Shaun Barnes, Executive Director at 21^st Century

For commercial entities in modern-day South Africa, the delicate dance between financial sustainability and ethical integrity often feels like navigating a paradox. On one side, there is the unyielding pressure to secure a company’s financial health (every shareholder’s stake) through increased profits and lowered costs. And this has become ever more pressured in a post-pandemic world beset by global instability, low growth rates and supply chain issues. On the other, there is the growing moral imperative to uphold ethical responsibilities towards employees and society at large (the stakeholder’s perspective).

Is this a uniquely South African problem or do we find ourselves within a greater global trend?

To answer this, one should first look at the difference between shareholders and stakeholders within a business. As defined by Investopedia, a shareholder is someone who owns part of a public or private company through shares of stock, while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation.

Stakeholders are those who either affect or are affected by a company. They have a “stake” in its success or failure. Stakeholders might be shareholders or owners. In general, stakeholders can be divided into two types:

• Internal stakeholders: Those who are employed by a company or have a direct relationship with it. These are usually employees, shareholders, executives, and partners.

• External stakeholders: Those who are impacted by a company but do not have a direct relationship with it. These are usually customers, suppliers, and community members.

Key to the emergence of ‘Stakeholderism’ is understanding the differences in effects on the two. As Allison Hendricks of Simply Stakeholders puts it, stakeholders are impacted differently to shareholders. Shareholders can sell their stock and purchase different shares, but stakeholders cannot easily steer their way out of the organisation’s influence, as they have a longer term relationship with the company. For example, if a company performs poorly financially, the vendors, employees and customers or clients will be impacted.

But for a shareholder, they can sell their stocks and leave before the impact affects them too severely. In this scenario, it is the stakeholders who do not have many options to leave. But even if they leave or are forced to leave (such as employees losing their jobs) they are still impacted and cannot negate the effects the organisation has on them.

While stakeholders have a “stake” or interest in an organisation’s decisions, plans, and financial stability, shareholders may often only care for the latter. Stakeholders can thus have a huge impact on an organisation in today’s world.

This can range from social media pressure, media stories, strikes, protests or legislative intervention. The emergence of Environmental, Social and Governance (ESG) investing and reporting has added to this. It is for this reason that organisations are increasingly acknowledging how critical it is for them to engage with stakeholders. Shareholders do not hold the same power over a business the way stakeholders do.

This new dichotomy between shareholderism and stakeholderism has led to much debate about the effectiveness of both, as noted by the Harvard Law School on Business Governance. Arguments have arisen that stakeholderism is merely an “enlightened form of shareholderism” whereby shareholders should promote good stakeholder interests during their normal monitoring of company performance (The Illusory Promise of Stakeholder Governance by Lucian Bebchuk and Roberto Tallarita, June 2020).

But what has emerged is that companies will be held to higher standards in the future than those imposed only by short-term financial gain or value. The British Academy published a paper in November 2018 titled “Reforming business for the 21st century”. This paper highlighted the three most important principles for modern corporations to address:

• The first is well-defined and aligned purposes. Corporate purpose is the reason why a corporation exists, what it seeks to do and what it aspires to become. Profit is a product of the corporate purpose. It is not the corporate purpose. In some, but by no means all cases, corporate purposes should include public purposes that relate to the firm’s wider contribution to public interests and societal goals.

• The second principle is a commitment to trustworthiness. When corporations commit to purposes, they commit to the various parties that are involved in the delivery of those purposes and vice-versa. This creates reciprocal benefits for the firm, its stakeholders and society. These arrangements rely on relations of trust.

• The third principle is embedding an enabling culture. The trustworthiness of an organisation is reliant on clearly articulated values that are adopted consistently in the culture of the corporation.

This has led to the emergence and measurement of what the British Academy refers to as the “Purposeful Corporation”. While we have our own set of circumstances within South Africa, we are clearly part of an ever-increasing move towards responsible rather than just financial capitalism.

In our own national context, we do have factors which impact on corporations even more. We have the highest inequality and unemployment rates in the world combined with the inherent societal inequality we have had for generations.

This leads to some tough questions for South African organisations:

• What will the new business model in a lot of industries be? How far will the ‘hybrid’ model be taken and what will the consequences be on areas like customer service and supply chains?

• What can we do to ensure our commercial survival while bearing in mind the profound social impacts of continued retrenchments in a country with the highest unemployment rates in the world?

• What must the balance between ethical and moral business and profits be?

• If we do need to downscale our business, how can we do it in an accurate manner that will not negatively impact us going into a period of economic recovery?

This paradox becomes particularly pronounced in the context of ‘Moral Restructuring,’ an approach that embodies the dichotomy of pursuing organisational changes like retrenchments, while steadfastly honouring the socio-economic realities of environments such as South Africa’s. Here, the stark challenges of unemployment not only demand our attention but urge us to rethink traditional methods of restructuring with a fresh, morally grounded perspective.

Can a restructure be ‘moral’? We believe it can if it is ‘optimal restructuring; rather than ‘traditional restructuring.’ What is the difference between the two?

Traditional restructuring is most often seen as negative, involves drastic cost-cutting attained most often through retrenchments, advocates for a smaller, leaner organisation all with a view solely on revenue, profits and margins.

Optimal restructuring, on the other hand, focuses on a positive intent to improve and optimise the organisation, not only cut costs. It is understood that this will be achieved through the optimisation of resources, upskilling, training and development of staff and a commitment to allowing the current structure to become faster and more agile in its ability to respond to market circumstances. This ensures that people and stakeholders are taken into account, not just revenue, profits and margins.

Optimal restructuring challenges leaders to exhaust all other avenues before considering “down-sizing/right-sizing,” promoting creative and innovative thinking in the face of financial distress. This approach demands a shift in perspective, where the immediate financial gains of retrenchment are weighed against the long-term societal costs and the potential erosion of trust and reputation.

Furthermore, in situations where financial distress necessitates tough decisions, moral restructuring offers a framework for navigating these challenges with integrity. It emphasises the importance of transparency, dialogue, and empathy, ensuring that stakeholders are engaged in the decision-making process and that the human dimension of retrenchment is never lost. This approach fosters a culture of trust, where employees understand that their welfare is a genuine concern and that every effort is made to preserve their livelihoods.

Moral restructuring, therefore, is not merely a theoretical ideal but a practical ESG imperative. It requires leaders to embody the values they espouse, making decisions that reflect the soul of their organisations.

By adopting this mindset, businesses can achieve a delicate balancing act, advancing their financial objectives while honouring their ethical obligations to employees, communities, and the planet. In doing so, they not only safeguard their reputations but also contribute to a more equitable and sustainable future.

ENDS