In previous columns, we have explored many elements of sustainable business. We’ve examined environmental, social, governance metrics (ESG) for assessing a company’s business practices, as well as stakeholder models that promote consideration of all stakeholders when business decisions are made. This month we will dive into specific ways that these ethical ideals can be put into action.
To understand how a sustainable business model can be achieved, we must first understand one crucial reason why most businesses are not sustainable. When shares are sold publicly, ownership of a company can be distributed among millions of investors, and these shares come with two important legal rights: the right to share in profits and the right to vote on company decisions. This may seem intuitive to most. After all, if one is risking their wealth on a given venture, shouldn’t they be given a say in the activities of the company? This system, however, comes with tangible consequences.
When millions of investors participate in an impersonal financial system, a share in a business is viewed simply as a commodity to make money. As a result, when investors own portions of a company, they use their voting rights to elect company directors that have their financial interests in mind with little consideration for the true value or mission of the underlying company. It is this coupling of voting and economic rights in company ownership that creates business models where the sole purpose is to maximize profits. This leaves little room for serious consideration of ESG standards or stakeholders in the operations of public companies.
You may be wondering: are there any working models that decouple voting and economic rights among company owners? The answer is yes, and in 2020 the Purpose Foundation published a comprehensive outline of one such model. In their publication Steward-ownership: A short guidebook to legal frameworks, the authors outline what they call the “steward-ownership” model, a legal framework whereby corporations may entirely separate investors from company decision makers. According to the article, this could be accomplished with two distinct types of shares:
General shares: These shares would possess only economic rights and no voting rights. This way, investors cannot pressure company decision makers into sacrificing the organization’s mission or long-term stability for short-term financial gains.
Steward-shares: These shares would possess only voting rights and no economic rights. Steward-shares would be owned by those most integral to the mission and vision of the company. These individuals would essentially be “stewards” of the company’s higher vision and long-term goals. By providing only voting rights and no economic rights, steward owners would prioritize executing the company’s mission. These shares cannot be sold, and are given only to those who align with the vision of the company.
By splitting these rights into different share classes, and implementing this system into a company’s legal DNA, stewards will be uncompromised ethically by financial pressures, allowing them to focus on ESG issues, scientific advancement, or any other areas that bring maximum value to society instead of only maximizing profit for investors.
According to the guidebook, a steward-ownership model could also be obtained through foundation-owned corporations. Examples of these include the Mozilla Corporation (developer of Firefox), Rolex, and IKEA. Since foundations are formed for furthering specific missions, they make ideal candidates to own stakes in companies. Beneficial State Foundation, another example of a foundation-owned company, expressly mandates recycling their profits back into the communities they serve. The guidebook claims that steward-owned companies such as these are six times more likely to survive than other companies over a 40-year timeframe.
Steward-ownership redefines business. Instead of seeing a company as a vehicle through which profit is an end in itself, steward-ownership uses financial success as a means to further its broader mission while placing overall societal well-being at the core of business operations. This model and others like it can help purpose-driven social entrepreneurs to bring meaningful change in the world without compromising on their vision. Importantly, this creates a framework through which sustainability and ESG principles can enter conversations in boardrooms across the world.
For further reading, view Steward-ownership: A short guidebook to legal frameworks.