The Upside of Trade-Offs

By Sarah Kaplan

In October 2019, Salesforce CEO Mark Benioff declared capitalism was dead in a New York Times op-ed. Earlier in the year, Larry Fink, chairman of BlackRock, caused a seismic stir in a letter to chief executives demanding that companies pursue purpose. In August 2019, CEOs of 181 companies in the Business Roundtable rejected the idea of shareholder primacy in favor of creating value for all stakeholders. Today, increasingly, corporations are being asked, pressured, forced, encouraged, regulated, and coaxed to consider a broader set of stakeholders in their business calculations.

The 2008 financial crisis focused attention on the ways in which corporations have wide-ranging effects on society. Climate change has attuned people to the potentially toxic effects of corporate policies. The global supply chain is more visible than ever before. Consumers are increasingly conscientious about their buying habits.

Further, in the current political environment, people are turning to corporations to pursue social policy agendas that governments cannot or will not pursue. The net effect has been that, more and more often, companies need to consider stakeholders other than the shareholder in developing their strategies and managing their organizations. The challenge for those who want to consider these diverse stakeholders (and the worry for those who think it’s a bad idea) is that each stakeholder comes to the party with different interests and views about what is of value. When these interests aren’t aligned, corporate leaders are required to make trade-offs.

For example, when the capital costs of installing pollution-control filters on a power plant or the operating costs of raising chickens in cage-free environments or the costs of improving conditions for workers in Bangladeshi clothing factories are high, those costs are likely to erode the financial returns of the companies implementing these changes or to prevent firms from undertaking the changes to begin with. Even more than just creating conflicts between stakeholder interests and financial returns, the needs of different stakeholders may be at odds with each other. When Walmart sets low prices, its decision benefits consumers — but those low prices have historically been based on low wages for workers. When consumers win, workers may lose.

Trade-offs at the center of social responsibility

Trade-offs, conflicts, and challenges, however, can be the source of innovation and transformation. Companies can develop explicit and coherent plans for addressing the tensions created by trade-offs. The stories of two large, well-known organizations, Walmart and Nike (as well as Levi Strauss & Co., mentioned below), show the ways that well-known organizations with varied stakeholders manage trade-offs. This is not to glorify or vilify them, but simply to show how frequently interests and agendas can conflict and highlight the kinds of difficult decisions that arise most often in today’s globalized economy. Coping with stakeholder trade-offs forced Nike to come up with less toxic glues and more environmentally friendly materials for its shoes and Walmart to pressure suppliers to change both products and their packaging to reduce waste and the environmental effects of shipping.

Read full article in strategy+business: The Upside of Trade-Offs