“We want to leave the world a better place; we want to lead responsibly. Stakeholder capitalism is a framework to do so; it is New Harmony with a brain, and a balance sheet, as well as a heart.”
These were the closing remarks made by Dame Vivian Hunt, a Senior Partner at McKinsey and one of the keynote speakers at Imperial College Business School’s Annual Conference. The event was dedicated to having open and thoughtful conversations about the topic of responsible leadership, and Dame Vivian delivered a compelling address about the importance of stakeholder capitalism.
McKinsey’s Senior Partner was quick to make one thing clear: she doesn’t think that the idea of responsible business leadership “is really all that new.”
Sharing the story of Robert Owen, who ran a textile mill in the town of New Lanark in Scotland in the early 1800s and successfully implemented what many would consider to be an early form of responsible leadership, he then travelled to the US and enthusiastically invested most of his fortune in a venture in the settlement of New Harmony, Indiana, in 1825. His model for a Utopian Community collapsed in financial ruin within two years. For Dame Vivian one major reason for its failure was the lack of a business model. As she put it in a recent article for McKinsey, “there is a term for an enlightened company with the most perfect intentions that does not make money: defunct.”
A fascinating speaker and thinker, Vivian sat down with me after the Imperial conference to share her insights about stakeholder capitalism. Harnessing the expertise and experience that come with a career at one of the world’s most recognizable management consulting firms, she shared her thoughts about a framework for leading responsibly, and how as parents and citizens we want to leave the world a better place.
“The times we’re living in tell me that responsible leadership is more important than ever before,” she began with the events of the last year in mind, this Harvard alumna is steadfast in her belief that a core element of responsible business leadership is resilience.
In a recent article outlining the five key steps for making stakeholder capitalism work, Dame Vivian, alongside her co-authors at McKinsey, notes that “resilient companies are prepared for bad times, are relentless about improving performance, and make decisions skilfully.” And in moments of crisis or flux, which according to Dame Vivian is, at least in the business world, virtually all the time, resilient companies “do better, getting hurt less during downturns and then coming out stronger compared with the competition.”
Giving thought to the balance between social responsibility and the profit agenda, Hunt does not believe that business leaders have to make trade-offs between making money and being a socially responsible actor. According to Dame Vivian, all can be reconciled through stakeholder capitalism. “It defines value in broader terms,” she tells me.
In her recent McKinsey article, Vivian states that stakeholder capitalism “requires business leaders to define their mission as creating long-term value not only for shareholders but also for customers, suppliers, employees, communities, and others.” In our conversation, referring back to the story of Robert Owen and New Harmony, she points out that, alongside the absence of a business model, it was issues around stakeholder management and engagement that ultimately put an end to Owen’s goal of replicating his New Lanark success in the New World.
“Starting a small business, and scaling up that venture as a responsible business, isn’t easy. It requires a lot of different types of engagement with many different stakeholders. The change in stakeholder context clearly played into the failure of Robert Owen,” she says.
Understanding who your stakeholders are, and then in turn working to build trust among those parties by acknowledging and addressing their needs, are the first two steps to implementing stakeholder capitalism.
And for Dame Vivian, one company that has clearly understood this is PayPal. “When they separated from Ebay a few years ago, PayPal explicitly did a ‘reset’ on their corporate strategy and purpose. They put employees at the center of it all,” she notes. “From that, they have grown with various stakeholder perspectives, but their strategy is really informed by this notion of a fair wage and net disposable income for their employees.”
PayPal CEO and President, Dan Schulman, has been widely recognized as an individual that has long seen the importance of serving more than just the shareholders, with many noting that his commitment to doing better dates back years before the 2019 Business Roundtable which catalyzed business into social action. And it’s this long-term perspective on value-creation exhibited by Schulman that will make the difference when it comes to performance, according to McKinsey.
One of the consulting firm’s surveys, which studied 615 public companies over 15 years, found that those with a long-term outlook – “something that is fundamental to stakeholder capitalism,” as Dame Vivian noted in her keynote speech at Imperial – outperformed their competitors in earnings, revenue, investment, and job growth.
She also cites Costco, the US retailer, as another great example of a company “with clear financial evidence”, as she tells me, to prove that taking a long-term approach to value creation for more than just the shareholders pays off in the long-run (pun intended).
“Costco’s founder and CEO, Jim Sinegal, was getting a lot of flak from investors in 2004 because he paid frontline employees well above the industry average…since then, Costco is up more than 850 percent—more than three times the S&P,” she told delegates at the Imperial conference.
With the current business environment in mind, Dame Vivian emphasizes that, in establishing ‘trust’ with your stakeholders – another key element of stakeholder capitalism – it’s never black and white. “It’s not as simple, say, laying off staff versus not doing so,” she tells me, “it’s about the quality of communication with your stakeholders, and transparency that companies had with their staff and stakeholder around the trade-offs they were being forced to make.”
“It’s transparency like this that made people want to come back to work quickly and reliably, which then enabled firms to act responsibly coming out of this crisis,” she says.
During her keynote speech, Vivian conceded that, for some, stakeholder capitalism can be “a little mushy”, and that “some companies can talk the talk fluently and not do so much.” That’s why, if firms are to build trust among stakeholders through stakeholder capitalism, “it’s a matter of rigor and hardheaded management - goals, strategy, and metrics. That is the language of business.”
Discussing the challenges that some companies have in actually measuring how they serve their stakeholders, she says “the allegation that ‘you can’t measure your impact on stakeholders in a quantifiable way’ simple isn’t true.” For this McKinsey Senior Partner, there are countless quantitative and qualitative metrics for companies to use measure their impact, from wages and personal finances, to employee engagement and organizational health. Within her latest McKinsey article, using the qualitative metric of employee satisfaction as an example, she notes that “firms with high employee satisfaction outperform peers by 2 to 4 percent a year in long-run stock returns”, once again emphasizing that stakeholder capitalism is good for a company’s bottom line.
“Ultimately, any and all aspects of stakeholder management can have the same level of discipline that any other business initiative can. And it’s those choices that the company makes, around who they want to serve, that will give them a unique vantage point. As those choices will differ.”
Looking to the future of business and stakeholder management, Dame Vivian is upbeat about the opportunities that lie ahead. “We have an incredibly engaged and aware generation of business leaders. I’m very confident about the global economy’s ability to recover and make decisions that are even more informed by stakeholders.” She attributes the ever-growing social awareness that’s evident within global economy in part to generational change, as new businesses, such as those in tech-economy, as well as fast-growth consumer companies continue to emerge. But Vivian also places a great deal of responsibility at the door of leading business schools:
“I think that schools like Imperial College Business School, Harvard Business School, and other brilliant institutions of learning – have a responsibility through their research, as well as their applied education, to be at the cutting edge of responsible business leadership,” she says.
“And I’m optimistic that the likes of Imperial – where people go to truly grasp and understand those inflection points in business – take that responsibility very seriously.”
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