Introduction
For business leaders in market economies, the sanctity of national law for setting their respective governance frameworks is diminishing. It is giving way to global forces and the activities of international institutions, alliances, and public opinion, spurred on by the laws of climate and nature. Previously, company leaders could have confidently said that they act in the interests of the company and its shareholders, that the company obeys applicable national laws that govern its activities, and that the company acts ethically and responsibly, but beyond that, they had wide discretion when carrying out their duties. Today, extraterritorial forces are redefining many aspects of corporate life and the agendas, roles, and responsibilities of corporations, their leaders, and governing boards.
An important illustration of this is the existential challenge for companies to transition from a focus on short-term profit to long-term sustainability and shareholder wealth creation. Likewise, there is a growing expectation that corporate leaders will take into account a wider range of stakeholders when exercising corporate powers. For CEOs, directors, and senior executives, new domains of responsibility are emerging with varying degrees of speed and certainty. They pose a challenge for leaders to keep pace with such fluidity and its implications for corporate governance. Some entities may carry on business in ignorance or defiance of the advancing forces, but the unstoppable march of those occupying the high moral ground who seek to advance matters of global moral concern, especially climate change, signals the inevitability of major change for most businesses and their leaders. And moreover, a company cannot rely on its nation’s government to be the arbiter of which demands will be met and to what extent and within what timeframe.
Thus, even if a government declined to fully support the Paris Agreement (United Nations, 2015) targets or withdrew its support completely, it would not prevent global investors from withholding essential finance from a proposed project or forcing strategic change upon a corporation and its leaders. Nor would it prevent businesses from voluntarily acceding to international and national market forces that effectively oblige leaders to associate their brands with fast-evolving principles of good corporate citizenship. To this end, fluid extraterritorial powers, especially fueled by climate change and other environmental, social, and governance (ESG) considerations, are able to act ahead of and, when necessary, independently of national governments. Supranationality is an ever-increasing modern phenomenon, manifesting itself in global opinion and the reach and actions of nonstate actors and movements, both challenging and supplementing the exclusivity of traditional principles of state-centered sovereignty.
Our era of fluid modernity provides a novel setting for issues of global concern to become deeply embedded into public discourses and ultimately flow into governance frameworks and corporate behavior. Modernity offers a translational efficiency never before experienced or available, probably outside of wars and pandemics, in relation to the regulation of business. Global agendas can now quite quickly filter down to influence governments, regulators, and national interest groups and, in consequence, change both local laws and business behavior. Influencers include global organizations, both public and private; global capital movements, such as institutional investors with unlimited reach; and social media, with its ubiquity and immediacy. Global and local standard setters also play an important role in this process of translation.
For the present purposes, four closely connected dimensions of these extraterritorial forces – namely, the laws of climate and nature, Climate Action 100+ (CA100+), the Task Force on Climate-Related Financial Disclosures (TCFD), and stakeholderism – will be considered in this chapter.Footnote 1 These are affecting the day-to-day settings of business life as global institutions and players have their agendas quickly translated into real action and real outcomes with impressive speed. For businesses and their leaders and those who educate them, this is the modern reality; a new era is unfolding.
Liquid Modernity
Liquid modernity (Bauman, Reference Bauman2012) describes contemporary global society in which many accepted elements are being uprooted or liquidized. Flexibility and immediacy are replacing established norms and practices. As a consequence, questions are being raised about the nature and purpose of modern corporations, how they should operate in the face of climate change and other concerns, the duties and accountabilities of their CEOs and boards, and the extent of their managerial power. Global power giveth and global power taketh away.
Power can move with the speed of the electronic signal – and so the time required for the movement of its essential ingredient has been reduced to instantaneity. For all practical purposes, power has become truly extraterritorial, no longer bound, not even slowed down, by the resistance of space…. This gives the power-holders a truly unprecedented opportunity: the awkward and irritating aspects of the Panoptical technique of power may be disposed of. Whatever else the present stage in the history of modernity is, it is also, perhaps above all, post-Panoptical. What mattered in Panopticon was that the people in charge were assumed always to be there, nearby, in the controlling tower.
Now power can be amassed globally and brought to bear across borders with relative speed, with or without state sanction or participation and with both private and public outcomes. Today, transactions, information, and corporate power flow more fluidly than ever before, thereby allowing for global dominance over product and data markets and industries. Not even the great and feared trading behemoths of earlier centuries, such as the British East India Company, could have amassed dominance across the globe with equivalent speed and efficiency. As one commentator observes: “Imagine an economy without friction – a new world in which labor, information, and money move easily, cheaply, and almost instantly … it’s here” (Colvin, Reference Colvin2015, para. 2). For example, in 2017, 69 of the world’s richest 100 entities by revenue, including countries, were corporations (Global Justice Now, 2018), and incumbent enterprises are said to own 80 percent of the world’s commercial data (Schumpeter, Reference Schumpeter2018).
Mark Zuckerberg, founder and chairman of Facebook, has said: “In a lot of ways Facebook is more like a government than a traditional company” (Farrell et al., Reference Farrell, Levi and O’Reilly2018, para. 1). Its 28 billion users are far greater in number than the citizens in any one country, and its influence, market value, and revenues exceed those of many individual nations. This is but one example of the modern realities of supranational power that sits uneasily with traditional theories and limits of sovereignty.
Capitalism has become light in the process. “The passage from heavy to light capitalism, from solid to fluid modernity, may yet prove to be a departure more radical and seminal than the advent of capitalism and modernity themselves, previously seen as by far the most crucial milestones of human history at least since the neolithic revolution” (Bauman, Reference Bauman2012, pp. 125–126). But while light or fluid capitalism describes the transience of industrial production and the freely moving, profit-seeking global capital, it also facilitates the movement of socially focused, long-term aspirational investment and its demands. It is this phenomenon of liquid modernity that allows direct private action successfully to be taken in pursuance of globally agreed-on social and environmental goals. Social narratives around the world are themselves more fluid than they were 10 or 20 years ago.
Historically, those holding the power write the narratives, and as Bauman (Reference Bauman2012) observes:
For at least two hundred years it was the managers of capitalist enterprises who dominated the world…. It was therefore their vision of the world, in conjunction with the world itself, shaped and reshaped in the likeness of that vision, that fed into and gave substance to the dominant discourse.
The dominant discourses, however, are beginning to change, as are those who shape and give effect to them. Now, international contributors such as the United Nations (UN), the World Economic Forum (WEF), PRI, CA100+, the TCFD, institutional investors, and powerful coalitions of interests united in beliefs and connected through modern media channels are exerting influence in time and reach way beyond what was possible or contemplated not so long ago. Speed, reach, and influence are now leveraged to shape policies, practices, products, and commitments while confronting corporations and their executives on issues of global and local community concern. Chief among them are climate change, protection of the environment, sustainability, ethical investment, human rights, and addressing inequality.
