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When the Stakeholder Perspective takes a Purpose Orientation

Understanding Business Sustainability Types in terms of stakeholder engagement

Every organization talks about stakeholder engagement – yet what does this really mean? In the era of positive impact, engaging with stakeholders goes beyond reaching out to your employees, customers, suppliers and concerned civil society institutions. A truly sustainable organization will have recognized that it is itself a stakeholder in a much larger context, in which it doesn’t play the central role. Creating a positive impact through focusing on purpose is all about recognizing one’s own limited perspective and value contribution to a society which includes other perspectives such as civil society and government.

The purpose orientation of business has become a popular topic recently. It is hard to open a new book on the current and future challenges for business and society and not stumble over the purpose topic. In analyzing the evolution of business sustainability empirically, Grayson et al. conclude in their book “All In” (2018: 30-32) that we have entered the “Purpose Driven Era” in 2016. For them, today’s best corporate leaders focus what they do through the lens of the purposeful and positive impact they aspire to have in the world.

This understanding of purpose contrasts with another popular interpretation of the role of business, the stakeholder model. The Business Roundtable, an association of some 200 CEOs of major U.S. companies, published a widely acclaimed statement on the purpose of a corporation in August 2019. These companies committed for the first time since 1997 to a responsibility to all stakeholders – namely customers, employees, suppliers, the communities in which they operate, and their owners. All stakeholders are seen by them as important, and value must be created for all of them. This is a significant extension of understanding from seeing the shareholder as the one primary stakeholder of business.

What is the difference between these two interpretations of business and its role in society?

What is the difference between the purpose orientation of business and the stakeholder model? And how do they relate to each other?

A helpful answer can be found in the Davos Manifesto 2020 on the role of business in the 21st century presented by Klaus Schwab, the founder and chairman of the World Economic Forum. This manifesto goes beyond the Business Roundtable’s position in two different ways. First, it includes society in the catalog of stakeholders. Second and more significantly, it sees business not only as an economic entity in the service of wealth creation for different stakeholders, but also as a societal institution delivering multiple values. Along with government and civil society, business here is seen as another, equally important “stakeholder of our global future”. Business is expected to contribute through its specific resources and capabilities to improve the state of the world, together with government and civil society. To achieve this, a purpose orientation is needed to guide the business.

How do we make sense of this evolution of understanding of stakeholders?

In a first step, an organization extends its understanding from a single stakeholder, often the owner or shareholder, to a more extensive group of business-relevant stakeholders. This is the shift from Business Sustainability 1.0 to Business Sustainability 2.0 in the Dyllick-Muff Typology (see below).  This extension from a single to a number of relevant stakeholder groups can be viewed as a “horizontal extension,” with new stakeholder groups being added to existing ones. A majority of organizations are in this conceptual phase of understanding stakeholder engagement. At this stage, the central focus, however, remains on the business, which is seen to fulfill multiple demands through its activities.

When an organization, in a further step, starts to consider itself as a societal stakeholder, this is a completely different perspective. It represents the shift from inside-out to outside-in thinking which means that an organization is able to look at its own role from an external meta level. It starts perceiving itself as just another stakeholder in society. It is society which takes on the central space, no longer the organizations which sees its role as providing a positive value to society. This shift introduces an additional dimension and can be seen as a “vertical expansion” of the relevant perspective. This new position is what Business Sustainability 3.0, or true business sustainability, is all about.

The graph illustrates that we are in effect dealing with two different perspectives on business and society. And these two perspectives bring about two quite different discussions, as has been demonstrated also in developing our concept of True Business Sustainability.

In reviewing the established approaches to Business Sustainability, we developed a typology that focuses on effective business contributions to sustainable development (Dyllick and Muff, 2016). We call it the Business Sustainability Typology (BST). It ranges from Business Sustainability (BST) 1.0 to BST 2.0 and BST 3.0.

What do we mean by this?

In a first phase of BST 1.0 companies recognize that through sustainability management they can save costs and reduce risks, they can increase their reputation on the job market as well as their differentiation in the product markets. We defined this early form of Business Sustainability 1.0 as a form of “refined shareholder value-management” where shareholders play the dominating role. This is reflected in the interaction between business and their shareholders in the graphic.

