Stakeholder capitalism: The squishy idea made more relevant by Covid-19


By Mukul Gulati


“Gradually… then suddenly” is Ernest Hemingway’s famous response to the question “How did you go bankrupt?” ‘Gradually… then suddenly’ also describes the rapid adoption of stakeholder capitalism, sustainability, and impact investing by the world’s largest investors and corporations. Climate change, persistent inequality, and COVID-19 have contributed to the increasing awareness of the private sector’s responsibility to the broader community of stakeholders.

In August 2019, 181 CEOs of the largest corporations in the United States announced their commitment to explicitly move beyond shareholder primacy and commit to serving key stakeholders, including customers, employees, suppliers, and local communities. Amongst the signatories were Larry Fink, the CEO of Blackrock, the largest asset manager globally, and Jamie Dimon, the Chairman of JP Morgan, the largest bank in the United States.

Why the sudden embrace of these squishy ideas by such hardened capitalists? This movement didn’t happen overnight. A gradual movement toward Environment, Social, and Corporate Governance (ESG) driven investing has been stirring for more than a decade. Businesses are noticing the impact of climate change and political convulsions resulting from the lack of economic opportunity experienced by large society sections. Low-income communities have endured the economic devastation caused by Covid-19.

In India and other emerging economies, federal and local governments have limited fiscal space and administrative capacity to address low-income populations’ economic challenges. The private sector has a critical role to play in addressing the needs of underserved communities. Companies need to deliver both products and jobs for low-income populations. While the private sector alone cannot solve all of India’s problems, businesses have to take the lead in formal job creation, ‘inclusion,’ and food security in the absence of state capacity.

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During the COVID-19 lockdowns, the sight of thousands of migrant workers walking to their villages was a stark reminder of India’s precarious employment state. Most jobs in India are informal, come with no health benefits, and can be terminated overnight. While all of us in the white-collar world quibble about ‘zoom fatigue,’ millions of poor Indians have lost their livelihoods.

First, we need economic growth and business investment for job creation. Second, we need formal, not informal jobs. Businesses need to ensure that jobs are ‘formal,’ i.e., on the payroll. Improvement in the regulatory environment will allow enterprises to create ‘on the rolls employment.’ Large businesses should emphasize that they will only work with vendors who ensure minimum labor standards and formal employment.

By ‘inclusion,’ we mean that companies should develop products and services for low-income customers. Take home loans, for example. A salaried employee in a big city will have ten banks chasing her for a mortgage loan, while poor people in villages have almost zero options for getting a loan for home construction. These market segments can be served sustainably and profitably. Digitization and technology allow banks and NBFC‘s to underwrite and disburse loans digitally and collect payments via mobile phones instead of incurring costs from employees having to drive to faraway locations.

While India produces enough food grain to feed its entire population, food security and undernourishment remains a significant challenge for many people. These issues can be addressed by improving agricultural productivity, increase farmer incomes, and improve logistics. There are significant growth and innovation opportunities for businesses that can improve agricultural productivity by providing high-quality inputs such as seeds and helping farmers by providing access to modern farming techniques. There is also a need for improved logistics, including storage and modern transportation. Digitization and low-cost mobile communications have made these problems easier to solve.

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Several examples of successful businesses have done well by delivering profits for shareholders while serving their local communities. Bandhan Bank serves 20 million low-income customers and has a market capitalization of $7 billion. Narayana Hrudayalaya performs heart surgeries at 2% of the global cost and is valued at $1 billion.

Indian businesses have an obligation to solve the problem of India’s poor. This will help improve lives and provide economic opportunities to the poor. It will also create a broad and sustainable market for these businesses, which can be a real ‘win-win’ proposition for shareholders and society.

(
The writer is the Managing Partner of Zephyr Peacock India. Zephyr Peacock is an India-focussed SME funds manager, an affiliate of the Zephyr Management in New York. He Tweets at @mukul_value.)





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