A feature of modernity has been a strong emphasis on short-term thinking and outcomes. “The ‘long term’, though still referred to by habit, is a hollow shell carrying no meaning; … the ‘short term’ has replaced the ‘long term’ and made of instantaneity its ultimate ideal” (Bauman, Reference Bauman2012, p. 125). This is the environment in which corporations and their leaders have been operating, facing incessant market demands for short-term profits while battling to gain market support for initiatives and investments that could only be harvested in the long term. And all the while, they are being met with ever-expanding demands for good corporate citizenship, whose nature is also rapidly evolving. These are the realities of modernity that have substantially eliminated time and distance in the exercise of power. However, the global forces representing climate action are changing the short-term–long-term equation. Long-termism is making a spirited comeback to challenge the dominance of short-term thinking, planning, and investment.Footnote 2 Nevertheless, much remains to be played out in this contest between two “deep-pocketed” forces.
How Quickly Things Develop
It took many centuries for Christianity and Islam to evolve into global religions, at least 1,500 years in the case of Christianity. In contrast, the science and political movements associated with climate change have emerged in less than 60 years, and widespread acceptance by the public at large of climate change as an existential threat to communities has occurred in around 30 years (Weart, Reference Weart2020) but with growing intensity over the last decade.Footnote 3 Black Lives Matter became a global movement in less than 7 years, and the MeToo movement became truly global in less than 3 years.
According to Thomas Friedman, the three largest forces on the planet, namely, technology, globalization, and climate change, are all accelerating at the same time (Friedman, Reference Friedman2016a, p. 120). As he says, even the pace of change is changing. In consequence, “so many aspects of our societies, workplaces, and geopolitics are being re-shaped and need to be re-imagined” (Friedman, Reference Friedman2016a, pp. 3–4). To this list can be added corporations, their purpose, their regulation, and the expectations of those who lead and oversee them.
Friedman refers to 2007 as the moment when the globalization of thought, capital movement, and fluid power became turbo-charged. “The moment that Steve Jobs introduced the iPhone turns out to have been a pivotal junction in the history of technology – and the world” (Friedman, Reference Friedman2016b, p. 20). He describes how a whole group of new companies emerged in and around that year: “Together these new companies and innovations have reshaped how people and machines communicate, create, collaborate, and think” (Friedman, Reference Friedman2016b, p. 20). Friedman also points to the “Big Shift,” which describes the knowledge flows that pass through countries and communities, creating opportunities and competitive advantages (Hagel et al., Reference Hagel, Brown and Davison2009b). As John Hagel observes of the globalization of flows: “We are living in a world where flow will prevail and topple any obstacles in its way.”Footnote 4 Global opinion and capital pressure, now flowing in increasing harmony with that of nature and the climate, are becoming irresistible forces.
Climate Change – a Force of Nature, a Force for Change
Ascendancy of the Climate-Change Movement – toward Climate Sovereignty and the Sovereignty of Nature
International agreements, such as the United Nations Framework Convention on Climate Change (UNFCC) signed by 197 countries (United Nations, 1992) and the Paris Agreement signed by 186 of the UNFCC signatories, broadly frame the global movements on climate change and climate action. At the time of writing, the Paris Agreement has been ratified by 190 countries. Aided by the developing science generated by the Intergovernmental Panel on Climate Change (IPCC) and many scientists and scientific organizations around the world, a global belief, even global consciousness, has emerged.Footnote 5 Because of this overwhelming scientific and public, albeit not universal, support for the notion that the climate change being witnessed in the world is human induced, businesses, their leaders, and their representative institutions have little choice but to respond accordingly. As a result, climate action now appears to be an unstoppable global force, with transitions to decarbonizing economies now backed by massive and growing investments,Footnote 6 perhaps meaning, in de Tocqueville terms, a revolution is underway as a result of rising expectations.
We are living in a state of anticipation, transnational in reach, where global warming and other issues “infuse a sense of looming time limits that generate urgency and anxiety about acting now to protect the future” (Adams et al., Reference Adams, Murphy and Clarke2009, p. 248). Fear and hope are important factors, and we see these at work with climate change and climate action. “Anticipation is not just betting on the future; it is a moral economy in which the future sets the conditions of possibility for action in the present, in which the future is inhabited in the present” (Adams et al., Reference Adams, Murphy and Clarke2009, p. 249). Thus, as climate-related disasters are seen as portents of future calamities, forces are amassing to take serious remedial action in the present.
This involves the participation of national governments, international governmental and nongovernmental organizations too numerous to list, private international capital, individual corporations, communities, individuals, and activist groups. Together, they comprise an international network of movements pursuing broadly common goals but often differentiated with respect to methodologies, timings, and impacts. Thus, globally engaged human thought is manifesting itself in a unique way – when else has this occurred so comprehensively and been so individually and institutionally embraced? And why does this groundswell of belief and support continue to gather strength and not waver? In large part, it seems, because the climate itself constantly catalyzes interest by delivering powerful and tangible reminders.
Are we, accordingly, in this age of liquid modernity, moving toward the recognition of new forms of sovereignty arising from the impacts of climate and the responses of nature to human and corporate activity? Could it be said that climate sovereignty and the sovereignty of nature – a federation of sovereignties – are being claimed or reasserted by Mother Nature through the agency of, but not limited by, governing and institutional constituencies around the world and her foot soldiers paying respect and pledging loyalty and obedience to her needs and demands such as conservationists, climate activists, the public, and compliant capital? Mother Nature can be seen to be asserting control over her domain, rewriting social contracts globally and demanding compliance with the rules of her regime in new and more apparent ways. And her regime can be considered to be every bit as sovereign or even more so than limits of temporal and territorial power existing within nation-states and other sovereignties.
In modern international law, sovereignty is generally linked to territory and to the right of peoples to govern themselves, subject to some exceptions. Yet extraterritorial power and movements are increasingly influential in the affairs of nations and of humankind more broadly. Climate and environmental activism are cases in point, including the forces of direct private capital flowing seamlessly across the globe, largely unfettered by states or the conceptual limitations of territorial sovereignty in search of climate solutions and the protection of nature. They deserve more serious consideration and analysis in the sovereignty debates as to the nature and source of their power and authority. In a well-reasoned analysis, which has analogies for global climate action, it has been argued that the authority of the International Criminal Court derives not from state power but from the international community of citizens and their human rights. The author concludes:
A supranational ius puniendi can be inferred from a combination of the incipient stages of supranationality of a value-based world order and the concept of a world society composed of world citizens whose law – the “world citizen law” (Weltbürgerrecht) – is derived from universal, indivisible and interculturally recognized human rights predicated upon a Kantian concept of human dignity…. This community is the holder of the international ius puniendi.
With climate action, by analogy, the right to “punish” or require obedience to long-standing norms ultimately derives not from territorial authority but from an even higher level of supranationality than “world citizen law,” namely, climate sovereignty and the sovereignty of nature.
In the world prior to territoriality becoming the cornerstone of jurisdiction, other forms of sovereignty existed, based on, among other aspects, tribes, race, religion, or nationality (Kassan, Reference Kassan1935, p. 240). For example, consider papal sovereignty. “The Holy See is essentially international and has to deal with higher motives and interests than the political ascendency of any state or group of states” (von Redlich, 1932, p. 244). Further, “Rome looks on at the forward march of the course of events in this world, not only from an international standpoint, but from one still more exalted, seeing the course of human life and the life of nations and states ‘sub specie aesternitatis’ – in the light of eternal truths and of the supernatural” (von Redlich, 1932, p. 244).
