How the "Great Lockdown" is resetting business.

“What are the greatest inventions of the past 1,000 years?”

If you invite people to submit a list of the three most influential inventions in human history, the answers will vary greatly. There are so many impressive achievements that helped the world move forward.

Paper. Fertilizers. The printing press. Electricity. Automobiles. Airplanes. The telephone. The microprocessor. The Internet.

The list of potential candidates is long. Technological innovation is amongst humanity’s greatest achievements.

And, no doubt, a person’s choices will reflect their own interests and perspective. Most of the above-listed inventions were genuinely disruptive. They improved the quality of people’s lives immeasurably, created fantastic new opportunities and opened new markets.

But how many people would mention the corporation? My guess, not that many. At first sight, an imaginary “legal” person doesn’t measure up to other life-changing inventions of the past.

And yet, don’t dismiss the corporation too quickly. Israeli historian Yuval Noah Harari (author of the non-fiction bestsellers “Sapiens” and “Homo Deus”) places the “legal fiction” of the corporation or “imagined reality” among humanity’s most ingenious inventions. Think about it. The corporation has played and still plays a crucial role in the commercialization of the most disruptive innovations (as well as the development of new ideas).

All it takes is an “imaginary” legal person that exists independent from its founders, investors, and managers. The corporation allows investors to exit and trade their shares without dissolving the business. And if the CEO leaves (for whatever reason) the corporation continues to exist as well.

Modern corporations have become the main players in the economy. They have encouraged entrepreneurship and economic risk-taking for decades. The corporation has been an effective way to enable the aggregation of capital for productive purposes. You see them everywhere (all over the world), in many forms, operating alone and in groups. Startups. Joint ventures. Multinationals. Conglomerates. Some of them are extremely powerful and richer than entire countries.

But it’s not all great. Besides the success stories, the “imagined reality” of the corporation has caused serious problems since its inception. Misuse. Fraud. Pollution. Greed. Unethical and overly risky behavior. A corporation offers the opportunity for people to hide behind and misappropriate its corporate veil at the detriment of usually weaker parties and society as a whole.

Perhaps, it is this mixed history that explains the exclusion of the corporation from the list of “greatest inventions.” It certainly explains the ambivalent feelings that many people have towards corporations and the corporate world.

And whenever there is a crisis in the corporate world or the economy more generally, the same questions continue to pop up:

What — or Who — is a corporation for? What should be the focus of a corporation?

It’s All About the Money

Is the business of a corporation doing business and making money? Or, do they have a broader purpose in society? Do large corporations also have a social responsibility to help improve the world?

I received these questions during an online webinar last week. The interest in the purpose of corporations was mind-blowing. Most of the 150+ participants believed that profit-making and maximizing shareholder value were the main goals of a corporation. But they also felt that a purely financial and commercial purpose fell short in these difficult times.

We have created a “mechanical financial world” which is all about the money. High-frequency traders are a great example. Even though they only count for a small part of all traders out there, they are responsible for two-thirds of all stock market transactions. They use super-fast computers and custom-built high-frequency trading algorithms to take advantage of movements in the market.

The increased uncertainty and volatility in stock markets during the current crisis make high-frequency trading very lucrative. Where most financial institutions are losing big-time, high-frequency traders are benefiting from the disaster.

This is not a problem in itself, but it has put them in the spotlight. Mainstream media have started to satirize high-tech frequency traders for not contributing in any way to solving the crisis. The reality is quite the opposite. High-tech frequency traders attract the most talented mathematicians to help them make their computers faster, more flexible, and more independent. Some of these traders require these math employees to sleep in tents in the office (taking self-isolation to the next level).

This clearly helps avoid virus transmission, but also (and this was the main reason of the isolation) potentially leads to “microsecond” improvements in the quality of the algorithm, helping high-frequency traders beat the competition and make more cash. The argument now is that these mathematicians should contribute to solutions that deal with the crisis and help mitigate the social and economic consequences, instead of only pursuing a money-driven goal.

Whatever you think of this example, I guess it’s fair to say that “crises reveal.” Difficult, stressful moments expose the true colors of both individuals and organizations. And, too often, difficult moments reveal the worst of the corporate world.

