It’s no secret that big data and artificial intelligence are starting to roil a bunch of professions. Yet there’s another job that is also being altered with extraordinary speed—only this one is getting reshaped not so much by high tech but, rather, by high ideals: chief executive officer.

A loud and swelling chorus is calling for CEOs to meet the interests of all their stakeholders— customers, employees, shareholders, the communities in which they operate and society as a whole.

By contrast, many of those leading the nation’s biggest companies assumed previously that, while none of their constituencies could be ignored, the interests of shareholders should invariably come first.

“Much of the discussion has revolved around maximizing shareholder wealth,” says legendary Wall Street lawyer Martin Lipton, who has long maintained that companies have put too much emphasis on short-term financial results at the expense of society and, in many instances, to the detriment of their own long-term viability. “We’ve made some really bad mistakes. We’re now trying to rectify that.”

In August, the Business Roundtable released a statement signed by 181 CEOs in which they pledged “a fundamental commitment” to “deliver value to all” stakeholders. This was a reversal;

since 1997, the Roundtable had endorsed shareholder primacy.

For CEOs, this new stance is certain to have far-reaching consequences: heightened scrutiny from various camps to ensure that the vows made to stakeholders aren’t empty rhetoric; the necessity to draw on personal traits and capacities that might have been underutilized when there were fewer priorities to juggle; and a push by reformers to revamp the incentives that determine executive pay.

Balancing interests Tom Wilson, CEO of insurer Allstate Corp., describes what’s happening as more “evolutionary” than revolutionary. “Businesspeople want to do good,” he says.

Nevertheless, he acknowledges that “most of the money” being generated by U.S. corporations

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https://www.wsj.com/articles/the-tricky-role-of-the-ceo-in-a-new-era-of-social-responsibility-11576170755

JOURNAL REPORTS: LEADERSHIP

The Tricky Role of the CEO in a New Era of Social Responsibility

The Business Roundtable recently said companies should meet the interests of ALL stakeholders, rather than just shareholders. CEOs should brace themselves for the consequences.

Dec. 12, 2019 12:12 pm ET

By Rick Wartzman

JOURNAL REPORT

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—whose profits have soared over the past two decades, save for during the 2007-09 recession—has “gone to shareholders,” while the vast majority of workers have not prospered.

From 1979 to 2018, according to the Economic Policy Institute, Americans’ hourly output went up about 70%, while the hourly wages and benefits of the typical worker essentially stagnated, increasing less than 12% after adjusting for inflation. A study published last month by the Brookings Institution showed that 44% of all U.S. workers ages 18 to 64—53 million people—now hold low-wage jobs, with median annual earnings of just $17,950.

“We’re in a place where people’s lives have not been made better off,” says Mr. Wilson, who serves as chairman of the executive committee of the U.S. Chamber of Commerce. In turn, he adds, a good portion of the public has lost faith in the capitalist system, while politicians are lining up to overhaul “our license to operate” and mandate that corporate fortunes be shared more widely—a regulatory reaction that, some fear, could throttle economic growth.

For its part, Allstate boosted its minimum wage to $15 an hour in 2016, and Mr. Wilson has not been shy about urging his fellow CEOs to create more decent-paying jobs. But he underscores that these are not simple decisions, as he tries to attend to all of his stakeholders, including the millions who own Allstate stock.

“It’s not like being a student where I can get an A in every class,” says Mr. Wilson. “There are trade-offs.”

You can see this tension play out in the Drucker Institute’s annual company rankings—a measure that is designed to assess how effectively managed a corporation is from a holistic, stakeholder perspective. (The rankings underlie the Management Top 250, a list of

the best-run U.S. companies, produced in partnership with The Wall Street Journal.) Most are highly uneven in their performance across the five categories examined: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength. Indeed, of the 820 companies evaluated this year, only eight scored among the upper 20% in all five areas.

Done right, watching out for all stakeholders should ultimately improve societal well-being and bolster the bottom line.

“Yes, we have to make our margins, be competitive on price, drive profit, grow,” says Ajay Banga, CEO of Mastercard Inc., the financial-services provider. “That’s the textbook definition of capitalism, and that’s what you’ll see if you’re only looking a few feet ahead of you. But when you raise your eyes a little and recognize that most companies and nations survive on people making and spending money, you realize that you’re part of an interconnected system. Giving people a lift, expanding the middle class, helping them thrive and grow will also do the same for you.”