In Islam, sovereignty derives from Allah and is not associated with, or limited by, the notions of states or territorial jurisdiction. “Thus, real sovereignty belongs to Allah alone and it is spread from arsh to farsh (from the Throne of God to the floor of the earth)” (Ahmad, Reference Ahmad1958, p. 249).Footnote 8 A recent analysis showed that some extra-legal and organic forms of sovereignty from premodern times continue to exist (Paris, Reference Paris2020). These include, relevantly, the idea of an organic, civilizational, transnational Chinese nation – a form of transcendent universalism (Paris, Reference Paris2020, pp. 472–473) not limited by China’s territorial borders.
To recognize climate sovereignty and the sovereignty of nature as contemporary federated sovereignties is to acknowledge their organic and transcendent existence, possessing permanence, authority, and the capacity to exert power and influence over a global constituency. They confer the benefits of production and regeneration and impose limits within which sustainable life, natural assets, and ecosystems can flourish and endure. They command respect and obedience and can instill fear when their norms are seriously broken or threatened. This includes fear for the future of the planet, communities, and business and industry continuity; financial instability; the prospect of public shaming; loss of predictability or certainty in the lives of individuals or families; various forms of extinction; and the loss of safety and security. These sovereignties are potent forces.
In relation to corporations, which rely for their existence on natural capital,Footnote 9 these sovereignties are rewriting the rules of “citizenship.” Oaths of allegiance are fast becoming mandatory. Being a good corporate citizen possessing moral legitimacy within these sovereignties has its onerous civic responsibilities, such as reducing greenhouse emissions and operating sustainably, but is accompanied by protected freedoms and benefits. Among others, there is freedom to continue in business and the benefits of a green reputation, together with supportive capital waiting to invest in and help transition and grow a business. And, some would say, the social license to operate is the ultimate concession, offering sovereign passports stamped with a visa for green-credentialed corporations to continue in business for the long term.
Conversely, industries and corporations not seen to be responding seriously to climate change and other social responsibilities are susceptible to having their social licenses to operate being canceled. This could arise, for example, through a government banning the extraction or processing of fossil fuels, as was highlighted by the newly elected US government’s action to pause new oil and natural gas leases on public lands and in offshore waters.
Thomas Friedman (Reference Friedman2016a) describes in an interesting way how Mother Nature controls her domain through a rigid and brutal rules-based regime: “Mother Nature also believes in bankruptcy…. She has no mercy for her mistakes, for the weak, or for those who can’t adapt to get their seeds, their DNA, into the next generation…. What markets do with bankruptcy laws, Mother Nature does with forest fires” (p. 306). And also with other effects of climate change, it might be added. This is how Mother Nature’s system of justice works. Friedman (Reference Friedman2016a) suggests that “Mother Nature in her own way, appreciates the power of ownership” (p. 305). But in contrast to human systems, he notes, “Natural systems have no owners, no self-interested managers per se” (Friedman, Reference Friedman2016a, p. 305). Yet, green shoots are emerging where nature’s ownership of its own capital is being recognized.
In New Zealand, personhood has been granted to the Wanganui River (Te Awa Tupua), from the mountains down to the sea, in a world first for river ownership (Chapron et al., Reference Chapron, Epstein and López-Bao2019). No longer the property of the Crown, the river has its own identity and owns itself, with all the rights, powers, duties, and liabilities of a legal person. Similarly, personhood has been granted to what was formally a large national park (Te Urewera) containing lakes, forests, and mountains (Biggs et al., Reference Biggs, Lake and Goldtooth2017, pp. 24–25). Personhood has also been conferred on the Ganges and Yumana Rivers in India, and rivers in Colombia possess rights to protection, conservation, maintenance, and restoration (Biggs et al., Reference Biggs, Lake and Goldtooth2017, p. 27).
As well, Ecuador became the first country to enshrine rights of nature in its constitution, and under Bolivian national laws, the inherent rights of ecosystems are recognized (Biggs et al., Reference Biggs, Lake and Goldtooth2017, p. 8). In the United States, the right of nature to exist and flourish has been recognized in a number of communities but with varying effects (West, Reference West2020), and Ohio’s Lake Erie was the first US example of an ecosystem to receive acknowledgment of its rights to exist, flourish, and naturally evolve (Community Environmental Local Defense Fund, 2020). Clearly, it is the early days in the process of fully recognizing the rights of nature; however, the movement’s achievements are growing, and it has established the International Tribunal for the Rights of Nature, where cases are presented by an “Earth Defender” (Biggs et al., Reference Biggs, Lake and Goldtooth2017, p. 36). Another example of natural capital emerging more clearly into the mainstream is the establishment of the Natural Capital Investment Alliance, which aims to invest $10 billion in natural capital investments by 2022. Falling under the banner of Prince Charles’s Sustainable Market Initiative, it is seeking to monetize activities that protect natural capital. Its Terra Carta (Earth Charter) manifesto aims to broaden the notion of sustainability beyond net-zero emission targets to include nature, people, the planet, equality, and prosperity (Fernyhough, Reference Fernyhough2021).
Questions surrounding “standing” to act on behalf of nature, which can arise in formal legal proceedings (Miller, Reference Miller2019), are avoided when direct action is taken by nature’s champions and defenders. They can employ a variety of extra-legal measures, especially leveraging the power of institutional capital to achieve outcomes on behalf of nature and the planet.Footnote 10 As well, groundbreaking legal actions are emerging around the world (Setzer and Byrnes, Reference Setzer and Byrnes2020). Notably, actions are being brought against governments, corporations, and regulators at local, national, and international levels. Among a widely expanding range of plaintiffs are individuals, including children, as well as groups, corporations, nongovernmental organizations (NGOs), and local communities seeking enforcement of treaty obligations, national laws, policies and regulations, and corporate commitments. Furthermore, the bases for such claims are similarly expanding as plaintiffs seek to rely on established causes of action as well as asserting new foundations for claims to protect their interests, both personally and on behalf of their communities or the local or global environment. Claims extend to seeking protection against future harm by applying for injunctions or declarations or to receiving damages for present or future loss. Decisions have been handed down requiring governments to take affirmative action, and increasingly, actions are relying on human rights to found the claims (Setzer and Byrnes, Reference Setzer and Byrnes2020). New high-water marks are being set within countries and at the international level.
An extraordinary example involves the case Lliuya v. RWE AG (Global Climate Change Litigation Database, n.d.), in which the plaintiff, a Peruvian farmer, is suing a German utility company in a German court for the partial costs of remediation of threatened flooding in his home country due to the recent increase in volume in a glacial lake near his farm. This was allegedly caused by the impact of climate change upon a nearby glacier. Although the farmer was initially unsuccessful in his claim, on appeal, the case was accepted for hearing. The potential is for the company to be found liable for its relative contribution to global climate change as a result of its greenhouse gas (GHG) emissions and to contribute the same proportion to the costs of remediation (Germanwatch, Reference Germanwatchn.d.). Many legal and scientific issues will be in contention, but the supranational dimension to this claim highlights the potential scope of climate-change liability as well as climate protection. In the age of liquid modernity and in light of the emerging consensus, it is hardly surprising that traditionally perceived limitations on the right to compel governments, regulators, and corporations to take action on climate change, either within or across jurisdictions, are succumbing to progressive judicial decision making.
