From dragging their feet to leading the charge

Companies have a long history of resisting change. Big Tobacco for many years denied the health effects of smoking; Exxon for many years denied the reality of climate change; Purdue Pharma for many years denied that opioids were addictive; and the auto industry for many years resisted the use of airbags. There are many other examples, but the effect in every instance was to reduce innovation in the economy.

That was then. How are companies responding to the challenges facing us now?

The challenges

In a survey of the World Economy, The Economist magazine identified three major challenges that the world will face in the next few decades:

• An aging population — which results in a relatively smaller workforce, higher pension and healthcare expenses, and (surprisingly) lower interest rates. In Canada, by 2075 the number of people aged 65 and older will be more than 50 percent of those aged 25-64.
• Climate change — which results in numerous challenges, including reducing greenhouse gases, transitioning to renewable energy, and developing electric vehicles.
• Geopolitical uncertainties — which result in doubts about future globalization (and the notion of friend-shoring, in response to doubts about authoritarian regimes), increased military spending, and supply chain insecurity.

The responses

In contrast to past deflections and denials, many companies are stepping up and actively advocating for change.  Consider the following:

• Pathways Alliance. This consortium of the six largest oil sands producers in Canada, accounting for some 95 percent of all output, has amalgamated several existing organizations, including Canada’s Oil Sands Innovation Alliance (COSIA). Together, they plan to spend $24.1 billion by 2030 on achieving net zero greenhouse gas emissions.
• Electric vehicles. The world’s auto makers are planning to spend US$1.2 trillion through 2030 to develop electric vehicles. This includes Volkswagen (spending US$100 billion); Toyota (spending US$70 billion), Ford (spending US$50 billion) and others including Tesla, which plans to build 20 million EVs by 2030.
• Sustainable Market Initiative. A collaboration of some of the world’s largest food and farming businesses — including Bayer, Mars, McCain Foods, PepsiCo, Waitrose and others — is calling for immediate efforts to increase sustainable agricultural practices, to avoid “destroying the planet”.
• Glasgow Financial Alliance for Net Zero A partnership that includes many of the world’s largest banks, founded by former Bank of Canada Governor Mark Carney, with assets on the order of US$20 trillion, wants to target lending to achieve the goal of net zero carbon emissions.
• Russian Sanctions Some 1,000 companies have publicly announced voluntary curtailing of their operations in Russia, beyond the bare minimum required by international sanctions.
• Royal Bank Canada’s largest bank has announced its own commitment to net zero emissions by 2050, with specific plans to reduce financed emissions in the production side of the oil and gas industry by 35 percent, in power generation by 54 percent, and in automotive by 47 percent.
• Business Council of Alberta. This group — consisting of about 100 CEOs and entrepreneurs at the largest enterprises in Alberta — has developed “Define the Decade”, a 10-year collaborative economic strategy to spur growth, sustainability, and health in this province.
• Traverse solar project. This $700 million private-sector investment is dedicated to the largest solar energy project in Canada, among the largest in North America. Almost all of the output has been purchased by Amazon, as part of its own commitment to reach net zero carbon emissions by 2040.

Why now?

It could be greenwashing, or currying favour with government. However, my view is that a big part of the answer lies in the gradual shift from shareholder to stakeholder capitalism.

Shareholder capitalism is the view that companies should focus exclusively on serving in the interest of shareholders, the owners of the stock of the company. It has been the dominant view of CEOs and Boards ever since there were CEOs, Boards, and shareholders.

Stakeholder capitalism acknowledges the need to make money for shareholders, but adds a responsibility for companies to be mindful of their customers, employees, and suppliers, as well as the broader social and environmental impact of their activities. This relatively new mindset has grown over the last 30 years, to the point where almost all  large Canadian companies now produce Corporate Social Responsibility reports. The same thing has happened in many other countries, and in some places these reports are mandatory. Even Exxon-Mobil, much demonized by critics in many corners, produces just such a report.

The reason for the shift from shareholder to stakeholder capitalism is fairly simple: society has demanded it. Polls show that the vast majority of Canadians expect companies to be socially and environmentally responsible. Again, the same is true in many other countries. Companies unwilling to respect this outlook will face difficulties with customers, shareholders, job seekers, and others, not to mention damaging their corporate reputation.

In this respect, of course, stakeholder capitalism is ultimately a matter of self-interest. Companies unable or unwilling to adapt to its demands may not be around for long.

Regardless of the motivation, it looks as if the stage is set for a fruitful partnership between government and business — or at least a good deal less acrimony than a generation ago — in addressing some of our most serious challenges over the next few decades.

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