A question of commitment All that said, whether most CEOs are prepared to make a real difference on the toughest challenges is an open question.

A number have spoken out on an assortment of important subjects—gun control, immigration, race relations, affordable housing, transgender rights and more. But they can be warier in taking on the issues that are most core to the business.

On the environment, for instance, “things are moving in the right direction—but not fast enough,” says Andrew Winston, who has advised major corporations on sustainability. “Emissions continue to go up, and companies are still preoccupied with asking, ‘What about the shareholder?’ ” A survey this year of 1,000 CEOs from around the world by Accenture discovered that just a third of them are willing to commit immediately to cutting greenhouse gases by amounts promulgated in the Paris climate agreement.

As to the experience of workers, there tends to be more self-congratulation among CEOs than honest self-reflection. Top executives “genuinely believe they are doing everything they can for their front-line workers and therefore don’t have a bad jobs problem,” Katie Bach and Zeynep Ton of the nonprofit Good Jobs Institutewrote last month in Harvard Business Review. “But

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they aren’t and they do.”

As CEOs try to navigate the crosscurrents, they are being forced to summon a host of new skills.

“Over the past decade, the CEO of choice was one who understood the balance sheet,” says Tierney Remick, co-leader of the Board and CEO Services team at Korn Ferry, the organizational consulting firm. “Over the next decade, you’re going to need someone who can drive both a business agenda and a much broader stakeholder agenda.”

Being successful at this, she says, “doesn’t mean having a lack of competitiveness.” But it takes considerable empathy and self-awareness, the ability to listen deeply and communicate cogently, and the courage to tackle an array of sometimes controversial topics. With an imperative to deal more with what’s happening outside the company’s walls, a CEO also has to prove adept at assembling and leading a strong cadre of senior executives who can concentrate internally.

“These were all nice-to-haves before,” Ms. Remick says. “They are must-haves now.”

How we got here In many respects, there is a back-to-the-future quality in what CEOs are being asked to do. In the 30 years after World War II, those at the helm of America’s most prominent corporations routinely conveyed how crucial it was to look out for “the balanced best interests of all,” to use the catchphrase of Ralph Cordiner, who was CEO of General Electric Co. in the late 1950s and early ’60s.

But by the 1980s, shareholders had been left to feel as if they were the one party that wasn’t being accommodated, as many companies posted poor financial returns in the face of recession and ever-fiercer global competition. The Dow Jones Industrial Average first closed above 1000 in 1972—and wouldn’t again until 1982.

Investors embraced the emerging philosophy of a group of scholars—the University of Chicago’s Milton Friedman, Michael Jensen of the University of Rochester (and later Harvard) and others—that executives were the “agents” of the shareholders, and their single aim should be to make as much money as possible within the bounds of the law. “Agency theory” moved quickly and pervasively from the halls of academia to the realm of practice.

In more recent years, however, many have concluded that this focus on profits and share price above all has helped to bring about some of our most serious environmental and social ills. And so now, the pendulum is swinging again.

“The CEO job today is radically different from what it was 10 years ago,” says Joshua Bolten, president of the Business Roundtable. “They now actually have to respond to a variety of stakeholders,” including employees who are apt to express needs and concerns “beyond wages and working conditions.”

For example, Mr. Bolten cites several CEOs who are implementing plans to aggressively reduce their company’s carbon footprint. In addition to conviction about the policy, he says, “that’s also what their employees and, perhaps even more so, potential recruits are demanding.”

Paul Polman, who retired in 2018 as CEO of consumer-goods giant Unilever PLC and has co- founded a venture called Imagine to assist other CEOs in combating poverty and global warming, observes pressure from all directions—“employees walking out, citizens making their voices heard, consumers making spending choices, governments demanding change.”

And then there are shareholders, who, as Mr. Polman points out, are increasingly weighing where to put capital based “on the nonfinancials or intangibles,” including those captured by

environmental, social and governance metrics. Last year, the US SIF Foundation reported that U.S. money managers addressed ESG criteria across $11.6 trillion in assets. That’s one in four dollars under professional management.

Mixed signals For CEOs, however, figuring out how to please shareholders can be a minefield. The Council of Institutional Investors has opposed the Business Roundtable statement, asserting that while “it is critical to respect stakeholders…accountability to everyone means accountability to no one.”

