The challenges facing society and the systemic drivers that contribute to them
We face challenges that threaten to destabilise our societies. Many of these challenges demand political action and engagement at many levels by public authorities and different actors in society. Business and the private sector has its own vital role to play.
Many feel the status quo is delivering economic benefits to the few rather than the many
Rising inequality has seen a dramatic increase in the share of income going to the richest (see research by Resolution Foundation) and the growth of the gig economy and growing automation is making this worse by creating insecurity for many. The Covid pandemic shed a light on and compounded these inequalities. A new Oxfam report, published for the opening day of the World Economic Forum in 2021, revealed that the world’s 10 richest men saw their wealth increase significantly and that whilst the 1,000 richest people on the planet recouped their Covid-19 losses within just nine months, it could take more than a decade for the world’s poorest – people like carers, factory workers and cleaners – to recover from the economic impacts of the pandemic.
Sustainability, Net-Zero and Nature Positive
The latest Intergovernmental Panel on Climate Change (IPCC) reports have been stark. Climate change is already happening: its effects are already widespread, coming faster and intensifying. The latest report warned impacts will likely be even more serious than previously thought. There is a major risk that the planet will in the coming years hit a number of irreversible tipping points where damage cannot be reversed and the process starts to accelerate even further. As a result, there is now global scientific consensus that unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach. The collective scientific view is that these changes need to occur more quickly than the previous goals to hit net zero emissions by 2050 and to halve emissions by 2030. [for more see Top Findings from the IPCC Climate Change Report 2023 | World Resources Institute (wri.org)]
Biodiversity and the importance of restoring natural capital is the other side of the climate change coin. Without healthy ecosystems including forests, peat bogs, permafrost and healthy soil, we will be unable to store the vast amounts of carbon that we need to store for net-zero and, even worse, these ecosystems will start releasing huge amounts of Greenhouse Gases rather than storing it, quickening the pace of climate change and making it far harder to stop.
The physical effects of climate change and the depletion of natural capital are well known and extraordinarily serious including the risk of heatwaves, droughts, crop failures, floods, tropical storms with the risk of rising sea levels inundating low lying areas and causing the displacement of millions of people.
The policy effects – the impact on business of the necessary responses by governments, regulators, the courts, investors, employees, consumers, NGOs and the media – will also be huge in the form of taxes, subsidies, incentives, penalties, obligations, bans, emissions trading, investor and employee action, public protests, court actions. Public and media campaigns can already be seen globally and will only increase.
The ECB said in September 2021 that the costs of climate change are far greater than the green transition. See discussion in this FT article: Costs of climate change far greater than green transition, says ECB (paywall)
The entire global economy needs to be rewired and transformed in the next 30 years with half of that change happening in the next decade. For business, it is no exaggeration to say that this is the biggest and most important business opportunity and at the same time the biggest threat, with some businesses and sectors at risk of becoming obsolete. Companies that can produce the best products and services at an affordable cost to deliver net-zero and the restoration of ecosystems – whether that be clean energy, clean transport, regenerative agriculture and net-zero homes and businesses – will see exponential growth. Companies that cannot or will not adapt to the transformation will suffer and many will go to the wall. For more information on climate change see: The Resources section
Underlying systemic drivers that are contributing to these challenges
We and many others believe that the relentless pursuit of short term financial returns above all other objectives has contributed to many of the problems that societies now face. In recent decades, the dominant view, in the US and UK context at least, is that the purpose of business should be to maximise profit. This view, together with a tacit assumption that people are self-interested utility maximisers, has profoundly distorted business and personal behaviour to the detriment of social and personal well-being.
A profound analysis of the malaise is set out in a celebrated 2005 article by Prof Sumatra Ghoshal, Bad management theories are destroying good management practice, which highlights the seminal influence of Milton Friedman’s dictum in the 1970s that the only social responsibility of business is to increase its profits within the law. He points to the flawed anthropology at the root of this thinking – a narrow view of what it means to be human.
In May 2017, a major Harvard Business Review (HBR) article on The error at the heart of corporate leadership (paywall) brought to the fore how a narrow focus on short term shareholder value had deeply distorted business leadership and that change was urgently needed. It highlighted also the way in which Agency theory, developed in the 1980s and 90s building on Friedman’s work, had been used to legitimate and reinforce self-interested behaviour on the part of both investors and corporate leaders. It concludes:
The time has come to challenge the agency-based model of corporate governance. Its mantra of maximizing shareholder value is distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention. History has shown that with enlightened management and sensible regulation, companies can play a useful role in helping society adapt to constant change. But that can happen only if directors and managers have sufficient discretion to take a longer, broader view of the company and its business.
Joseph L. Bower and Lynn S. Paine
Change is happening
Over the last few years, there has been an increase in the number of people discussing the need for change and a growing number of business leaders are actively engaging with this.
There is growing consumer awareness of both environmental and social issues contributed to by movements such as Black Lives Matter, Me-Too and growing climate activism. The increased focus on single use plastics, the school strikes led by Greta Thunberg and the activities of Extinction Rebellion are all reinforcing the pressure on business, investors, regulators and governments to take action. As Elizabeth Uviebinene discuses in this article in the FT: As workers and consumers, we can push companies to put ethics first (paywall).
…choosing where we out our time, talent and money can have a huge impact on our quality of life; it also has an impact on the communities we are part of and , critically, on the planet we live on.
The rise of social media means that companies can no longer hide, and their reputation is always on the line. Employees are demanding more of their employers, consumers are demanding more of the companies they buy from and, as discussed in the next section, investors and regulators are also demanding more.
It will take a shift in the entire ecosystem for lasting change to happen. This includes law and regulation but we believe an important part of the change needed is also a change in the assumptions and beliefs investors and people in business have about the purpose of business and about people. The market never exists in a pure state and is always a social and cultural construct. The two ideas – that the purpose of business is to maximise profits, and that people at work are essentially self-interested – have together profoundly shaped business behaviour. Reinforced by the dominant view among investors, these ideas have been the current orthodoxy – but they are being challenged.