December 9, 2021
December 9, 2021
Board service has evolved over the last few decades, requiring directors to be knowledgeable on more issues facing companies than ever before: risk management, financial concerns, corporate governance, material disclosures—the list goes on. This reflects the growing complexity of the business environment, with environmental, social, and governance (ESG) issues permeating many conversations these days, including in the boardroom.
In addition, stakeholder capitalism emanating from ESG concerns is quickly becoming one of the most talked-about concepts among directors and officers. Stakeholders are using their influence to demand change around multiple facets of ESG-related issues. It is not a buzzword but a movement.
What Is Stakeholder Capitalism?
In essence, stakeholder capitalism is when an organization works to create value by meeting the demands of its various stakeholders as opposed to exclusively concentrating on profit and shareholders’ demands.
It is not a novel concept—in fact, as discussed in a piece on Investopedia, corporations were largely guided by the stakeholder philosophy until the 1970s, when the focus shifted to shareholders. After a hiatus of several decades, boards are once again faced with recognizing the relentless demands of the non-shareholder stakeholder.
Stakeholders can be any group with an interest in an organization, such as shareholders, employees, customers, and suppliers. From a pragmatic standpoint, people want to work for, invest in, and buy from companies with like-minded values and missions. Companies must better understand how to attract and retain talent in a fiercely competitive labor market, while simultaneously recognizing that customers and investors are all demanding that they demonstrate their commitment to the principles of sustainability and ESG protocols.
It’s the dawn of a new balancing act for the board, and the pressure to act is coming from all sides:
All these threats—including litigation—can result in enormous costs for businesses and for individual directors and officers.
What Boards Can Do
History shows that people and their organizations don’t shift their focus quickly enough to address emerging issues. What actions should boards be taking to adapt to this shift back toward stakeholder capitalism?
Everyone wants to avoid regrets, and this certainly applies to the evolving area of ESG and its impact on the board.
Think about the situation emerging, evaluate what your organization has done and is doing to address change, and engage others with expertise to counsel you. Do all of this on a regular basis and wrap it with a D&O insurance policy that is cutting-edge, and you should never have regrets.
Jack Flug is a managing director at Marsh and leads the US Financial and Professional Liability (FINPRO) claims practice. Maureen Gorman is a managing director and the ESG leader in Marsh’s FINPRO practice.
NACD: Tools and resources to help guide you in unpredictable times.