2019 Lane Reports

Davos Adds Its Voice to the Growing Call for "Stakeholder Capitalism"

The Lane Report, November 2019
Friday, November 1, 2019 10:00 am
by Marc J. Lane

Davos Adds Its Voice to the Growing Call for "Stakeholder Capitalism"

By Marc J. Lane

Recognizing that this is a time of widening economic inequality and deepening distrust of business, the Business Roundtable, an association of many of America’s leading CEOs, on August 19 restated its historic commitment to generating long-term financial returns to their shareholders, but also pledged to deliver value to their customers, deal fairly and ethically with their suppliers, and support the communities in which they work. Following on the heels of that important policy shift, the iconic World Economic Forum has now announced that its 50th Annual Meeting, to be held in Davos, Switzerland, in January will focus on "Stakeholders for a Cohesive and Sustainable World."

The Forum’s Executive Chairmain Klaus Schwab will convene 3,000 notables from around the world to bring clarity to the evolving notion of "stakeholder capitalism," to help governments and institutions track their progress toward meeting the aims of the Paris climate agreement and the U.N.’s sustainable development goals, and to join forces around the contentious issues technology and trade governance present.

The Forum’s programming will reflect Professor Klaus’ observation that, "People are revolting against the economic ‘elites’ they believe have betrayed them, and our efforts to keep global warming limited to 1.5 degrees Celsius are falling dangerously short." With the world at a critical inflection point, he argues for a “Davos Manifesto 2020” to re-imagine the purposes of companies and governments, and the metrics by which their performance should be judged.

With those noble ambitions in mind, the Davos meeting will prioritize six key objectives: to mobilize business to address the challenges of climate change and adopt strategies to protect bio-diversity; to ease the pressure of long-term debt and embrace policies of inclusion and diversity; to invite consensus around the deployment of Fourth Industrial Revolution technologies and thus avoid a "technology war;” to re-skill and up-skill a billion people in the next decade; to kick-start conciliation in global hot-spots; and to help create new business models that will meet increased expectations from all business’ diverse stakeholders despite rising political tensions and exponential technological change.

Davos' agenda, although socially conscious, is market-driven. The 26 richest people in the world are wealthier than the poorest 3.8 billion, and our continuing reliance on fossil fuels forces our planet to face a short-term existential threat.

In the United States, income and wealth inequality are more stark than we've experienced in at least the last 50 years. The wealthiest 0.1 percent own about 20 percent of the nation's wealth while too many of us wouldn't be able to cover the cost of a $400 emergency.

The solution to these problems relies, in large measure, on business roundly rejecting the Council of Institutional Investors' unrealistic position that "it is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives." The truth is that business leaders need to look beyond short-term shareholder returns and also measure their stakeholder returns. The empirical evidence continues to mount: companies that are accountable to all their stakeholders see their share prices outperform their peers’ over time. Those are the companies most likely to retain good employees, attract long-term investors and loyal customers, and build the brand equity that supports market value.

When government fails to act, businesses should claim the high ground as they seek to do well and to do good. A few examples should illustrate the point:

  • While legislation to close loopholes in the Equal Pay Act continues to languish in Congress with women earning only about 80 cents for every dollar earned by men, companies should step up and close the pay gap.
  • While Congress resists efforts to pass a national privacy law despite massive data breaches, companies should support a strong national law, perhaps one modeled after the European Union's General Data Protection Regulation, and signal to their customers that take seriously their responsibility to protect their privacy and uphold their trust.
  • And as the current Administration has withdrawn from the Paris agreement, businesses should systematically reduce emissions in their operations and across their sectors, move toward renewable energy, and align their operations and supply chains with emissions reduction targets.

We encourage the Business Roundtable and the World Economic Forum to deliver on their urgent promise, and we eagerly stand ready to help our business clients embrace a fairer, more equal and more sustainable capitalism.


Marc J. Lane is a Chicago attorney and financial adviser and the vice chair of the Cook County Commission on Social Innovation.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpu

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