The global economy is experiencing significant change. Social structures and belief systems are evolving.
Leaders at all levels must grapple with this to ensure that their businesses remain relevant. It has become vital for new-age leaders to gain a deeper understanding of the social dynamics and processes that influence economic activity. Moreover, business leaders are under renewed pressure to recognise and provide solutions to society that are not exclusively aimed at maximising their organisations’ profits. Firms are required to adopt shared-value strategies that produce inclusive long-term wealth creation solutions. To do so, leaders need to develop a broader, system-level mindset that best serves longevity, taking into consideration the growing challenges that society faces, including climate change, inequality, unemployment, and the different (often conflicting) expectations of a firm’s stakeholders.
Below are some of the changes that leaders need to navigate.
There has been a wide acceptance that capitalism in its current form is failing society and business, and there are growing calls for businesses to change. This structural change in the global economy is gaining momentum, especially since the US Business Roundtable – an association whose members are chief executive officers of the largest US firms – in August 2019 committed to a new way of doing business. Referred to as purpose-driven leadership, this entails companies adopting a social purpose as a reason for their existence. This shared value approach further requires that firms focus on long-term value creation, in addition to the maximisation of short-term profitability. A key rationale for this new approach is that the well-being of businesses depends on the prosperity of society. A healthy and inclusive economy translates into healthy and sustainable companies. Put differently, making money at the expense of society will no longer be tolerated.
Stakeholder capitalism has come of age. A growing number of global investment firms (such as Blackrock – the world’s biggest fund manager, which manages approximately USD$10 trillion) have announced that they will, in future, use their significant influence to sanction firms in which they invest if they fail to repurpose. The increasing prominence of purpose-driven leadership has resulted in various regulators investigating the need to change governance structures to enforce this development, including the introduction of formal certification of firms that comply.
Many firms face renewed pressure to embrace sustainable social, environmental and governance (ESG) business principles. In South Africa, there has been a similar change, and company boards have been under pressure to enforce these principles. Globally, regulators are introducing various climate regulations for business and climate risk weightings. These will not only affect investment in companies but also how firms do business (for example, who banks can lend to). The global umbrella body for market regulators seeks to harmonise ESG rules, which will dictate how businesses disclose sustainability risks.
The investment industry has already adopted a framework for the evaluation of firms’ climate change risk profiles. There are several proposals to introduce new accounting rules which will require company profits to account for environmental impact. In addition, the World Economic Forum recently released a set of universal ESG metrics and disclosures to measure stakeholder capitalism that companies can report on, regardless of their industry or region. Since then, 120 members of the Forum’s International Business Council have indicated strong support for these metrics, with some firms expected to incorporate these into their reporting. It is expected that these measures may eventually become compulsory. A global agreement that would require all listed companies to disclose the climate change risks they face in a standardised way could be adopted at the COP26 conference in November.
Notwithstanding the initiatives above, not all industries are making sufficient progress in dealing with climate risks. Many fossil fuel companies, which face existential risks, have been strategically planning to reinvent themselves yet have failed to do so due to the shareholder value maximisation trap, focusing on short-term profitability only. Other firms, such as Ørsted in Denmark, which reinvented itself between 2008 and 2018 to become one of the world’s most sustainable green energy companies, have already successfully navigated the changing environment.
The Fourth Industrial Revolution
Technological disruption, particularly artificial intelligence, or AI, has a bigger impact than many business leaders realise. The biggest likely impact is and will continue to be the replacement of human employees and the reliance on machine learning. Already, traders in banks are being replaced by AI, investments are being managed by autonomous technology, and processes are left to smart systems to make decisions. Quantum computing will speed up this process. These have huge benefits and enable many new opportunities, such as the internet of things, complex system analysis tools, and consumer behavioural prediction and modification strategies. But it also brings risks for the unprepared. For example, AI decisions are often ‘black boxes’ in that humans do not know how they reached their decisions.
Evidence is growing that firms that successfully embrace diversity significantly outperform homogenous ones over time, measured in profitability, innovation, decision-making, and employee engagement. And yet, many firms fail to harness the benefits of diversity. Others fall into the surrogation trap – when metrics become goals. Achieving diversity targets does not necessarily mean progress. Diversity should not become a box-ticking exercise. Successful firms truly empower leaders and employees with different opinions, skills and experiences.
The ability of companies to reap the benefits presented by the transformation of the global economy without neglecting the risks requires continued upskilling of leadership capabilities. In many cases, leadership structures may need to change radically. In addition, leaders will be required to adapt to leadership styles that enable development, upskilling, and reskilling of employees affected by material changes. The ability of leaders to harness the power of diversity is reliant on the ability to accelerate inclusivity. Therefore, it is vital for companies to facilitate the development of their leadership’s skills and tools that accelerate greater inclusivity, equity and social justice.
Dr Francois Laurens is the lead faculty on the GIBS programme entitled: 'The Power of Purpose-Driven Organisations'. For more information on this programme click here.