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Leadership at a Crossroads: Addressing the Stakeholder Revolt

October 25, 2019

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Relational Risk: Boards, Backlashes, Boycotts and the Stakeholder Revolt*

 

As Blackrock engages with your company this year, we will be looking to see how your strategic framework reflects past year’s changes [growing backlash]in the global environment. Larry Fink, CEO, Blackrock ($5.1 Trillion AUM) speaking softly but carrying a big stick in letter to S&P 500 CEOs

 

Relational risk is the expanding, uncharted threat that boards and their executive teams face today. Few road signs point the way for addressing this new world of militant stakeholders aggressively taking on institutions and their leaders. Customer, employee and shareholder boycotts and revolts have become the new-normal for front-page headlines in 2017:

 

Uber: CEO Steps down from Trump Council after Customers Threaten Boycott Guardian 2/3/17 Uber blasted by investors for ‘toxic’ culture – sexual harassment USA TODAY 2/23/17 Can Arianna Huffington [board member] Save Uber? NPR 3/24/17 200,000 customers ‘deleteUber’

 

American Airlines: Pilots Blast Return of Toxic Culture Bloomberg 3/6/16 Pilot Union Chief Rips CEO Over Skipping Trump Meeting Reuters 2/11/17 Profit falls, so why the raises? Our history has ‘bred some mistrust,’ says CEO DMN 4/28/17

 

Wells Fargo: CEO Steps Down…Sales Tactics WSJ 10/12/16 Wells Fargo credit card applications plunge 55% Money.CNN 3/20/17 Wells scandal: Where was the board? Money.CNN 4/24/17 Proxy adviser ISS urges vote against 12 of 15 directors

 

L.L. Bean: Group Take L.L. Bean Off Boycott List If Co. Takes Linda Bean Off Board Maine Public 1/9/17

 

United Backlash erupts after passenger yanked off…CNN 4/11/17 stock loses $1B Southwest will end practice of overbooking, CEO says USA TODAY 4/27/17

 

Controversy-averse boards and their C-suite executives find themselves embroiled in front-page stories often with newsworthy financial impact as they attempt to thread the needle in navigating angry, politically-partisan and generationally-divided customers, employees and shareholders.

 

The Era of Stakeholder Disruption

 

While technology disruption rightly gets a lot of press these days, relational disruption may have a more lasting, destructive impact. Yuval Harari, (Sapiens) is among many authorities who contend that cooperation is what distinguished and enabled humans to evolve and succeed over other species. If cooperation and working collaboratively drove evolution, surely relational unraveling is a force for devolution. Three key forces combined to drive the disruption of stakeholder relationships.

 

Destruction: The number of listed public companies has dropped by half since 1996 and the average life span of an S&P 500 company has declined from 61 years in 1958 to 20 years today. At the other end of the pipeline, the number of business startups is down 44 percent since 1978. Finally, as Larry Fink warned CEOs, “Dividends and buybacks of the S&P 500 exceeded the companies’ operating profits” often competing for capital needed for longer-term growth and sustainability. Why does this matter? Research just reported in the Harvard Business Review estimates that the short-termism of the recent “shareholder value” movement has cost more than $1 trillion in asset value and 5 million jobs.

 

Concentration: The wealth of eight men now equals that of 3.6 billion or half of the world’s population. In fact, economists at the World Economic Forum in Davos this year identified rising economic inequality as our most significant economic trend. The corporate version of wealth concentration is closely tied to market concentration: three of the most valuable tech companies are virtual monopolies in their segment – with Google at 88 percent market share, Facebook 77 percent and Amazon 74 percent. Fifty percent of new business start-ups are concentrated in 20 of the U.S.’s 3007 counties and 80 percent of venture funds flow to three states, leaving 47 states to share the remaining 20 percent. As J.D. Vance points out, in 2016 California received $52.4 billion of those funds while Kentucky received $22 million.

