Toward Stakeholder Capitalism (CHROs)

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Toward Stakeholder Capitalism (CHROs)

December 06, 2021 | Report

What the Shift Means for Chief Human Resources Officers

The concept of stakeholder capitalism is not new. Its origins reach back at least to the early years of the Great Depression. Where the business community is seeing change is in increased pressure for businesses to engage more publicly and act more transparently as social media platforms amplify the voices of diverse stakeholders, and investors place greater focus on stakeholder issues ranging from diversity, equity & inclusion, to sustainability, to employee well-being and workforce management, to community impact.

While many organizations have talked about the current shift toward stakeholder capitalism, The Conference Board has uniquely focused on what it means, in practice, for CEOs and the C-suite. During 2021, The Conference Board held a series of roundtable sessions with CEOs and chief financial, legal, human resources, government relations, communications, marketing, and technology officers focusing on 1) whether the shift toward stakeholder capitalism is significant and durable, and 2) what it means for their roles, the organizations they lead, and the composition and functioning of the C-suite. The discussions were held under the Chatham House Rule, with participants free to use the information received but barred from identifying speakers or their affiliation.

Here is what CHROs told us:

What Is Changing

The shift is durable because human capital, once narrowly defined as the labor input in a business model and categorized as an expense, is now recognized by management, the board, and investors as a valuable intangible asset that lies at the heart of the transition to a stakeholder focus. With the onset of the COVID-19 pandemic, workers have risen to become the second-highest priority for boards, just behind liquidity, research by The Conference Board finds.^{^[1]}

CHROs see their role expanding to that of a strategic adviser, requiring a broader vision of risks and opportunities across the enterprise and the need to become more fluent in areas outside their core expertise. Meeting the demands of this expanded role means greater communication and collaboration between CHROs and their C-suite colleagues. As functional silos disappear, more give and take across the C-suite will be essential to balance the needs of the overall enterprise as opposed to just looking at one function. While participants recognize the momentum behind the shift, they agree not all companies, boards, or investors are in the same place.

“My view is that societies have been quite accepting of the externalities that businesses create like pollution, waste, inclusion or exclusion, but that tolerance has gone down a lot…now societies are insisting, quite rightly, that we do have responsibility. This pressure is coming in different forms; it can be from groups or regulators—and the time frames are a lot shorter. Before, we had a lot of careful consultation; societies got fed up with that. Decisions are being made for us, like no more plastic straws, and companies may not be ready.”

Even as companies look to provide strong financial returns to shareholders in the long term, while also driving long-term value for stakeholders, some participants in our CHRO roundtable offered a reality check about maintaining balance:

“The reality of it is that while you can move toward more of a stakeholder analysis, the whole system is set up for finding that balance between short-term and long-term results. There’s an awful lot of companies that still get measured on earnings per share, quarterly earnings…. And so those are the things that still measure what we do. And that’s what many boards are very focused on as well. So that’s something we need to be very mindful of as we think about the impact on the C-suite and CHROs.”

What the Transition Means for Chief Human Resources Officers

The increasing focus on talent and talent strategies at all levels of the organization positions the CHRO at the epicenter of the transition. The commitment to a stakeholder focus, coupled with the COVID-19 pandemic and its labor market distortions, is making boards realize that keeping a firm’s top talent requires new initiatives and investments. CHROs have taken on the additional role of convener across the company and across business units to coordinate and align all factors that affect the employee experience and employer brand.

“A skill growing in importance is convening and collaborating, facilitating agreement at the executive level that’s less egocentric, hearing other views. And there’s so much change, you must have change management skills. We need to be able to pivot quicker.”

The shift introduces additional layers of risk that include political, public perception, and human capital risk. CHROs can be a strategic voice to mitigate those risks. The HR function is going through a rapid transformation, and there is a shared understanding that the function needs to more strategic and less policy oriented and administrative. Not only must the CHRO have greater business acumen and expert knowledge about increasing regulatory and reporting requirements, but staff within the function must develop similar skill sets to have credibility with both internal and external stakeholders.

“One of the things that I found successful is that you really need to think about moving toward a stakeholder approach as more of a risk management exercise. Boards, CEOs, and C-suites can understand that. So, you do need to address things and talk about the potential reputational risk, brand risk, talent risk in terms of retention and attrition. Their expectations are changing.”

CHROs are now focusing on building an inclusive work culture that enhances employee engagement and underscores management commitment to a stakeholder focus. The CHRO role has typically focused heavily on executive compensation, but the emphasis on broader ESG-related indicators means a broader remit. While CHROs expect executive compensation to remain part of the role going forward, it will not be the primary driver. CHROs are also serving as teacher and coach for other C-suite members and executives about the shared responsibility for human capital–related ESG measures such as diversity, equity & Inclusion (DEI). CHROs and their staff can help colleagues create a continuous listening mindset to gather insights and feedback from the workforce, enhancing the company’s commitment to a stakeholder focus. In many situations, creating a safe space for employees to talk through an issue internally contributes to a more inclusive culture with greater positive impact than public pronouncements on social issues. CHROs need to convey to their CEO and C-suite colleagues that there is an important difference between engaging directly with employees on an issue and speaking out publicly on behalf of the company.