Reflecting the growing movement to protect nature’s capital, the EU High-Level Expert Group on Sustainable Finance recommends making investor duties more explicit by including impacts and dependencies on natural capital and ecosystems and how these may be material to investors, companies, and insurers (EU High-Level Expert Group on Sustainable Finance, 2018). Another of its recommendations is to include consideration of natural capital among the good-faith duties of company directors (EU High-Level Expert Group on Sustainable Finance, 2018, p. 40). Corporations are now facing the formidable combined forces of climate and nature and those acting on their behalf, with far-reaching implications for all parties who are direct or indirect stakeholders in corporate life.
Climate Action 100+
An Overview of Private Politics and Financial Power
The climate-change phenomenon in raising global consciousness has spawned a multiplicity of organizations, both public and private, to vigorously campaign for radical changes to business practices and models. It is best described as a “regime complex for climate change” (Keohane and Victor, Reference Keohane and Victor2011, p. 7). It defines the “hodge-podge of loosely connected, decentralised institutional arrangements scattered around the globe that … emerged in the absence of any unified, binding environmental policy regime” (McAdam, Reference McAdam2017, p. 190). This recognizes the elements that “are linked more or less closely to one another, sometimes conflicting, usually mutually reinforcing” (Keohane and Victor, Reference Keohane and Victor2011, p. 7).
Such regimes are loosely coupled sets of specific regimes, and in contemporary world politics, structural and interest diversity tend to generate a regime complex rather than a comprehensive, integrated regime (Keohane and Victor, Reference Keohane and Victor2011, p. 7). The former has two distinctive advantages, namely, flexibility across issues and adaptability across time (Keohane and Victor, Reference Keohane and Victor2011, p. 15). The regime complex for climate change emerged rather than having been comprehensively designed (Keohane and Victor, Reference Keohane and Victor2011, p. 19), reflecting the infeasibility of a comprehensive regime as a result of the complexity of issues, the multiplicity of power groupings in the international arena, and the fluidity of their respective interactions. The emergence of CA100+ is a prime example of this fluidity.
In the space available, CA100+, a powerful activist group, has been chosen to demonstrate the speed, reach, and outcomes that are occurring through the use of private politics (Baron, Reference Baron2003)Footnote 11 – that is, using direct engagement to achieve change or resolve disputes without relying on the law or governments. CA100+ was established in 2017 to implement the first Global Investor Statement on Climate Change, which was published in the lead-up to the adoption of the Paris Agreement (Climate Action in Financial Institutions, 2019). As a senior executive at CalPERSFootnote 12 says: “Climate Action 100+ illustrates owners’ ability to come together to solve the tragedy of the commons” (Rundell, 2020, para. 1). In this case, it’s a coalition of 617 investor organizations of enormous financial scale, with combined assets exceeding $65 trillion (CA100+, 2020), which, remarkably, and presently surpasses the combined gross domestic product (GDP) of the United States, China, and Europe. Furthermore, these organizations represent vast numbers of grassroots members around the world who depend upon them for their long-term financial well-being. In the context of current global politics, both public and private, CA100+ possesses the legitimacy to succeed in its campaign: for it, “the time is right” (Sjöstrüm, Reference Sjöstrüm2020, p. 9).
CA100+ signatories acknowledge the need for the world to transition to a lower-carbon economy consistently with the targets set by the Paris Agreement. Accordingly, three broad aims with potentially far-reaching governance consequences were specified in relation to 160 heavy emitters that are said to be responsible for up to 80 percent of industrial emissions.Footnote 13 CA100+ aims to secure commitments from each focus company to implement a strong governance framework that clearly articulates the board’s accountability and oversight of climate-change risk and opportunities. Second, it wants reductions in GHG emissions across company value chains, consistent with the Paris Agreement’s goal of limiting global average temperature increase to 1.5°C above preindustrial levels. And third, it is seeking enhanced corporate disclosure in line with the final recommendations of the TCFD. This includes disclosure of sector-specific expectations on climate change to enable investors to assess the robustness of companies’ business plans against a range of climate scenarios, including the Paris Agreement targets, and to improve investment decision making (CA100+, n.d.).
The expectation of companies is that they will have an ambition to achieve net-zero emissions by 2050, if not sooner, across their supply chains and a reduction in emissions of 45 percent by 2030 relative to 2010 levels. To this end, companies in collaboration with CA100+ are expected to develop and implement net-zero transition action plans for their value chains and sectors. This requires a resetting of corporate strategies over the short, medium, and long terms and may require companies to reinvent themselves and their operating models. The corporate thinking that is required, therefore, is not to view climate change as a corporate social responsibility issue but one that “is best addressed with the tools of the strategist, not the philanthropist” (Porter and Reinhardt, Reference Porter and Reinhardt2007, para. 1).
A useful analysis of the scope of these challenges is set out in a 36-page Royal Dutch Shell report (Royal Dutch Shell PLC, 2021). Another useful example of the sheer scale and ambition required to reimagine a major business lies in the proposal by Fortescue Metals Ltd, a global leader in the iron-ore industry, to become one of the world’s largest energy providers by transitioning to becoming a global renewable resources company (Thompson, Reference Thompson2020) with a particular focus on green hydrogen. Beyond individual corporations, probably the most far-reaching transition proposed is that of the European Green Deal (European Commission, 2019).
A Net-Zero Company Benchmark launched by CA100+ in 2021 includes 30 indicators to provide a comprehensive analysis of which companies are leading the transition to net-zero emissions as well as providing indicators for investors to inform their investment and corporate-engagement strategies (Ceres, 2020a).Footnote 14 This initiative, accompanied by data tracking and analysis, sends strong messages to companies and their leaders that, increasingly, their climate data will be publicly available, with implications for their corporate reputations, brand health, and the ability to continue to attract investment. The intention is to hold companies accountable. As the CEO of Ceres, one of the five key stakeholders in CA100+, stated bluntly when referring to the proposed 2021 Net-Zero Company Benchmark: “We’re going to hold them accountable. We’ll assess their progress towards this call to action with the public benchmark next year” (Min, Reference Min2020, para. 4).
Ethical and moral considerations underpin the work of CA100+, but it is also motivated by self-interest because its signatories’ investments are at risk of being devalued by climate change:
With our long-term investment horizon and multiple generations relying on us for pension security, establishing a thriving low-carbon global economy in which we can invest is vitally important to our ability to protect our members’ assets and earn risk adjusted returns. Climate change is a systemic risk which needs to be managed and mitigated. For an intergenerational, universal owner like us, there is nowhere to hide.
An advantage of private capital acting internationally is that it can cut through the intransigence and opposing political forces that inevitably appear when state-based reform is proposed. Nor is it forced to succumb to unacceptable compromises. It also avoids the impasse over the status of corporations under international law.Footnote 16 Importantly, it can escalate its use of financial power in cases when cooperation is not forthcoming. As will be seen, this is proving to be a successful strategy. Although CA100+ cannot achieve a green business revolution in the 5 years of the project, its success to date is, nevertheless, remarkable, with inevitable flow-on effects.
