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Lack of trust is eroding confidence in stakeholder capitalism and ESG claims.
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Corporate leaders must work even harder to build and maintain trust.
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Three core components can help cultivate trust and build stakeholder confidence.
Corporate leaders today are measured by a new yardstick. The supreme test of a CEO and board of directors is now the value they create not just for shareholders, but for all stakeholders.
Our research shows that trust is the key to success. Yet growing distrust, cynicism and misinformation are eroding confidence in corporate impact and Environmental Social & Governance (ESG) claims.
To prosper in the age of stakeholder capitalism, companies must actively cultivate the trust of employees, investors, customers, regulators and corporate partners: developing strategies to understand these stakeholders more intimately, implementing deliberate trust-building actions, tracking their efforts over time, and communicating openly and effectively with key stakeholder groups.
Stakeholders’ Power Grows
Companies that acknowledge and act on the need to earn trust with their stakeholders will position themselves to lead; those that don’t put themselves at risk.
There is plentiful, clear evidence that the world has shifted to stakeholder capitalism. The Business Roundtable in 2019 famously redefined corporations’ purpose, asserting that corporations exist not just to make money for investors but to promote an economy that serves everyone. Business leaders and major brands are devoting vastly more time, energy, and budget to ESG and impact-related priorities than they have in the past, including substantial resources to connect with stakeholders on climate, diversity, equity and inclusion (DEI), human capital and other key themes.
And CEOs and boards now are expected to fulfill a complex, sometimes contradictory array of roles: leading on social and environmental challenges, taking clear positions on nuanced, divisive political issues, building an inclusive company culture and responding to the needs of all stakeholder groups, all while generating strong business results.
Companies that haven’t navigated these roles effectively have struggled. According to recent Edelman research:
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79% of employees expect their company to take action on key societal issues.
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64% of consumers switch, boycott or select brands based on their stance on social issues.
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90% of shareholders believe they’ll see better returns if only companies could hit their ESG targets.
Yet managing according to the stakeholder model isn’t only about mitigating risk. Companies that deliver for all stakeholders stand to reap substantial rewards. Impact, in other words, can be a source of competitive advantage. JUST Capital’s work indicates that, compared to their peers, large corporations doing the best job of meeting stakeholder needs in the US:
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Generate return on equity more than 4% higher than their peers.
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Pay 12% more in dividends.
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Have outperformed in the market by almost 7% over the last five years.
The Central Role of Trust
The shift to stakeholder capitalism creates pressure for corporate leaders to try to satisfy a wide range of constituencies with different, sometimes conflicting interests and perspectives. Earning their trust is key to navigating this tricky terrain.
Decades worth of Edelman research has revealed the essential role trust plays in businesses’ overall performance. Trusted companies have beaten the market by 5% in times of growth and 11% in times of crisis. They have received twice the positive media coverage and half the regulatory scrutiny. They enjoy significantly higher rates of customer and employee loyalty, public engagement and shareholder support.
Yet building trust among stakeholders has gotten harder. Skepticism about corporate pronouncements on ESG, sustainability and impact issues is rampant, while the media and regulators increasingly seek to root out greenwashing and purpose doublespeak. Edelman trust research finds that:
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More than eight in 10 global investors question the accuracy of company ESG disclosures.
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More than seven in 10 don’t believe companies will achieve their stated sustainability, ESG or DEI commitments.
Worse, a recent study for Google found that more than half of corporate executives believed their own companies have been guilty of greenwashing. In this climate, it should surprise no one to see intensifying activism by consumers, shareholders and employees.
Trust may be undermined by excessive stakeholder expectations or by companies’ self-serving statements about ESG and impact issues. Either way, falling short on trust can create significant business financial and operating risks. The examples listed above represent the rule more than the exception: look carefully and you will see crisis teams responding to corporate ESG and impact missteps on an almost daily basis.
Given the urgency of building trust and the headwinds to it, leaders need to make trust around corporate ESG, sustainability and impact performance a top priority.
Three Keys to Earning Stakeholder Trust
The C-Suite executives and company directors we speak with know they have a complex challenge on their hands. They must identify impact and ESG issues that are material to their business performance, understand all stakeholder expectations related to those issues, measure their current performance on each one, and decide where to allocate capital to address material issues while building trust across their constellation of stakeholders.
We believe the path to success has three core components:
1. Mapping
Companies first need to map their trust level with each stakeholder group across the key ESG and impact issues. This job includes breaking down the factors that underpin stakeholder trust and developing a deeper understanding of stakeholder motivations, behaviors and needs. Mapping helps to prioritize where a company needs to focus and which actions it can and should take.
2. Actions
Next, company leaders need to take stock of the impact their actions and communications will have on traditional financial and operating performance indicators, including total shareholder return, valuation multiples, cost of capital, employee engagement and retention, brand recognition, customer loyalty and purchase intent and more.
3. Measurement
The final task is to understand which trust-building initiatives generate the most value. This information enables leaders to make basic projections for “return on trust” – the amount of value created per dollar invested in ESG and impact initiatives.
Taking this deliberate approach to cultivating trust offers a range of benefits. It can help build stakeholders’ confidence in the veracity of ESG and impact performance, demonstrate those efforts’ relevance to business results, drive greater environmental and societal outcomes, engage stakeholders in new and powerful ways and help break the cycle of skepticism and mistrust.
Companies today need to mean what they say about ESG and impact and deliver on their promises. Measuring performance, reporting on progress and maintaining open and honest communications with the outside world engender the trust that is necessary to create maximum value for all stakeholders.
