In the new year, the question of revamping the corporate model is at the heart of public debate on both sides of the Atlantic. The French government has just launched a project for a legal reform to revisit the purpose of for-profit companies, in order for them to incorporate social and environmental goals. In doing so, France follows the lead of other countries such as the United States, the United Kingdom, and Italy, which have already created new legal statuses for companies pursuing not only financial, but also social and environmental objectives.
At the same time, in the United States, Larry Fink, co-founder and president of BlackRock, one of the world’s most powerful investment groups, signed an open letter to corporate CEOs calling them to integrate the pursuit of social and environmental objectives alongside their companies’ financial objectives. Mr. Fink, whose company manages more than $6 trillion in investments, thus opens the door to systematic consideration of financial, social, and environmental data in investment decisions.
If effective actions follow these announcements, 2018 may mark a major change of direction in the evolution of capitalism, resolutely distancing itself from the paradigm of the sole maximization of financial profit for shareholders. But, let’s not be naive. Speaking about and calling for this change will not be enough to make it happen. The change in question requires a radical transformation of the mentality and behavior of all the players in our economic system. The state, of course, has a key role to play in pushing for a reform of companies’ legal status, in partnership with employers and employee unions in France. Likewise, investors such as Mr. Fink will have to move from words to action and support companies in the joint pursuit of financial, social, and environmental objectives.
This joint pursuit represents a true challenge for companies. We have been conducting research on how companies can address that challenge for more than 10 years at Harvard University in the United States and ESSEC Business School in France. Our studies on social enterprises which put social and financial objectives at the heart of their activities show just how difficult it is for companies to stay on course: economic priorities easily override social needs, and the answer to social needs sometimes means making an outright loss on business investments. The risk of drifting from and dropping social objectives is greater still in large public corporations that face the demands of high financial returns from their shareholders and whose internal processes and systems were initially set up to ensure the sole maximization of profit.
Some companies have shown their willingness to take up this challenge. The multinational corporations Danone and Veolia, for example, whose CEOs Emmanuel Faber and Antoine Frérot respectively, have called for a change in the purpose of corporations, have for several years developed initiatives that combine social and commercial objectives. Among other projects, the two groups have developed subsidiaries with the Grameen Foundation founded by Muhammad Yunus – Grameen Danone (specialized in the production of nutritious yoghurts for children suffering from malnutrition) and Grameen Veolia (specialized in the production of drinking water in rural areas). Ten years after their creation, these subsidiaries are still struggling to achieve social impact and economic viability.
Our research shows that companies which manage to sustainably pursue financial and social objectives are those which develop, internally, a ‘hybrid culture’ dedicated not only to operational excellence and profitability but also to their social mission. The development of such a culture relies on four main levers: translating these dual objectives in business activities; training and mobilizing leaders (administrators, directors, and managers) capable of understanding this duality of objectives and carrying them through to action; setting up of performance measurement and reward processes which take into account these dual objectives; and implementing negotiation and decision processes that facilitate the development of answers to the challenges and conflicts generated by this duality.
The transformation required is deep and one to which companies must commit themselves – because organizations and individuals that have until now essentially been looking exclusively towards profit maximization will not change their approach overnight, no more than their boards, lawyers, bankers and consultants. It is, moreover, a global transformation that is required which reaches out to companies both large and small. The recent ‘French Impact’ initiative launched by the French government to support social innovation in local communities may in this respect be of great help.
While these forthcoming developments carry hope and suggest that the capitalist model is undergoing perceptible change, the realization of this hope will nevertheless lie in our collective capacity to act upon it. The young generations, who sit in our lecture halls and classrooms, are powerful drivers for this change – as they invent new models of hybrid enterprises which straddle the divide between the business and social sectors, or demand from their employers’ exemplary conduct in both the economic as well as social spheres. But they cannot succeed alone: the joint effort of companies, policy makers, unions, shareholders, and consumers is essential for the hope raised at the beginning of this new year to become reality.