The Indian Government will therefore need to look at not just internal measures such as ease of doing business but how they are contributing to the global SDG’s through far reaching, environmentally and socially sound policies. Abhijit Banerjee’s social income transfers that achieve common good might have an important role to play in this. Measures such as natural capital accounting that put in a value to the natural capital owned and preserved will also pick up.
- Global Supply chains will transform….and shrink
Today’s world functions on shipping things around. Fruit, clothes, cars, shampoos, washing machines may have parts and materials sourced from all across the world. The emissions from logistics and transportation are perhaps the biggest culprits in our high carbon economy. With climate change and wild weather events these global supply chains are increasingly at risk. In fact, the top 5 risks in the Global Risk Report released at Davos are environmental risks. In such a situation, global companies are looking at new technologies that can create products out of local materials. If, for instance, production and consumption of certain things moves towards localization, Indian companies with a large export footprint need to de-risk themselves and determine what their new solutions will need to look like.
This will mean an increased emphasis on understanding customer needs, new materials and creation of brands with purpose.
- ….So will production and consumption
The last decade was about making human to human connections, where we used Facebook, Twitter and other such social tools to speak with anyone across the world. The coming decade will be about changing the way we produce and consume things because these processes currently, across sectors, are hugely wasteful. Fashion produces more clothes than we need and has possibly damaged the environment in equal measure to the oil and gas industry. The same is true for FMCG that produces large quantity of things in packaging that harms the environment.
The new decade will be about producing goods in different ways. As we get into the 5G world, machines will get smarter and quicker. AI and machine learning will be able to anticipate, produce and deliver products based on demand. New products that can upgrade via software may mean that the source of value by putting in natural obsolescence may disappear. Reverse supply chains will become an integral part of business as companies integrate into the circular economy. This will be enabled by the new generation of customers who will demand corporate action against waste and brands that care not just for their profits but causes that create a better world.
- Technology acceleration and Network effects will create new value sources and business models.
Huawei CEO Ren Zhengfei and historian Yuval Noah Harari spoke in Davos about the future of technologies and the rise of digital surveillance which will increasingly become centerstage to how companies capture and use data.
AI led automation is also growing rapidly as is the fear of huge job losses, which runs counter to the idea of broad stakeholder capitalism. Dr Shefaly Yogendra, currently serving on UK Research & Innovation’s AI Review external advisory group, sees this differently. “We have had periods of near-full employment in recent history and we are currently in one, although there is understandable fear of automation related job losses. What history tells us is that jobs change. Some jobs that exist today will not exist tomorrow, but new jobs will be created. This means the real challenge is re-skilling and constant learning and easy access to ways to update skills. Big data for insights and predictions is equally available to policy makers and to those shaping future trajectories in education and skills.”
Davos 2020 has seen an unprecedented focus on sustainability and perhaps these discussions and concerns can spearhead the change towards rapid, scalable and sustainable action. Prince Charles, a long-term vocal environmentalist, outlined a 10-point agenda highlighting that sustainability and profitability are not mutually exclusive. He has called for deploying nature-based solutions for various sectors and valuing natural capital to reshape our economy to fight climate crisis. According to Lutfey Siddiqi of the London School of Economics, it is clear that Davos 2020 marks a tipping point in terms of bringing sustainability to the core of the dialogue. The battle of rhetoric appears to have been won by “stakeholder capitalism” with major corporations outdoing each other in their attempts to be associated with it. However, the jury is out on whether that rhetoric is matched by action and action by material outcomes.
For the Responsible Future blog
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