Stakeholder Capitalism’s Forgotten Stakeholder

I was talking with a couple of Midwestern manufacturing CEOs the other day, each of whom runs the kind of midsized operation that employs a few hundred people and helps keep a small town’s lights on. One was talking about a painfully expensive environmental certification she was grinding through the process of obtaining.

Not easy. Plenty tricky. And required. “Is this a California thing?” the other CEO asked.

Nope. Nor is it a Europe thing or an EPA thing. It is a customer thing—a new mandate from her biggest client, a multibillion-dollar, publicly traded global consumer brand that’s an award-winning leader in what’s come to be known as ESG, the all-encompassing push for improving environmental, social and governance practices on the road to Stakeholder Capitalism. If she wants to keep the business—and she must—she must get the certification. Period.

Welcome to the shadows of ESG. Far from the good intentions of Nasdaq and the Business Roundtable and the headline-grabbing social-standard setting of massive investment shops like BlackRock, State Street and Vanguard, moves by large public companies on issues from sustainability to diversity to worker pay to climate are rippling through the supply chain. Expect it to soon form a tsunami.

But while we’re hearing plenty these days about large-company CEOs and boards working to improve every sort of corporate behavior, you hear far less about big companies pitching in to help their smaller, privately held suppliers make it happen.

That’s a pity, says Ram Charan, the well-known advisor to boards and CEOs around the world and author of Boards That Lead and other books, and potentially a lost opportunity to make a real, lasting difference. When it comes to ESG—especially the E—“no one company can do it alone,” says Charan. “You need an ecosystem.”

Charan reminds us that when Walmart, for example, made its big push on leaning-out its logistics years ago—the move that turned it into retail’s prime player—it worked hard to help its suppliers upgrade technology and practices. When Honda entered America with its then-unheard-of demands for quality, it put people on the ground inside their main suppliers’ operations, coaching them, cajoling them and ensuring long-term contracts to those that could master their way of doing business. Both instances were catalysts for incredible change—and growth.

If boards really want to make progress on ESG issues—not just for their companies but, for society—they need to remember they can’t do it alone, nor should they try. After all, suppliers are stakeholders, too.