In a second phase, companies start broadening their stakeholder perspective beyond their shareholders, thereby pursuing a triple bottom line approach. Value creation mow includes economic or social values to other stakeholders as well. This advanced view of BST 2.0 we have called “Managing for the Triple Bottom Line”. In contrast to BST 1.0 not only economic objectives, but also social and environmental objectives are pursued by business as part of their stakeholder management. But the companies still look at things from the inside out, from its own activities to stakeholders and to society. And it is about diminishing the negative side effects of the economic activities. This is well reflected in the horizontal extension to multiple stakeholders in the above graphic.

In a third phase, companies shift from an “Inside-Out-Thinking” to an “Outside-In-Thinking”, i.e. when the company starts from society and its problems and then asks itself which opportunities arise by contributing to solving societal challenges? This results in BST 3.0 or “True Business Sustainability” and is well reflected in the perspective where an organization sees itself as a societal stakeholder.

With regard to the vertical expansion the relevant questions address the needs of society to continue solving its problems and the relevant contributions made by government, civil society, and business. It raises questions about the role of business and its purpose in the development of the economy and society. This requires business to engage with the broader external environment, beyond the economic and market environments. And it requires an “outside-in perspective” instead of the dominant “inside-out perspective.” Such a perspective considers the company and its impact from the outside, starting with the societal problems and challenges; rather than from the inside, starting from the goals and concerns of the company itself.

This is a major step change in thinking about the development of business sustainability, or more generally, about business and society. It opens the discussion for the new question about corporate purpose. And it frames the discussion in a different way. Not as adding value to more stakeholder groups, but as focusing on very different challenges, societal challenges, where corporate contributions are much in need.


Personal Change Challenges Leaders

I have been in the change agent business for many years. As an organizational psychologist, I have assisted companies in identifying and addressing obstacles to their organizational success. Recently my work has turned towards companies that wish to redefine and broaden their definitions of success. These companies are examining their purpose beyond profits. They have not abandoned the desire to make a profit and they are certainly still committed to delivering financial returns to their shareholders. However, they are looking for ways to succeed financially by pursuing solutions to societal challenges – the wicked problems that I discussed in my April blog. The question that I would ask the formal leaders of these companies is whether they are ready for the personal changes that this journey will require.

This quest for purpose really picked up steam after Larry Fink, the CEO of the global investment management corporation Blackrock, said the following in his annual letter to CEOs: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” While his proclamation has been controversial, many have heeded his warning by examining their own companies’ purpose beyond profits. By and large I consider this to be very good news indeed. Our societal challenges necessitate looking for solutions from all corners of our world. However, I fear many in formal positions of leadership are unaware of how the pursuit of purpose beyond profits will affect them personally. As Katrin Muff pointed out in her May blog, only exceptional individuals are able and willing to embrace their own roles as global citizens.

Katrin and I agree that the term “leader” should not be limited to those who are in formal positions of authority. Still, successful company transformations do compel those who fill these roles to undergo personal changes. In my role as an advisor to companies undergoing change, I have observed a remarkable lack of awareness of how the desired transformations will necessitate personal changes in those at the top. My educated guess is that many are completely unaware of the need for personal change and others are unwilling to live with the inevitable discomfort that change always brings.

Change is hard. Indeed, global consultancy Bain and Company reports that only 12% of corporate transformation programs succeed in reaching or exceeding the goals. Furthermore, only 2% achieve their goals when the transformation is focused on sustainability. This low level of success can be attributed to many factors including resistant cultures, shifting priorities and lack of a vision that inspires and engages employees. However, my own experiences, both personal and professional, have led me to conclude that leaders’ resistance to personal change is a major stumbling block to successful organizational transformation. Often leaders of our client companies take the position that everyone and everything can and should change as long as they, themselves, are not affected.

Many powerful individuals come to believe in their own infallibility. They assume, sometimes unconsciously, that they rose to these levels of power because of their superiority. These assumptions concerning how they got where they are may be accurate. Nevertheless, as the game changes, so do the rules for how to play it.

