When it comes to determining the best approaches to solving the world’s economic and social ills, rational people can, and do, disagree. But there’s one point on which something approaching unanimity has emerged: That private enterprises – companies – must be part of the solutions.
This near-consensus has evolved out of a spreading realization about the limits of government power, whether it’s the inability of debt-laden nations to spend their way out of the Great Recession, or of their central banks to QE their way out of it.
Add to that a growing sense that companies, especially multinationals that transcend political and geographic borders, have in many ways grown stronger during the economic pain of recent years — a phenomenon that was one of the recurring, if informal, themes of conversation among the cognoscenti gathered at the World Economic Forum in Davos earlier in the year.
So when many of those same big thinkers gathered at this week’s Clinton Global Initiative, the question on hand wasn’t whether companies need to help, but how to make that happen. TIME managing editor Richard Stengel, who moderated Tuesday’s panel on “Creating Value for Business and Society,” made plain the core challenge: That the profit motive is sometimes at odds with the broader interests of society at large.
Stengel’s three panelists, however, each put forward practical ideas for resolving this intractable-seeming contradiction. “Seeming” is the operative word for Lynn Stout, a professor at Cornell Law School, who argued that the corporate gospel of shareholder value – the idea that companies must be run primarily or even exclusively with the goal of maximizing stock prices – is a myth of very recent vintage. Not only is this “rule” not enshrined in law, she says; there’s not even any solid evidence that companies that more closely hue to it perform better than those that don’t. And she sees tons of evidence to suggest that it contributed greatly to our current economic and financial woes. After 25 years of focus on shareholder value, she says, “we all know it’s not working out well.”
But Stout’s an academic, right? What does she really know about doing business in the trenches of the real economy? Well, those who look down on the Ivory Tower might have been more persuaded by Jochen Zeitz, chairman of German sneaker maker PUMA and chief sustainability officer of the company’s parent, PPR. A one-time wunderkind, Zeitz was the youngest CEO of a German public company when he took over PUMA in 1993 and proceeded to grow the company’s share price 40-fold over the next 13 years. Yet Zeitz argues that CEOs should be judged not by traditional financial metrics, but rather by a more holistic set of measurements, including something he calls an Environmental Profit & Loss Account, which takes into account a company’s environmental impact up and down the supply chain.
No Pollyanna, however, Zeitz also argued passionately for a dose of realism. “Sustainability doesn’t come for free,” he insisted to an audience perhaps too inclined to buy into the win-win argument made by many environmentalists. “We can’t walk around saying sustainability will always be good for business. It can be good for the bottom line, but it happens in the long term. We have to think long term and balance the short-term pressures that we are under.”
Those short-term pressures, of course, are the demands of the capital markets, which register the cheers and jeers of investors at an ever-increasing pace, with ever more violent results. Will investors ever have the patience to wait until the long-term financial benefits of sustainable business practices trickle down to the bottom line? Stout earlier had noted that the average holding period for a stock in 1960 was eight years; today the average is four months. Can CEOs convincingly argue for patience when their entire constituency turns over three times a year?
Investment banking veteran Arif Naqvi, founder and CEO of Dubai-based Abraaj Holding, was on hand to argue in the affirmative. Naqvi runs what is perhaps the Middle East’s most prominent private equity firm, making him a leader in a business that doesn’t have a reputation as the most patient class of investors. And yet Naqvi argued that in our increasingly interconnected world — one in which thriving communities become thriving markets — long-term sustainability and long-term profitability go hand-in-hand. Still, he acknowledged, convincing a broad range of investors “is going to be a long-term education process.”
(COVER STORY: Making the World A Better Place)
Meanwhile, a handful of practical suggestions emerged that have the potential to speed that process. Stout argued for two measures: imposing a stock transfer tax, which, by increasing the cost of buying and selling stocks, would presumably grow the average stock holding period and thus the time-horizon of the average investor; and building sustainability-related incentives into the compensation packages of corporate executives.
Zeitz, for his part, would like to see some version of an Environmental P&L statement on the packaging of everything we buy, ”so that consumers can look at it like they look at the labels for nutrition and calories,” he said. “We as businesses have to be transparent, and those that don’t want to be transparent need to be made transparent.”