People increasingly blame climate change, pollution, poverty and corruption on capitalism and pressure firms to address social problems. Donald Siegel and R Michael Holmes Jr write that business leaders must change the public perception of pervasive corporate malfeasance and the impression that firms do not advance the public interest. They say that to regain trust and salvage capitalism, firms must prioritise their social and financial missions more equally, using each mission to advance the other.
There has been a precipitous decline in trust in capitalism and large corporations. Although capitalism has generated substantial wealth, prosperity, and cheap access to path-breaking innovations across socio-economic classes in many countries, the public and many business school academics blame capitalism for a growing list of societal problems, such as climate change, pollution, poverty, and corruption. Over half of respondents to a recent survey in 28 advanced industrial nations believe that capitalism does more harm than good. Anti-capitalist sentiment is even stronger among young people.
A concomitant trend is that the environment, social, and governance issues (ESG) movement has heightened pressure on firms to be more “socially responsible” and even directly address social problems. The media has also played an important role in pressuring firms to address the alleged failures of capitalism and the need for companies to behave more “responsibly.” Market failure and corporate wrongdoing merit more attention in the media than government failure and malfeasance. The upshot is that declining trust can empower politicians to regulate business more heavily, which can hinder managers’ efforts to create value for investors and other stakeholders.
Facing both trends, how should managers respond to regain trust, and in the process, salvage capitalism? We believe that the proper response starts with the realisation that the behaviour of some corporate executives and those who regulate them is causing a lot of this mistrust. It is incumbent upon business leaders to change the public perception of pervasive corporate malfeasance and the impression that firms do not advance the public interest. We assert that they can accomplish this objective by integrating the social impact of business into their business and corporate-level strategies in a very specific manner that we refer to as stakeholder-oriented leadership. In a nutshell, managers should prioritise their social and financial missions equally, using each mission to advance the other.
There are three elements of stakeholder-oriented leadership. The first is that managers should embrace prosocial values, defined as a sensitivity to and desire to promote the welfare of others. Managers also need to adopt a paradox mindset, defined as the capacity to value and even feel comfortable with tensions that top managers and other leaders often face. In the context of social responsibility, there may be a “profit-purpose paradox.” The paradox is that in some cases, a firm’s profitability and its social purpose may be at odds. However, studies have shown that leaders with paradox mindsets have been able to simultaneously achieve superior profits, R&D, market share, and an enhanced corporate reputation. The third element of stakeholder-oriented leadership is that managers should avoid over-quantification of strategic social responsibility. Many leaders believe it is vital to quantify projected financial benefits of stakeholder-based strategies and to base their decisions primarily on such projections. Unfortunately, because the financial benefits of social missions can be difficult to quantify, over-quantification can hinder stakeholder-oriented leadership and the adoption of more socially conscious strategies.
In our paper, we provided two examples to illustrate our point about over-quantification. The first is the case of the Ford Pinto. The Pinto contained design flaws that caused the vehicle to catch fire, and sometimes, entrap occupants, in the event of a rear-end collision. Ford’s corporate leadership essentially placed a monetary value on human life by calculating the costs of defending court cases vs. recalling the vehicle. Based on this analysis, they decided to absorb the litigation costs, rather than fully protect customer safety. The result was a financial and corporate relations disaster for Ford.
On the other hand, we noted that managers who resist over-quantification are more likely to promote the well-being of non-financial stakeholders simply because they believe it is the right thing to do. For example, Johnson & Johnson was lauded in 1982 for placing consumers first by recalling 31 million bottles of Tylenol from store shelves, due to a concern that some bottles had been laced with cyanide poison. Although the recall and relaunch cost the firm over $100 million, these actions helped create goodwill for the firm. Over the next two decades, investors earned over 2,100% returns on the firm’s stock. By avoiding over-quantification in this case, Johnson & Johnson advanced both social and financial goals.
Johnson & Johnson’s history shows that stakeholder-oriented leadership is difficult to maintain. According to the US Centers for Disease Control and Prevention, more than half a million people died from opioid abuse between 1999 and 2021. Although it was clear by 2008 that opioid abuse was becoming a major societal problem, Johnson & Johnson launched and aggressively marketed a new opioid drug in 2009. The new drug was developed to replace over $2 billion in lost revenue after a patent on another opioid drug expired in 2008.
Avoiding over-quantification means that financial returns are not the only driver of decision-making. A key challenge that executives encounter is that virtuous/conscious capitalism is difficult to sustain over time. You have to be consistent in your commitment to social responsibility, even if sticking to such a commitment results in a short-term loss.
For most of the twentieth century, strategic leaders were encouraged to focus almost exclusively on maximising financial returns, as embodied in the shareholder primacy principle. Despite the growing pressures on leaders to use their businesses to address social problems, most firms still face intense pressure to maximise shareholder returns.
Therefore, stakeholder-oriented leaders explore and exploit opportunities to pursue social and financial goals. For example, socially conscious product offerings — such as organic food, electric cars, and fair-trade coffee — tend to command premium prices and yield more customer loyalty. Likewise, offering employees more profit sharing, stock options, and other forms of pay linked to firm performance boosts employees’ earning potential, while increasing firms’ access to talent and improving motivation and retention. Stakeholder-oriented leaders also tend to favour stronger industry self-regulation to protect firms’ reputations and encourage socially conscious strategies throughout their industries. Importantly, however, seemingly prosocial strategies also can be a cover for unethical behaviour — such as greenwashing and corruption — that could erode the public’s trust in capitalism further. Thus, a consistent and authentic focus on stakeholder-oriented leadership is essential.
In sum, a more widespread, consistent, and concerted effort to integrate social and financial missions, and to balance the needs of multiple stakeholders, is needed to mitigate the loss of trust in capitalism. Practising stakeholder-oriented leadership and using stakeholder-based strategies can help firms address the new challenges they face. However, considering the ongoing pressure on managers to increase financial returns as well, we may need substantive changes in business norms and culture that place financial and social missions on a more even footing and balance the needs of multiple stakeholders to address the important problem of declining trust in capitalism.
- This blog post is based on Declining Trust in Capitalism: Managerial, Research, and Public Policy Implications, Academy of Management Perspectives.
- The post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics.
- Featured image by Mike Erskine on Unsplash
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