Introduction

The World Economic Forum (WEF) has released a new manifesto — Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution — describing a firm's principal responsibilities towards its stakeholders, ahead of the January annual meeting.

Stakeholder capitalism is the best approach?

WEF Founder and Executive Chair Klaus Schwab argues that shareholder primacy/shareholder capitalism (as propounded by Milton Friedman) on the basis a single minded focus on maximising profits to shareholders, and delivery of those profits in the short term, 'is no longer sustainable' both from a financial and from an environmental perspective.

There is increasing recognition Mr Schwab writes that 'adherence to the current economic system represents a betrayal of future generations, owing to its environmental unsustainability.'  In addition, he argues that pressure/influence of younger generations who do not want to work for/invest in/buy from companies that 'lack values beyond maximizing shareholder value' is having an impact, as is the increasing acceptance by executives and investors of the link between their own long-term success and that of their customers, employees, and suppliers.

Given this, and given that the third alternative model state capitalism — which entrusts the government with setting the direction of the economy — is also in his view flawed, Mr Schwab argues that stakeholder primacy in which companies are positioned as 'trustees of society', with responsibility not only to shareholders but to the community more broadly 'offers the best opportunity to tackle today's environmental and social challenges' and as such is the better approach.

The new Davos manifesto

The manifesto includes the following principles.

• The purpose of a company is to engage all its stakeholders in shared and sustained value creation. Further, in so doing, a company serves not only its shareholder but all its stakeholders including: employees, customers, suppliers, local communities and society at large.   'The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company'.
• A company serves its customers by providing a value proposition that best meets their needs. The manifesto gives a number of examples of this including that a company: a) accepts and supports fair competition and a level playing field; b) 'has zero tolerance for corruption'; c) makes customers fully aware of the functionality of its products and services (including adverse implications);  d) treats its people with dignity and respect (eg fosters diversity', 'fosters continued employability through ongoing upskilling and reskilling'); e) considers its suppliers as 'true partners in value creation' and integrates respect for human rights into the entire supply chain; f) serves society through its activities, supports communities in which it works; and g) pays its fair share of taxes.
• A company provides its shareholders with a return on investment that takes into account the incurred entrepreneurial risks and the need for continuous innovation and sustained investments. It responsibly manages near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.
• A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.
• A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.

Concrete action is required

Mr Schwab comments that living up to the principles in the manifesto requires concrete actions from companies including the use of new metrics to measure performance differently. 

For example, he suggests that companies need a new measure of 'shared value creation' and that this should include environmental, social and governance goals in addition to financial metrics.  In addition, he suggests that executive performance metrics need to be realigned with delivery of long-term shared value creation, rather than purely with shareholder returns.

Why issue a new manifesto now?

Mr Schwab said that a new manifesto has been released now to capitalise on the shift on the part of investors, and by the community, towards acceptance of stakeholder capitalism (as opposed to shareholder capitalism) as the better approach.

For example, the release of the manifesto follows the release by the US Business Roundtable of a statement redefining the purpose of a corporation to include delivery of benefits to all stakeholders (see: Governance News 21/08/2019) and the rise of impact investing.

In light of this, he argues that 'We should seize this moment to ensure that stakeholder capitalism remains the new dominant model. To that end, the World Economic Forum is releasing a new "Davos Manifesto," which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field – particularly in the "platform economy."'

Indicative of a shift in approach here, and overseas

Commenting on the release of the manifesto, MinterEllison Partner Geraldine Johns-Putra said that 'The WEF's new manifesto and refutation of shareholder primacy as the chief purpose of the corporation reflects increasing recognition from so many quarters that a corporation's purpose is to consider multiple stakeholder interests through a long-term not short-term lens. In Australia, the focus is increasingly on how directors can best reflect this principle in their decision-making and how companies can embed this ethos throughout the organisation'.  

[Sources: World Economic Forum Manifesto; WEF Blog 01/12/2019; [registration required] The FT 04/12/2019]