By Martin Reeves, Georg Kell and Fabien Hassan
In 2014, CVS Health, a major US retail pharmacy chain, stopped selling tobacco products in all of their stores, in spite of the significant contribution that these products made towards sales. The following year, the company left the U.S. Chamber of Commerce to protest lobbying against tighter tobacco regulation.
In Germany, CEOs are also increasingly involved in shaping the broader context of business. In July 2017, Peter Terium, CEO of Innogy (ex- renewable energy branch of RWE) launched the #We4Europe coalition for “an open, united and strong Europe” as a reaction to growing anti-EU sentiment. The coalition was joined by many high-profile German companies such as ThyssenKrupp, Volkswagen and Lufthansa.
These are examples of corporate statesmanship. There is now a strong case for CEOs to take a bolder role in public affairs.
We can define corporate statesmanship as the intervention of a corporate leader in public affairs to reshape the game and foster collective action in support of the common good, beyond the scope of the company’s enlightened self-interest.
Social stresses abound and 2018 may well prove to be a moment of truth for CEOs, especially in the US, where companies will be under greater scrutiny because of tax reductions and regulatory relief. The societal challenges we face are well-known – from inequality, fear of technological disruption of employment, deterioration of the environment, to the financial stress on social welfare.
At the World Economic Forum in Davos, the business community showed increasing awareness of these issues. Leaders are now stepping up on sustainability and Corporate Responsibility (CR), not least because of growing evidence of a positive link with financial performance. CR is fundamentally about individual action, in ways which are compatible with common interest, in other words, “doing well by doing good” within an existing policy framework.
By contrast, statesmanship goes a step further. It is about shaping the game by influencing the collective will. It tackles problems that can’t be resolved through the enlightened self-interest of individual companies and solves the prisoners’ dilemma of non-cooperation leading to poorer outcomes for all.
In most of the world, there is a historic division of roles where corporations drive economic activity while governments take care of the common good. Allowing companies a stronger role can certainly create conflicts of interest, akin to having the fox watch the hen house.
However, there are strong reasons to believe that many governments may not be in a position to address all challenges by themselves. The scope and scale of some of the issues are arguably too broad even for large individual states, while weakening global cooperation reduces the chances for collective action. Short political cycles, increasing political polarization and financial pressures constrain public action and limit the ability of governments to address long-term issues. And as a result, confidence in governmental institutions is falling.
There is an understandable reluctance for firms to get involved in public affairs. But the risk of acting needs to be balanced against the risk of inaction. Regardless of political inclinations, corporate leaders have a common interest in preserving the game of business and defending the drivers of growth, like technology and globalization. Ultimately, business cannot succeed if societies fail.
The path to statesmanship for companies
- First, be a good citizen
A good statesman has to be a good citizen. Maximization of Total Shareholder Return (TSR) within given legal boundaries is not enough. Leaders need to define clearly a human purpose, the higher social goal which their corporation serves, and ensure that their impact is compatible with that purpose. And they need to ensure that their own operation is based on values and a commitment to integrity.
- Understand and protect the rules of the game
Statesmen need to protect the rules and institutions which guarantee balance in society. Companies benefit from a “license to operate” from society. Statesmen understand the underlying conditions of the game, and the lines that cannot be crossed without jeopardizing their license to operate.
- Bolster government
To play the game of business, companies need a fair set of rules and a referee. The rule of law is a basic condition for economic development. African fintech CEOs have been calling for regulatory actions to prevent fraud and facilitate the development of the industry. “Regulations have a huge role to play in ensuring the fintech industry becomes bigger and better,” said SimbaPay CEO Nyasinga Onyancha
- Support smart regulation
Empowering governments is a first step, but corporate leaders also need to propose and support smart regulation to preserve social balance. A case in point is the financial industry, which is highly complex and interconnected. It shares many features with biological systems, where all actors benefit from the ecosystem. In such situations, actors that over-stretch the system by systematically maximizing only their private benefits may provoke collapse that is ultimately detrimental to their own interests.
- Oppose injustice
When confronted with situations that are obviously unfair, the right response of the statesman is to take action. As Elie Wiesel put it, “We must take sides. Neutrality helps the oppressor, never the victim”.
- Take the lead
The major issues of society are well-known. Sometimes even the solutions are obvious but political, social or economic conditions prevent those solutions from being implemented. Statesmen do not use this as an excuse and will instead take the lead and demonstrate that action is possible.
For instance, Google built a group of hackers called Project Zero, which aims at identifying and addressing digital threats with a focus on the software made by others. This is a tangible way for Google to show that it takes responsibility for the overall stability of the internet.
- Shape and join horizontal coalitions with other companies
Leadership and exemplification are meant to trigger collective action. For businesses, the rationale for engaging with others is not just about maximizing impact. Acting together with other industry players is also a way to ensure that the conditions of competition remain fair and equivalent for all.
In a particularly striking example, 400+ companies including Microsoft, Adidas and Sony have committed to being climate neutral, i.e. to minimize their greenhouse gases emissions, and compensate for unavoidable emissions.
- Shape coalitions with investors
CEOs have a direct responsibility toward their shareholders. This is often used as an argument for business leaders to remain within the strict limits of their assumed mandates, and thereby focus on the maximization of TSR (Total Shareholder Return). However, there are now many examples of investors pressuring leaders to take a stand on global issues such as climate change, human rights and inequality. Growing evidence that corporations which tackle such challenges perform well, and new tools such as the Arabesque S-Ray that empower investors to systematically assess corporate performances on ESG issues, mean that the case for corporate statesmanship can increasingly be made with investors interested in long term value generation.
- Build narratives
It is often impossible for even informed citizens to know all of the facts, which are in any case often disputed, especially in the case of controversial social issues. People understand reality individually and collectively through stories. Statesmen exert influence and shape minds through narratives. CEOs need to explain why they believe what they believe and advocate for it by building understandable and compelling narratives, which not only stand up to scrutiny but which can create alignment and support.
Martin Reeves is senior partner in BCG’s New York office and director of the BCG Henderson Institute. Georg Kell is Chairman of Arabesque, an ESG Quant investment firm and founder and former head of the UN Global Compact. Fabien Hassan is an ambassador to the BCG Henderson Institute.