These impacts are shrinking timeframes between principle and practice. For example, TCFD disclosure is fast becoming the governing framework for climate-change governance, disclosures, and reporting well in advance of national legislation, except in rare instances.Footnote 17 Relying on the social movements’ theory, Reid and Toffel (Reference Reid and Toffel2009) affirm the effectiveness of private politics such as that exercised by CA100+. They found “that companies respond to private politics by adopting new practices that adhere to the underlying objective of the social activists” (Reid and Toffel, Reference Reid and Toffel2009, p. 1171). They also observe
that political context affects the success of a social movement in that firms under threat of regulation related to the social movement are more likely to agree to engage in practices consistent with the aims of the movement …, as are firms that share an institutional field with firms under threat of regulation.
Presently around the world, national governments and regulatory bodies are moving at various speeds, generally slower than the private political forcesFootnote 18 regarding, for example, reduction of carbon emissions, requiring climate risk reporting to improve financial market stability, and encouraging industry and corporate transitions. Evidence of this lies in the extent of commitments being undertaken by corporations around the world voluntarily, by agreement in response to market pressures or as a result of public and private politics, but nevertheless in advance of regulatory compulsion to do so.
Climate Action 100+ Disciple Model
With its highly committed action working groups deployed around the world, CA100+ has become a potent private force driving business transition in response to climate change.
Under the CA100+ model, signatories are entrusted as fiduciaries to engage with target companies in their respective jurisdictions, either alone or in partnership with other signatories, to achieve climate outcomes. There is a clarity of purpose that informs the discussions held with target companies.Footnote 19
Although its main targets are the 160 identified major GHG emitters, the reach of CA100+ is now far more pervasive as its signatories, generally large institutional investors, use its goals to guide the other investment decisions they make. BlackRock, for example, is targeting 1,000 companies in 2021, reaching beyond direct heavy emitters to those who finance such companies (BlackRock, 2020b, p. 6). It should be noted that the signatories’ shared unity of purpose may not always prevent their own commercial interests from coming into conflict while they, themselves, are transitioning their portfolios.Footnote 20
Engagement may take all or any of the following forms: holding one-on-one meetings with companies; holding group meetings with companies; conducting investor roundtables; making a statement at company annual general meetings (AGMs); supporting shareholder resolutions on climate change risk; voting for the removal of directors who have failed in their accountability of climate change risk; voting against reports, accounts, and company-led resolutions; and making joint statements with the company (CA100+, 2019). When necessary, the methods employed to achieve positive results can be scaled up according to the circumstances. CA100+ has firmly stated that it will approach unresponsive and poorly performing companies with targeted action strategies (Ceres, 2020a). A striking example of this approach is BlackRock’s stated intention to increasingly use its voting power on shareholder resolutions where engagement is not providing sufficient outcomes or where its voting would accelerate progress in a particular company (BlackRock, 2020b, p. 7). This is a powerful business model at work.
CA100+ Achievements
As a stakeholder possessing power, legitimacy, and urgency (Mitchell et al., Reference Mitchell, Agle and Wood1997, p. 878), CA100+ is achieving both tangible and precedential outcomes.Footnote 21 The first CA100+ Net-Zero Company Benchmark Report released in early 2021 contains a useful snapshot of areas in which significant progress is being made, as well as areas of continuing challenge for corporations. Thus, 52 percent of focus companies have made full or partial commitments to 2050 net-zero targets; 60 percent have made full or partial commitments to long-term (2036–2050) GHG emission reduction targets; and 67 percent have similarly committed to medium term (2026–2035) emission-reduction targets. Other areas in which major progress has been made, no doubt because these are the easiest and least complex to implement, are climate-policy engagement (63 percent), climate governance (89 percent), and commitment to TCFD disclosure (80 percent).Footnote 22
In contrast, two areas that go to the heart of business operating models, strategy, and financing of transitions, namely, capital allocation alignment and decarbonization strategy, have achieved the least progress to date. Only six companies have made full or partial progress in aligning their capital allocation with their climate-action commitments, and only 40 percent of focus companies have achieved full or partial progress in developing and implementing a decarbonization strategy.
A few specific examples, however, highlight the progress being achieved. In 2018, Royal Dutch Shell PLC (Shell) announced its intention to reduce its carbon footprint by around half by 2050, to link its energy transition with long-term remuneration, and to disclose in line with the TCFD recommendations. Then, in April 2020, Shell announced a new ambition to become a carbon-neutral energy business by 2050 and to reduce scope 3 emissions by 65 percent by the same date (Royal Dutch Shell PLC, 2020). Importantly, the Shell CEO declared that its previous targets were not sufficient and that society had moved toward meeting the more ambitious Paris Agreement targets of 1.5°C (Royal Dutch Shell PLC, 2020).
Maersk, the world’s largest shipping company, committed to net-zero emissions by 2050 (Maersk, 2019), and Glencore, the world’s largest mining company by revenue, agreed to cap its coal production at current levels while prioritizing investment in commodities that support low-emission technologies, among other commitments (Glencore, 2020). Another notable success, following discussions with CA100+, was Total’s announcement of its ambition to achieve 2050 net-zero emissions across its worldwide operations (IIGCC, 2020b). It further committed to assessing capital expenditure for its consistency with the Paris Agreement, together with annual reporting, and to actively advocate for policies that support the achievement of net-zero emissions. The CA100+ 2020 Progress Report contains a full outline and analysis of corporate commitments and progress in key sectors (CA100+, 2020).
Lobbying commitments are another key feature of agreements reached between CA100+ and individual companies. This involves obtaining undertakings to ensure that lobbying by industry associations of which a focus company is a member is balanced and does not unduly emphasize the cost of taking action. Thus, significantly, BHP, the world’s largest miner by market capitalization (Statista, Reference Sjöstrüm2020), worked with CA100+ and other key investors to establish its new Global Climate Policy Standards, which state that advocacy on climate policy should be balanced to avoid focusing on the cost of reducing emissions; fact-based, using the best available evidence and avoiding ambiguity; focused toward areas that present the greatest benefits to members and communities while avoiding advocacy that might unduly exacerbate policy tensions; and be technology and commodity neutral (BHP, n.d.).
Using the proxy system to propose shareholder resolution is another strategy being used to good effect by CA100+, more so in the United States than in Europe (Horster and Papadopoulus, Reference Horster and Papadopoulus2019).Footnote 23 Importantly, the publicity associated with shareholder resolutions in major corporations also sends strong signals to others in the same industry: “firms are more likely to agree to engage in practices consistent with the aims of a social movement if they … or other firms in their industry … have already been targeted by a shareholder resolution on a related issue” (Reid and Toffel, Reference Reid and Toffel2009, p. 1171). Areas of focus for shareholder resolutions include director elections, climate strategies aligned with the Paris Agreement, board independence, alignment of executive remuneration with ESG metrics and Paris Agreement goals, and commitment to TCFD reporting.Footnote 24
A truly remarkable example of CA100+ in action is its role in having a resolution passed by over 99 percent of the vote at the 2019 Annual General Meeting of BP (BP, 2019a). The resolution directed the company to include in its future Strategic Reports and other reports a description of its strategy, which the board believes to be consistent with the Paris Agreement goals. Further, the company was directed to state how future capital expenditure would be consistent with the Paris goals, together with climate-change metrics and targets over the short, medium, and long terms. Notably, it was supported by the BP board itself. Subsequently, BP set a 2050 net-zero target and announced that it would reinvent its business (BP, 2020). The company’s detailed response to the direction is evident in the contents of its 2020 AGM Report (BP, 2019b).