Being an effective communicator rises in importance. Sensitive issues like unconscious bias and microaggressions have moved up the priority list in HR, with more time and resources devoted to group discussions and trainings on difficult topics such as race, discrimination, and mental health. Running these kinds of emotionally charged discussions and trainings requires strong facilitation skills. Effective facilitation entails candor, openness, and the ability to suspend judgment to collectively trigger new ideas. Staying grounded in the company’s values and being transparent and authentic elicits a better response from stakeholders.

“This shift impacts my role, and what we’re doing is changing. We do an annual road show with our investor teams to meet shareholders to explain our HR strategies, and now we are talking a lot more about sustainability, employee engagement, culture, and corporate governance. It’s definitely a journey for senior managers and employees. Our CEO gets it, but the board is a mixed bag. We’re trying to say we need to drive sustainability, not just because it’s hip, but because it makes sense—and it’s not a choice. You have to be persuasive.”

Prepare for more exposure to, and harder questions from, the CEO and the board. The shift to a stakeholder focus has, in many cases, elevated the status of the HR function. Boards are giving the function more agenda time and expecting credible and data-driven answers: How do human capital practices and strategies contribute to the firm’s goal of a stakeholder focus? How does the goal tie into business strategies and results? Several participants said the focus on HR issues at high-level executive meetings is greater than they’ve ever seen it.

“I have by far the biggest time allocation for topic leaders; this probably reflects the centrality of some of the things HR deals with for the executive team and CEO. They want far more time than in the past; they’re looking for direction, not just collecting thoughts.”

“My role is evolving in that it's a whole ESG approach versus just the human capital metrics. And so, I'm working with the whole board, not just the compensation committee and, in particular, going deep with the governance committee.”

Be sensitive to global priorities and differences. In a world without borders, the changing relationship between stakeholders is not confined to a single country or region. CHROs must appreciate the nuances of global difference, and they must act with agility to make quick decisions and adjustments to respond to regional demands and issues. While many US-headquartered companies tend to think of stakeholder governance as a primarily US-based phenomenon, the changing relationship with employees is following a similar trend, regardless of geography—and in many cases other regions are further along on the journey.

“Your social brand is crucial—the facts you put in front of the observer. They don’t want theory; they want an explanation of facts. So, we work with finance and our regions to answer questions and emerging local topics and concerns…which now can translate, sometimes within hours, into a global topic.”

Lead with more humanity and humility. The shift is changing both leaders and the organizations they lead. People want to work for companies with empathetic leaders. CHROs have an opportunity to harness and guide that energy, but they need to act with humanity, humility, and integrity—building trust that will enable them to explain the inevitable difficult trade-offs among stakeholders with credibility.

What the Transition Means for the HR Function

The HR function is becoming more strategic and less transactional, which in turn requires HR personnel to have a wider range of both hard and soft skills. Business acumen is a good starting point. CHROs and their HR staff will need to be more broad gauged, more strategic, more rigorously analytical, and more attuned to external forces affecting the business and the workforce. CHROs expect these traits to be of more importance in the future not only to their role, but to their HR staff’s: a mastery of data analytics, expertise in DEI, cross-functional influence, deep understanding of ESG issues, and global and cultural acumen. They will need to be agile, authentic, empathetic, inspiring, action-oriented, and values-driven strategic thinkers.

“I’m trying to hire people with a backbone. In the past, the function has had a serving attitude, but we’ve become a business function, and I want the team to be that as well, to be contributors to the business like every other function, not just doing what the business wants.”

“HR is finally at the table, but it needs better self-understanding and greater self-esteem. I’m not looking for people who have come into HR because they ‘love working with people.’ I need people who can make tough decisions.”

Expectations for high-quality data and analysis mean the function needs to place more emphasis on data quality oversight. Investors, boards, C-suite leaders, and employees are seeking a broader array of information to judge the overall performance of the organization’s workforce, its human capital practices and strategies, and its fairness to employees. While data collection is below CHROs’ pay grade, the ultimate responsibility for the data’s credibility in the marketplace lies with them, participants say. The challenge for HR staff is that previously much of the data that may now be required had not been tracked with great rigor, so quality control at all levels of the process is essential to avoid brand damage and questions about data credibility and relevance.

“When it comes to data literacy, some members of my team seem unable to analyze data and bring it into the conversation in a meaningful way. Instead, they go off on a tangent. If they understood the data, they would realize what is important and what isn’t. Leaders need to understand numbers and data and be capable of recognizing the insights.”

Creating social impact and generating safety nets. HR will increasingly be called upon to recognize societal shortcomings in health care and childcare and address those issues inside the workplace. Given labor shortages and the importance of attracting and retaining talent, this need will become acute.

“Employees are already choosing employers that are sustainable, and this will be a clear differentiator in the future.”

“The employer-employee ‘deal’ shifted forever in 2020, with employers seeking a greater ‘safety net’ than before. There is more care taking than care offering.”

“HR will need to see more of the bigger picture, understand the changes taking place outside HR and in society to distill the changes needed for our people.”

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To understand how the shift to a stakeholder focus is affecting chief financial, human resources, legal, communications, marketing, and government relations officers—and the functions they lead—see the full series here.