 

Technology Disruption: McKinsey estimates that 45 percent of current paid jobs can be automated with current technology. Truck driver is the largest job category in 29 states which means self-driving vehicles will eliminate the job that will most hurt those without college degrees. Meanwhile Tesla with .2 percent of U.S. sales becomes more valuable than General Motors with 17.3 percent of sales. Finally, retail which employs about one in ten workers is projected to close about 8600 stores in 2017 according to Bloomberg – the worst decline on record.

 

This rising destruction, concentration and tech disruption is profoundly altering the lives and relationships of workers, families and communities. It helps explain why only 19% of Americans ages 18 to 29 identify themselves as capitalists and only 42% support capitalism. As a coal miner told CNN, “Guys with overalls built this country and guys in suits tore it down.” The pitchforks and torches mob along with a representative from Larry Fink’s office will be heading to a boardroom near you shortly.

 

Relational Risk: Uncharted Territory

 

This great disruption has greatly eroded the trust stakeholders have of organizations and their leadership. Edelman Trust just reported the largest-ever worldwide drop in trust of business, government, NGOs and the media. A majority in two thirds of surveyed countries distrust all four. CEO credibility fell 12 points globally. In 2015 Deloitte reported the leadership gap had widened, without exception in each of 53 surveyed regions and 50 percent of U.S. workers would not recommend their employer to a peer. Approximately 70 percent of workers report they are not engaged at work, in spite of diligent efforts of many companies. The generational divide between Millennials and older generations plus our incredible political polarization only add to the challenge.

 

This relational disruption means that activist stakeholders are increasingly “de-authorizing” leaders. The orderly world of business leadership – boards and C-suite executives – historically adept at identifying and measuring financial risk has fallen into an alternative universe where a growing source of financial risk comes from alien sources not encountered before. The old tools – budgets, audited financials, risk committees, corporate governance – are a mismatch for the magnitude of change and attendant relational risk in this new land without maps.

 

Relational Leadership: Addressing the Risk of Relational Disruption

 

Relational disruption makes big demands of leadership – the kind Hal Gregersen describes: (April, Harvard Business Review): “When you’re the CEO of a large organization—your greatest responsibility is to recognize whether it requires a major change in direction.”

 

It is what Larry Fink is addressing. He prioritizes longer-term value-creation and identifies climate change, diversity, and worker issues including uneven wage growth as substantive issues. Are these just feel-good suggestions disconnected from a real world driven by financial results? Probably not. SRI (Sustainable, Responsible, Impactful) funds focused on more socially responsible investing are up 33 percent since 2014, now totaling approximately 21 percent of invested funds. More countries are moving to require public companies to provide “Integrated Reporting” on environmental, social and relationship capital along with financial capital.

 

The era of stakeholder disruption demands a different brand of leading: Relational Leadership – intentional, by-design leadership that prioritizes and optimizes sustainable stakeholder relationships. It acts to influence diverse players with very varied talents, goals, incentives, levels of commitment and even opposing interests – like board or C-suite rivals – to play as a team in the most purposeful, productive way possible. Sustainable financial capital requires productive relationship capital.

Boards must step-up by taking three key steps to demonstrate relational leadership and demand it of their company leaders:

 

1. Declare and document productive stakeholder relationships as a strategic enterprise priority – customers, communities, employees, management, regulators, etc.

2. Assign formal responsibility/accountability for productive stakeholder relationships to an existing/newly-formed board committee, without meddling – “noses in, fingers out”

3. Develop a stakeholder relationships scorecard – set goals, track and report on customer, employee, shareholder etc. relationships with support from marketing, human resources, investor relations and strategic communication functions

 

Companies have big, costly bets placed on the productivity and sustainability of their vital stakeholder relationships. That means in order for boards to be good financial stewards they must become better stakeholder stewards.

 

*(This article is based on a keynote address to the Institute for Excellence in Corporate Governance, Annual Conference, Naveen Jindal School of Management, University of Texas at Dallas April 12, 2017)

 

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