Rarely, if ever, is a major corporation directed by its shareholders to undertake such far-reaching strategic steps;Footnote 25 however, it is a sign of the times when the legal niceties of traditional corporate-governance principles are giving way to global social realities and new ways of governing. Agreements freely entered into, such as those negotiated by CA100+ and the BP example, in particular, avoid issues of legal standing faced by shareholders or other stakeholders when trying to force changes to corporate policies and strategies.
Through a combination of direct actions and their flow-on effects, CA100+ is making a major impact on corporate responses to climate change in the countries in which it is active. Nevertheless, evidence of the sheer scale of the task confronting CA100+ lies in the findings of a recent global survey: it reveals that 60 percent of CEOs have not yet factored climate change into their strategic risk-management activities, and ironically, companies in countries with the highest exposure to natural hazards are least likely to have embedded climate change into their risk-management frameworks (PricewaterhouseCoopers, 2021). Likewise, a major European survey reveals that few companies have a governance and steering mechanism in place to develop and implement climate strategies (Coppola et al., Reference Coppola, Krick and Blohmke2019). Even so, CA100+ has achieved remarkable momentum in a short time, and with the commitment of its signatories and significant like-minded others, it is part of an impressive movement that is not only helping to transform corporate politics but also heralding the emergence of a new corporate governance paradigm.Footnote 26
TCFD Reporting
One of the most significant reforms arising out of the climate-action movement is climate reporting (Reid and Toffel, Reference Reid and Toffel2009),Footnote 27 for which demand has been rising for several years. Of themselves, corporate disclosures may not achieve changes in corporate behavior or reductions in GHG emissions (Sjöstrüm, Reference Sjöstrüm2020), but they are, nevertheless, crucial elements in the broader accountability framework that is emerging. They will assist in investment decision making; shaping corporations; and, coercively, enabling activists such as CA100+Footnote 28 to hold corporations to their stated climate actions.
It is now clear that the recommendations of the TCFD are gaining traction around the world as the preferred reporting framework (TCFD, 2020).Footnote 29 The TCFD was established by the Financial Stability Board (FSB) as an industry-supported initiative to consider the implications of climate-related issues for the financial sector, and it released its recommendations in 2017 (TCFD, 2017). TCFD recommendations are intended to be adoptable by all organizations and be included in financial filings, and they are designed to provide forward-looking information on the financial impacts of climate change to assist with decision making by users. There is a strong focus on risks and opportunities as organizations transition to a lower-carbon economy (TCFD, 2017, p. III). The core elements of TCFD reporting, governance, strategy, risk management, metrics, and targets (TCFD, 2017, pp. 14–16) require deep consideration, planning, and evaluation by companies. TCFD reporting is creating a new, multifaceted dimension for investment decision making and corporate governance more broadly.
The recent endorsement by the International Organisation of Securities Organisations (IOSCO) of a proposal from major international reporting standards organizations to align their respective frameworks with the TCFD recommendations in an endeavor to “deliver an integrated and consolidated set of disclosures that meets multiple stakeholders’ needs” is a pivotal moment in climate-related disclosure (IOSCO, 2020, p. 3). The measures of TCFD’s growing influence are contained in its 2020 Status Report, which reveals that it is supported by over 1,500 organizations globally, including financial institutions responsible for assets of $150 trillion (FSB, 2020). Nearly 60 percent of the world’s 100 largest public companies either support the TCFD, report in line with the TCFD recommendations, or both. From 2020, TCFD reporting has become mandatory for PRI signatories totaling more than 3,000, with assets under management exceeding US$100 trillion (PRI, 2019).Footnote 30 And 42 percent of companies with a market capitalization greater than $10 billion disclosed at least some information in line with each individual TCFD recommendation in 2019 (FSB, 2020). As well, over 110 regulators, as well as governmental entities and governments around the world, now support the TCFD recommendations’ framework (FSB, 2020, p. 71). This is amazing progress in a short period of years.
Recently, New Zealand (NZ) became the first country in the world to adopt mandatory climate-change reporting based on the TCFD framework. The NZ obligations apply to banks, asset managers, and insurers with assets exceeding $1 billion or premium income exceeding $250 million. The legislation is intended to help NZ meet its Paris Agreement targets and assist investors in valuing companies and realigning their portfolios to contribute to a lower-carbon world. At the same time, Australia, Canada, the UK, France, Japan, and the European Union are heading toward the requirement for companies to report climate risk (Fernyhough, Reference Fernyhough2020). The European Commission has also taken a major step forward by incorporating TCFD recommendations into its Guidelines on Reporting Climate-Related Information under the EU’s reporting requirements to assist companies in making climate-related disclosures (FSB, 2020). CA100+, as already noted, regularly negotiates outcomes with companies that include a commitment to report climate matters in accordance with the TCFD voluntary-disclosure framework. From its very beginning, the pursuit of TCFD reporting was one of the three key objectives of CA100+ (Climate Action in Financial Institutions, 2019).
Some of the most onerous of TCFD requirements are in setting and disclosing climate-related strategies. In particular, organizations are recommended to describe the climate-related risks and opportunities an organization has identified over the short, medium, and long terms (Climate Action in Financial Institutions, 2019, p. 14). These should have regard for the nature of the organization’s assets and infrastructure and the fact that climate effects often manifest themselves over the medium and long terms (Climate Action in Financial Institutions, 2019, p. 20). There should also be a description of the specific climate-related risks for each of these terms that could have a material impact on the organization (Climate Action in Financial Institutions, 2019).
Significantly, organizations should disclose the resilience of their strategy, “taking into consideration different climate-related scenarios, including a 2°C or lower scenario” (TCFD, n.d., section C). This has been described as the most complex disclosure recommendation ever laid down because companies do not have historical data to compare with; commonly agreed-on climate scenarios; or consistency in methodologies for the assessment, quantification of, and reporting on climate impacts (KPMG Australia, 2020). The TCFD regards this form of scenario planning, although in its infancy, as one of its key recommendations because it allows information users to better understand the potential impacts of climate change on the organization over the coming decades. The TCFD (2020) status report demonstrates the difficulty corporations are having in complying with this onerous requirement (FSB, 2020, p. 2).
It follows that the more diverse are the business activities of a corporation, the more complex and challenging it will be to comply with the framework. For example, a major Australian international bank took 26 pages to set out its 2020 TCFD report to disclose the identification and management of its climate risks across its client base, which spans many industries (Macquarie, Reference Macdonald-Smith2020). Nevertheless, with the support of major investors, regulators, and many major companies, the recommendations are becoming mainstream. And as TCFD reporting becomes more developed and uniform, its influence will surely grow. In particular, it can be expected to influence decision making by major investors, especially those with an ESG focus, and will more easily allow commitments made by corporations and their leaders to be tracked. In these ways, TCFD reporting is adding new and dynamic dimensions to corporate governance frameworks.