When leaders commit to moving their organizations towards purpose beyond profits, they are very likely to find that to succeed, they must give up some of the power that they have enjoyed. Wicked problems require collaborative solutions. Likewise, leaders are likely to be confronted with world views different from their own cherished beliefs. And all must live with ambiguity that may be foreign to them in roles where they have had complete power to make unilateral judgments and act decisively.

These personal challenges are not easy to confront. Some leaders will be up to the tests while others won’t even try. Katrin wrote about the difficulty of overcoming defense mechanisms that blind us to the need for personal change and cushion us from its discomfort. To illustrate this point, a friend and colleague reminded me a few years ago that a person who wants to quit smoking may still be unwilling to give up cigarettes. So too, leaders who want their organizations to transform may not be willing to take on the personal challenges that will lead to success.

I have experienced this resistance myself when I have slammed into my own defenses. As I have worked collaboratively with colleagues from across the globe, I have become very aware of my own limitations when my world views and power are challenged. I work diligently to push through my discomfort as I realize that I must change personally if I am to become a global citizen. Some days I am up to the challenge and other times I dig in and refuse to budge. Nevertheless, I know that my personal journey to overcome my own defenses is worth the effort. I truly want to contribute to addressing our collective global challenges. And to do so requires me to seek awareness of ways that I must change. I must learn to live with the discomfort that I experience as a result. I take one step at a time. Sometimes I fall back a few steps but overall, I keep moving forward. Gradually I am making progress in my own change journey.


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The challenge for business educators

As business educators we must challenge the underlying assumptions of economic and business development, like the need for economic growth, unlimited consumerism, shareholder value. It is up to us to ensure that we create leaders who will focus on creating value for the world rather than only for a few shareholders. Leaders who act as servants for the common good operate a conscious business, they are engaged with society and the planet and they are asking for their real needs concerning economic innovation.

This is the contract we as management educators have with the world and with society. No more silos, no more tenure, no more clear-cut divisions between institutions, nor between business and other active players in the world (formally known as NGOs) , nor more citation indices to evaluate scholars.  This is what we must measure ourselves by and this is what we should strive to achieve. And we shouldn’t leave a stone unturned in order to get there, even if it means undoing some brick and mortar and doing away with some ivory towers.

Business executives – more than any other profession – have developed the capacity to deal with complexity and to adapt their strategy to an evolving environment. Businesses have evolved beyond national boundaries into global enterprises, uniquely able to address and act on global issues. As such, they do have an important contribution to make as co-trustees and co-actors, working with all stakeholders towards a larger vision for the world (“Living well and within the limits of the planet’s natural resources”, WBCSD).


A call for a radically new vision for business education

When considering the short-comings of existing business schools, it becomes clear that nothing less than a fundamental, possibly radical, new vision for business education is required. Leading business schools congratulate each other on their important incremental steps forward. The trouble is that they don’t even know how far off the mark they really are! All of us, from Harvard all the way to the uncountable business schools in the Philippines. There isn’t a single business school that has gotten it right, and most of us are not even aiming in the right direction!

We need an ideal, maybe illusionary, model of business education to enable business education to find its North again. This ideal may not be achievable or even realizable, but it shall serve as a flagpole on the horizon guiding institutions with a desire to educate leaders that are equipped with skills and competences to embrace the emerging global environmental, societal and business challenges of the future.


Diploma in Sustainable Business Module One- September 2011

Dr. Katrin Muff, Dean of Business School Lausanne, shares first impressions after the launch of the new 1-year executive program in cooperation with the University of St. Gallen and the WBCSD: Diploma in Sustainable Business.

Prof. Dr. Thomas Dyllick, Professor for Sustainability Management at the University of St. Gallen, shares first impressions about the launch of the new 1-year executive program in cooperation with Business School Lausanne and the WBCSD: Diploma in Sustainable Business.

Caroline Van der Veeken, participant in the newly launched 1-year executive program of Business School Lausanne and the University of St. Gallen – Diploma in Sustainable Business – shares first impressions about the program participation.