“There has to be a north star, and it’s long-term shareholder value,” says Ken Bertsch, executive director of the council. While some decry shareholder primacy, Mr. Bertsch worries that it will be replaced by “CEO primacy”—with companies chasing all sorts of social objectives and not being answerable for their actions.

Mr. Bertsch concedes that too many investors “pay excessive attention to what’s happening to share price day to day.” But plenty of CEOs, he says, “haven’t been good at articulating their long-term vision” for turning their strategy into desired financial outcomes.

Investment firms with a distant time horizon, including those that primarily put money into passively managed exchange-traded funds and index funds, have been insisting that companies spell out how environmental and workforce matters translate into longer-term opportunity and risk. But CEOs complain—usually privately—that while those in the “corporate engagement” department preach a lot about these things, the individuals actually in charge of portfolios are still often fixated on shorter-term financial gains.

“That’s where the power lies,” Mr. Lipton says.

Betty Yee, who as California’s controller sits on the boards of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, agrees that institutional investors can send contradictory signals. But she says that initiatives such as the Climate Action 100+, in which more than 370 investors have banded together to lean on companies on greenhouse gases, indicate that they’re on the right track. “We get things done when we don’t send mixed messages,” she says.

All the while, however, there’s another set of shareholders who make no bones about trying to wring out more profit in the short term: activist investors, who have been known to

swoop in and threaten to oust the CEO unless costs are cut and more money is handed to those who own the stock. The presence of activists—who have won more than 800 board seats since 2013, by Lazard Ltd. ’s count—is one reason, among several, that CEO turnover has been climbing and time on the job has been dropping. PricewaterhouseCoopers notes that median CEO tenure at big public companies stands at about five years, down from eight years in 2000.

“One group wants this, one group wants that—one wants short-term, one wants long-term,” says Steve Odland, president and CEO of the Conference Board, a business research organization, and the former CEO of Office Depot Inc. and AutoZone Inc. “It’s like you’re trying to play a game, and there are not consistent rules.”

Compensation’s role At the same time, some wonder whether compensation—more than confusion—is the steepest impediment to adopting a true stakeholder orientation.

Last year, median pay rose to $12.4 million for the heads of S&P 500 companies, up 6.6% from 2017, according to a Wall Street Journal analysis. Critics suggest that such fat paychecks make it hard for CEOs to relate to the kinds of hardships with which many people are struggling, and this inhibits how far they’re willing to go to enhance workers’ wages or benefits.

“If you were a CEO in the 1960s, you lived in one of the biggest houses in town, but you didn’t live in a different world,” says Leo Strine, who just stepped down as chief justice of the Delaware Supreme Court, where many landmark business cases are litigated.

As much as a CEO’s pay level may affect things, so does the mix. Two-thirds of CEO compensation last year was tied to share price through restricted stock and options. By comparison, less than 15% of companies in the S&P 500 incorporate ESG-type indicators into their executive-compensation packages, a review by my colleague Kelly Tang, the Drucker

Institute’s senior director of research, has found. And generally, the sums involved are relatively trivial.

As long as this situation persists, say advocates of a stakeholder approach, expecting CEOs to refrain from favoring shareholders will remain wishful thinking.

Meanwhile, for those who would like to link a bigger slice of CEO compensation to a full range of stakeholder metrics that include ESG, the absence of a universal structure for doing so is a significant barrier. Although efforts are under way to remedy this, “things right now are all over the map,” says Jim DeLoach, managing director at the consulting firm Protiviti. “We need globally accepted standards.”

Ms. Yee, the California controller, is likewise eager for the government to establish what stakeholder information companies must disclose. “I can’t overstate the role of the regulators,” she says.

Even the most committed CEOs stress that it will be impossible to make progress alone. Some, such as Allstate’s Mr. Wilson, want boards of directors to step up.

Jim Keane, CEO of furniture maker Steelcase Inc., says he has been encouraging everyone up and down the ranks to weigh the broader impacts of the company’s activities. “Every decision made by every employee would be better if it more explicitly considered the contextual understanding that comes from an ESG mind-set,” he says.

That is undoubtedly so. Yet it will be the CEO who is celebrated for demonstrating authentic and meaningful “woke leadership,” as Ms. Yee terms it—or who gets slammed for being all talk.

Mr. Wartzman is the head of the KH Moon Center for a Functioning Society, a part of the Drucker Institute at Claremont Graduate University. He can be reached at reports@wsj.com.

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