A Snapshot of CA100+ and TCFD Reporting in Australia
CA100+ in Australia
Australia has been chosen for the purpose of taking a single-country snapshot of the reach and impact of CA100+ and the TCFD recommendations for several compelling reasons. First, Australia is one of the world’s leading mining countries, and as the largest exporter of coal and gas, it is a significant exporter of GHG emissions (Moss, Reference Moss2020). Australian coal accounts for nearly 30 percent of the world’s coal exports (Reserve Bank of Australia, 2019). Its contribution to the national GDP of 3.5 percent (Reserve Bank of Australia, 2019) makes the country heavily dependent on this revenue and underpins significant employment and community sustainability. And although domestic coal consumption has been declining, exports have been increasing (Reserve Bank of Australia, 2019). In the face of global climate action, there is, therefore, a vulnerability of mining companies to both price and global consumption trends as well as to the national economy as a whole.
Second, Australia hosts some of the world’s largest mining companies, such as BHP and Rio Tinto, an Anglo-Australian company that is the second-largest metals and mining company in the world by market value (Statista, Reference Sjöstrüm2020). Of the 160 CA100+ focus companies, 13 are Australian. Further, nearly 10 percent of CA100+ signatories are Australasian, thereby implying the likelihood of a high degree of climate activism. Australia also has a high rate of climate-related litigation. According to a recent analysis (Setzer and Byrnes, Reference Setzer and Byrnes2020, p. 6), 98 such cases have been initiated, which is greater than the total of all European cases and 50 percent greater than those in the United Kingdom. Based on that analysis, Australia is second only to the United States for climate cases, but on a per capita basis, it is the most climate-litigious country in the world.
Finally, in the country’s political setting, there is sharp disagreement between the main political parties on the setting of emission-reduction targets. Presently, the Australian government has not formally adopted the goals of the Paris Agreement, of which the country is a signatory, despite all Australian states having done so (Allens Linklaters, 2020b). Moreover, 56 percent of Australians consider climate change to be a serious and pressing problem requiring immediate action, and over 80 percent regard it as important for Australia to reduce its carbon emissions (Colvin and Jotzo, Reference Colvin and Jotzo2021). As we will see, ironically, while the national polity has been unable to establish a national consensus and action plan on climate change, CA100+, surely and steadily, assisted by the efforts of others, is achieving particularly significant successes. Some notable examples demonstrate the growing influence of CA100+ within Australia.
In consultation with CA100+, and in what has been described as a landmark shift for corporate Australia (Toscano, Reference Toscano2019), BHP agreed to develop targets for downstream emissions from its customers’ use of its products (scope 3 emissions) and to act as a steward to its supply chain. It was the first major mining company to make such a commitment. This agreement complements the company’s commitment to the Paris Agreement goals. Also, as noted earlier, BHP, in consultation with CA100+, published its Global Climate Policy, which committed to strict and progressive standards governing its public advocacy on climate change. Underpinned by global agreements, including the Paris Agreement and its temperature targets, the company states that climate policy should be constructive and targeted at emissions reductions, achievement of national targets at least cost, policies that support the development and deployment of low-emissions technologies, and policies that make a broader transition to a net-zero economy (BHP, n.d.).
Another prominent example of CA100+ in Australia is the commitment in February 2020 by Rio Tinto to reach net-zero emissions by 2050 and to spend $1 billion to achieve this target (Rio Tinto, Reference Tinto2020). Further, having committed to the TCFD reporting framework in 2018, it published its first TCFD report setting out the impacts of climate change and identified technological breakthroughs in materials that have a key role in low-carbon transition (Investor Group on Climate Change, 2019). While acknowledging these developments as progress, criticisms had been leveled about the pace of change, the absence of a comprehensive plan, and the commitment to all aspects of the CA100+ agenda.Footnote 31
Australian Super, the largest retirement fund in Australia, is, together with other CA100+ signatories, targeting at least 12 other Australian companies to make CA100+ commitments following its successful negotiations with BHP. They are using their voting power to help achieve these ends. A further useful example worth highlighting is the consultative engagement between CA100+ and Origin Energy, a major Australian company. The engagement was undertaken so that both parties could more fully understand and contribute to the company’s alignment with the Paris Agreement, emissions reductions, increased disclosure, the alignment of climate action to executive remuneration, and its plans toward exiting coal-fired generation by 2032. It is regarded as a model for climate-action engagement with companies around the world (CA100+, 2019, p. 31).
A final example that signifies a serious change of pace in Australia is the release in June 2020 by the Minerals Council of Australia (MCA) of a Climate Action Statement that acknowledges the net-zero target, albeit without specifying a deadline for its achievement. The release of the statement followed public and investor pressure. Although open to criticism by some, the statement nevertheless shows that the combined global and local forces of climate action are reaching deeply into the control centers of carbon emission. The momentum that is currently at work will bring further and more specific outcomes. To this end, CA100+ influential member Australian Super has adopted an assertive stance in relation to the MCA announcement, warning that it was insufficient because it failed to specify how MCA members would contribute to the Paris Agreement goals. It vowed to maintain the pressure on all industry associations whose climate agendas did not match the stated goals of their members (Butler, Reference Butler2019).
Through its gravitas and scale, CA100+ increased the velocity of climate-action forces in Australia, thereby accelerating the pace and depth of change. This is so not only in respect to a relatively small number of major emitters but also, through the ripple effects of its activities and especially its signature successes, in terms of the broader scope of climate action in Australia’s corporate sector. In consequence, several powerful interest groups have been formed to pursue climate-action goals similar to those adopted by CA100+, including, notably, the Climate Leaders Coalition, an organization comprising 22 leading Australian corporations (Australian Climate Leaders Coalition, n.d.).
TCFD Reporting in Australia
Although there is as yet no mandatory climate-change reporting framework in Australia, the TCFD is rapidly gaining support for reporting generally or within or associated with a company’s annual report (Deloitte, 2020).Footnote 32 Notably, the Australian government stated that TCFD reporting could be implemented by corporations without any law reform required for the recommendations to be implemented (Governance Institute of Australia, 2018). Further, the TCFD is gaining popularity with regulators, major investors, and major companies that are either committing to it or are now embedding it in their annual reports. Among the signatories to the PRI are 141 Australian investors who are committing to mandatory climate disclosure in accordance with TCFD recommendations (Governance Institute of Australia, 2020, p. 5).
In view of the necessity for such reporting, the Australian Securities & Investment Commission (ASIC) has recommended that publicly listed companies consider reporting their climate-change exposure and risk in accordance with TCFD recommendations (ASIC, 2018). Under ASIC Regulatory Guides, climate change is identified as a systemic risk that might affect a company’s future financial prospects, and if it is a material business risk, a listed entity is required to disclose it (Allens Linklaters, 2020a). As a clear signal to the business world of the materiality of climate-related disclosure in corporate reporting, ASIC has undertaken deep-dive analyses and desktop audits in critical sectors such as energy and industrials (Ross, Reference Ross2021). Similarly, the Australian Prudential Regulatory Authority (APRA) encourages Australia’s large banking, insurance, and superannuation institutions to address the climate-data deficit through scenario analysis, stress testing, and disclosure of market-useful information, in accordance with TCFD recommendations (APRA, 2020).