Stakeholder Capitalism

However, it would be a mistake to judge the corporate world purely based on such anti-models. Many companies do take the health and safety of stakeholders very seriously. CEOs send emails, write blogs, and post videos in which they explain why flagship shops are closed (social distancing), online shops are upgraded, and top managers’ salaries are cut. Also, they postpone dividend distributions and delay share buyback programs — everything to retain customers and avoid layoffs.

And there is more. Corporations and their managers have become increasingly innovative when it comes to engaging with stakeholders. They look for opportunities for their companies to improve the world. They generally focus on three areas:

1. Healthcare and the front-line responders.
2. Education
3. Small businesses

They donate their products or make services available. Shoes for healthcare workers, latex gloves for responders, webcams for teachers, etc. Some companies also provide improvised products/services. Think sanitizers made by breweries, ventilators manufactured and assembled by car companies, and face masks donated by fashion and lingerie companies. Improvisation is everywhere right now.

And yet, participants at the webinar asked how sincere and altruistic initiatives can be distinguished from window-dressing exercises — a fair question.

After all, history shows that we go back to “business-as-usual” as soon as a crisis is over. There was a lot of shareholders-versus-stakeholders talk after the global financial crisis of 2009. But things soon went back to normal.

For instance, CEO-Worker compensation ratios — which dropped dramatically in the aftermath of the crisis — soon began to increase, as well.

We have short memories and anti-corporate feelings dissipate quickly when the economic situation improves. Much as a crisis reveals our true colors, good times also make us forgetful and forgiving.

So, will it be different this time?

Many of my academic colleagues doubt it. They have a hard time to “unlearn” what they’ve preached for so many years (the only purpose of a company is shareholder wealth maximization). According to them, a stakeholder view is confusing.

How can you serve multiple masters with different, and often conflicting, interests? According to them, trying to find a balance is illusory and could even hurt the corporation (including all its stakeholders) in the future.

They seem to forget that a CEO doesn’t solely define the corporation. A corporation isn’t a single person. A corporation is a team. It’s a complex, evolving ecosystem of people (employees, consumers, investors, founders of startup companies, and other organizations) committed to working together as a team to reach a complex mix of different goals.

Like any team, a corporation is a multi-faceted entity that cannot be reduced to a simple formula. At least, reducing it to simple formula is both dishonest — it obscures the reality of the thing it describes — and counter-productive — in the sense, that any suggestions for improving performance are likely to miss the target.

And, of course, serving multiple masters is difficult. But, embracing the messy reality of building a successful team that delivers a meaningful experience for everyone is surely a better, more human option than the pursuit of financial gain.

Accelerating the Future

Stakeholder capitalism isn’t equal to corporate social responsibility. It’s a necessary strategy to ensure that corporations remain relevant in a fast-changing world.

Ironically, corporations that seem to embrace a stakeholder-oriented purpose outperform their peers when it comes to stock market returns. To convince the participants of the webinar, I referred to the ten best-performing stocks of the last decade (only taking large-cap corporations into account). The list was published by the financial and investing advice company “The Motley Fool.” What was so good about the list was that most of the companies weren’t household names. Also, they operated in entirely different industries and sectors.

1. Netflix (media-services provider)
2. Domino’s Pizza (restaurant chain)
3. MarketAxess Holdings (financial services)
4. Exact Sciences (healthcare)
5. DexCom (medical devices)
6. Cheniere Energy (energy)
7. Transdigm Group (aerospace)
8. Broadcom (semiconductors)
9. Fair Isaac (computer)
10. United Rentals (construction/industrial)

If you had invested $1,000 in each of these companies in January 2010, you would have made a total of $271,730 in ten years. On this view, defending stakeholder capitalism is not only about fairness or doing the “right thing.” It is about maximizing performance for the benefit of all. It is about money and meaning.

So, what made these companies such an excellent investment in the 2010s? Some companies operated in growth markets (streaming service and aerospace components). But there is more. Nine out of ten companies take their stakeholders exceptionally seriously. They understand that the digital transformation has forced them (and has also given them the tools) to engage and co-create with their stakeholders.

My explanation would be that their strategies revolve around five Cs: culture, community, collaboration, co-creation, and communication. They invite stakeholders to share ideas, they have established grievance mechanisms and created an open culture that allows stakeholders to identify themselves with the corporation, learn, and participate in the decision-making process.

The coronavirus crisis is accelerating the future. It’s a tipping point that encourages corporations to promote socially desirable values. It makes most of us realize that a mere focus on profits and investors will hurt companies and society. Are we entering a more human world?