Economic growth is not sustainable if it is not inclusive. IMF Managing Director, Christine Lagarde, clearly made a statement at this year’s World Economic Forum in Davos. But she was not the only one making pungent statements about the future of business. Philips’ CEO, Frans van Houten, claimed that “Global companies need to rally around a multi-stakeholder approach to doing business.” McKinsey’s Global Managing Partner, Dominic Barton, called upon business leaders to tackle the declining number of lower and middle-skilled jobs: “More than 60 percent of jobs and 30 percent of activities can be automated today. We can’t rely on government to reskill people in the face of rapid technological change and automation; business will have to drive this.” To tackle these challenges, the International Business Council of the World Economic Forum led this year’s initiative on responsible business leadership. More than 100 CEOs, including those of Nestlé, Unilever, Bank of America, Total, and Philips have already undersigned the Compact for Responsible Business Leadership. By signing the compact, the CEOs not only set an example for the business community at large, but also publicly commit themselves to a course of action for which they will be held accountable by their boards, investors, peers, and managers, as well as by external stakeholders like governments and NGOs.
The council argues for the “emerging consensus on the need for a new Compact for corporations, their chief executive officers and boards of directors, as well as leading investors and asset managers to create a corporate governance framework with a focus on the long-term sustainability of corporations and the long-term goals of society.” By undersigning the compact, a company “shares the conviction that society is best served by corporations that have aligned their goals to serve the long-term goals of society.” To the extent that companies pursue short-term financial gains, they should not distract from long-term economic prosperity and social welfare. The UN Sustainable Development Goals (SDGs) provide a relevant roadmap for the alignment of these interests.
The compact is clearly an important step forward for corporations operating in a global society. Their commitment to a more inclusive society marks the beginning of an era in which economic growth, participation by the least advantaged, and a redistribution of wealth will be tightly coupled. Philips provides a good example of a company that attempts to align a just, inspiring, and social economy with market-based capitalism. In Davos, the company worked with governments and civil society organizations on the development of 1,000 Community Life Centers (CLCs) in Africa, starting in Kenya. The CLCs provide primary health care services, solar energy, and fresh water, and are intended to increase access to better healthcare for millions of deprived citizens. As such, Philips attempts to fulfill social needs and commercial interests simultaneously, in collaboration with local communities and the government.
Yet, despite the great examples that sometimes surface, the compact and the practice of corporations are often out of sync. There are three reasons why leaders need to rework the current version of the compact and reissue a version 2.0:
1. Calling the document a compact is an overstatement or misinterpretation of what a compact really is. According to the Oxford English Dictionary, a compact is a “formal agreement or contract between two or more parties.” The Compact for Responsible Business Leadership is simply a statement or declaration by a corporation, signed by its CEO.
2. By specifically addressing the long-term interests of society, the compact—if it were to be a contract or an agreement—should include representation from governments or civil society. By excluding representatives of (local) governments, intended beneficiaries, and civil society organizations, corporations are only expressing their intentions about society and not with it. There is no reason to assume that the long-term interests of society—as perceived by business—coincide with real societal interests.
3. The compact deserves praise for taking the SDGs as a useful roadmap to align societal and business interests. But whether stakeholders will be able to achieve this objective in daily practice remains to be seen. Take Bridge International Academies (BIA)—an acclaimed social enterprise that provides private primary education to more than 120,000 children in Kenya and Uganda, and is rapidly expanding to other countries. At first sight, BIA seems in perfect alignment with SDG number four: Ensure inclusive and quality education for all and promote lifelong learning. But while research shows that the Bridge approach to education leads to a significant positive effect in acquiring knowledge and skills in English and math, it has also received a lot of criticism. Instructors do not have adequate qualifications, according to Education International and the Kenyan National Union of Teachers, instructors do not have adequate qualifications, and classrooms do not provide an appropriate and safe learning environment. Illustrative of the debate is the critique of the World Bank investing $10 million in BIA, while making no investments in the public education system in Kenya or Uganda. This makes it hardly impossible for the government, critics argue, to level with the private company in terms of service delivery.
The Institutional Business Council of the WEF deserves praise for bringing business leaders together around an agenda to support the creation of long-term societal value. But as Philips’ CLCs and Bridge International Academies demonstrate, achieving society’s long-term objectives requires that governments, local communities representing beneficiaries, and civil society organizations ought to take part. A contract or an agreement that aims to further the interests of society—guided by the SDGs—simply must have that same society at the table.
If the compact is intended to significantly contribute to the alignment of social welfare and a sustainable, long-term development of the economy, we need a new version that calls on corporate leaders, investors, governments, and civil society to jointly stimulate sustainable economic and social growth, a fair distribution of the proceeds of the economic activities, and an inclusive decision-making process that allows the intended beneficiaries to have a clear say in the development.