First came the statement from the Business Roundtable redefining the role of business in society. Then came Larry Fink’s annual shareholder letter, in which he said BlackRock would make environmental sustainability a core investment criterion. That
was followed by the World Economic Forum, where Goldman Sachs CEO David Solomon announced the firm would refuse to take companies public if they didn’t have at least one female director.
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It appears the titans of industry have finally woken up to the barbarians at their gates – their customers, their employees, and the communities in which their companies are located. Slowly, they are tiptoeing back from economist Milton Friedman’s 1970 declaration that corporations need only care about their investors. Shareholder primacy is out; stakeholder capitalism is in.
The new mantra isn’t just for giant corporations. Tech startups can no longer expect to garner trust simply because they are the cool kids. They are likely to face stakeholder demands similar to those faced by the incumbents that may ultimately acquire them. If incumbents are beginning to care more about a broader range of stakeholders, fintechs better care too.
The last 40 years of shareholder primacy has taken its toll. According to the latest Edelman Trust Barometer, more than half of respondents believe capitalism as it exists today does more harm than good. People are pessimistic about their economic prospects despite a roaring stock market and record low levels of unemployment, with 83% worried about losing their jobs due to a combination of the gig economy, a looming recession, a lack of skills and automation.
Americans are increasingly concerned in part because they have lost faith in institutions to solve problems. Fintechs have it doubly tough: The financial services industry has long been the least trusted business sector in the Edelman survey, especially in the wake of the financial crisis. And while the tech sector remains the most trusted, trust levels declined by 7 percentage points in the last year.
In this era of institutional distrust, it is tempting to write off recent CEO announcements as mere window dressing. But Americans overwhelmingly support the shift away from a single-minded focus on shareholders – 87% believe that customers, employees and communities are more important to long-term business success than shareholders. And they are willing to vote with their wallets.
Ethical behavior trumps competence when it comes to building trust, according to Edelman. Consumers expect brands to take action against societal problems, and a growing majority say they actively choose brands based on the stands they take. So do workers. While three-quarters of people still trust their employer, roughly the same amount want the opportunity to help shape the direction of the company they work for. Witness the walkouts at Google.
Communities are also raising the bar on what they expect from business. The latest example: The mayor of Bolingbrook, Illinois, population 75,000, told Amazon he did not support the company’s plan to build a new warehouse in his community, in part over concerns about the quality of the planned 1,500 jobs it would bring.
Startups have a couple of advantages over big corporations as they adapt to the era of stakeholder capitalism. They face less public scrutiny when they misstep, for one, and their products, policies and culture are more malleable.
A hallmark of tech startup culture is an incessant focus on the customer experience. But a good experience is different than a good outcome, and a good outcome is what builds trust. Companies should interrogate their products from the vantage of consumer outcomes to ensure that they are effective in improving financial health.
Consider the typical credit card refinance loan. What no one talks about is the fact that consumers often use the proceeds for more spending versus paying down their balances, and they wind up deeper in debt. Lending Club realized this and, in a bid to better align the company’s financial interests with that of its customers, launched a new product last year that sends loan proceeds directly to creditors in exchange for a lower interest rate. Customers reduce their debt for less, while Lending Club reduces the risk of default. Both win.
Likewise, employees deserve more than the fairytale version of startup land, in which they get lots of free food and some equity in exchange for working 24/7. They could use the same kinds of benefits that are becoming popular at big corporations, which ironically are often provided to their workers by fintech startups. For instance, 15 of the top 100 best companies to work for offer student loan debt repayment. How many of the startups in the student loan repayment business offer the same benefits to their own employees?
Increasingly, shareholders are among those pushing corporate America to consider a broader set of societal impacts. That’s not true for startups. Examples abound of venture capitalists pressuring their portfolio companies to grow at all costs, which in turn can lead startups to shirk their responsibilities to customers and employees.
Ultimately, running a company that considers all of its stakeholders is a balancing act. Making money and doing the right thing can mutually reinforce each other, but sometimes there are tradeoffs.
A couple of years ago, a group of tech CEOs launched Founders for Change to focus attention on the lack of diversity in Silicon Valley. The movement galvanized more than 1,000 founders to commit to choosing investment partners based in part on the diversity of the partner roster. Because, let’s face it - money talks. For tech founders that want to embrace stakeholder capitalism, one of the most important decisions they will make is who to take money from.