Finally, the Australian Stock Exchange (ASX) recommends that a listed entity should disclose the existence of any material ESG risks and the management of such risks, and it further recommends that they be disclosed in accordance with the TCFD recommendations (ASX Corporate Governance Council, 2019, p. 27). Thus, TCFD reporting is gaining a major foothold in Australia, with implications for all corporations with climate-related risks as well as for their CEOs and governing boards.
Stakeholderism and Corporate Purpose
Stakeholderism is the fourth global force to be considered in this chapter. In brief, stakeholder theory suggests that a corporation that is managed for the benefit of its whole body of stakeholders will produce better outcomes than those whose principal focus is profit making for shareholders. Although it is widely regarded that stakeholderism is an emerging form of responsible capitalism, others regard it more as a rebirth (Reich, Reference Reich2014). It also enjoys public support, exemplified by the Edelman 2020 Trust Barometer, in which 87 percent of global respondents expressed a belief that stakeholders, not shareholders, are most important to the long-term success of companies (Edelman, Reference Edelman2020).
A stakeholder is “any group or individual who can affect or is affected by the achievement of an organization’s purpose” (Freeman, Reference Freeman1984, p. 53). This is a wide and expanding group. It has been said to include “persons, groups, neighbourhoods, organisations, institutions, societies, and even the natural environment” (Mitchell et al., Reference Mitchell, Agle and Wood1997, p. 853). In the current stakeholder and climate-action debates, investors, employees, suppliers, the community, nature,Footnote 33 and society are commonly referred to as stakeholders, not necessarily in that order. Furthermore, and due to the influence being exerted by them, CA100+, TCFD, and PRI (Majoch et al., Reference Majoch, Hoepner and Hebb2017) could each be considered to be stakeholders in the corporations they affect.
Stakeholderism has been advanced as being the preferable central paradigm for the business and society field (Jones, Reference Jones1995). “It focuses on the contracts (relationships) between the firm and its stakeholders and posits that trusting and cooperative relationships help solve problems related to opportunism” (Jones, Reference Jones1995, p. 432). Further, “It implies that behavior that is trusting, trustworthy, and cooperative, not opportunistic, will give the firm a competitive advantage. In the process, it may help explain why certain ‘irrational’ or altruistic behaviors turn out to be productive and why firms that engage in these behaviors survive and often thrive” (Jones, Reference Jones1995, p. 432).
Another explanation is that the capability to create close relationships with stakeholders represents a source of sustainable competitive advantage and that “the incremental benefits of a close relationship capability can exceed the costs of a strategy used to develop and maintain it” (Jones et al., Reference Jones, Harrison and Felps2018, p. 388). Beyond issues of competitive advantage to corporations, stakeholder theory or stakeholderism is now taking on a significant public policy dimension, becoming as much a moral as an economic consideration. This is driven substantially by international public opinion as a means of tying corporations, their supply chains, and other stakeholders into the measures for addressing climate change and other major global concerns.
National laws typically define those to whom corporate boards and CEOs owe their duties when managing corporations and for defining the purposes of a corporation. In some places, shareholders are the primary focus (shareholder capitalism), whereas in others, it is a broader range of stakeholders (stakeholder capitalism).Footnote 34 However, stakeholderism is a global force gaining increasing traction in public discourses and consequent action. Strong support for it can be found in Europe, the UK, the United States, and many other countries. Although it lacks the cohesive support underpinning climate action across the globe, it is, potentially, a major disrupter of corporate theory and practice. If adopted in legislation as a mandatory obligation,Footnote 35 it will redefine the purpose of a corporation and substantially alter decision-making processes. In consequence, it would rewrite the rules and scope of discretionary business judgment. Although there are significant obstacles to its formal adoption in law,Footnote 36 its proponents have considerable momentum, nevertheless. Adoption of stakeholderism, accordingly, has significant implications not only for corporations, their leaders, and governing boards but also for shareholders, other stakeholders, regulators, and business schools and their accreditation bodies.
The Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance incorporate a stakeholderism approach but without advocating that national corporate governance frameworks adopt a mandatory requirement to consider all stakeholders. It is recommended that a “corporate governance framework should recognise the rights of stakeholders … and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises” (OECD, 2004, p. 21). And, further, where “stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights” (OECD, 2004, p. 21). This might require a step-change for Enlightened Shareholder Value (ESV) jurisdictions in which corporate leaders are generally shielded from stakeholder actions seeking to challenge corporate decisions. The OECD Guidelines for Multinational Enterprises (OECD, 2011) similarly highlight the importance of stakeholders and recommend that their interests be taken into account but in a manner that is consistent with the ESV approach.
In Europe, the EU High-Level Expert Group on Sustainable Finance proposes to clarify the fiduciary duties of institutional investors and asset managers to incorporate ESG considerations into their decision making and to ensure that directors of investee companies are subject to sustainability duties (EU High-Level Expert Group on Sustainable Finance, 2018, pp. 20–23). It also proposed to adopt a mandatory form of stakeholderism. In particular, it proposes that director duties and corporate governance explicitly incorporate sustainability by requiring a director to act in good faith and in a way that is most likely to promote the success of the company for the benefit of its owners and other stakeholders. A director would be required to have regard for the following: the likely long-term consequences of any decision; the interests of the company’s employees; fostering relationships with suppliers, customers, and others; the impact of the company’s operations on the community and the environment; and saving the world’s cultural and natural heritage (EU High-Level Expert Group on Sustainable Finance, 2018, p. 40).
A director would also have to exercise reasonable care, skill, and diligence and be aware of the direct and indirect impacts of the company’s business model, production, and sales processes on stakeholders and the environment. As well, nonexecutive directors and supervisory boards would be required to develop a climate strategy aligned with climate goals and to describe the company’s approach to the UN SDGs (EU High-Level Expert Group on Sustainable Finance, 2018, p. 41). These are far-reaching stakeholderism proposals that will face considerable implementation challenges but enjoy strong political support.
Further, in the EU Guidelines on nonfinancial reporting, the European Commission set out six guiding principles, including that reports should be stakeholder oriented (European Commission, 2017, p. 15) and that companies should report on their engagement with their stakeholders and how their information needs are taken into account. Under this model of reporting, shareholders are on an equal footing with all other identifiable stakeholders, a development that has been described as a significant step on the path toward stakeholderism in Europe (Howitt, Reference Howitt2020). It is also worth noting that the European Green Deal states that managing the transition to a sustainable Europe Investment Plan will lead to “significant structural changes in business models,” impliedly incorporating stakeholder approaches (European Commission, 2019, p. 16).
The British Academy recently released the Principles for Purposeful Business, which are thoroughly researched and developed proposals to radically reform the underlying paradigm of corporate law and corporate governance (British Academy, 2019). If adopted, they would replace profit-making with corporate purpose, which would, inter alia, take into account social, political, and environmental issues. Profit would be an outcome of a company’s purpose, not the central focus. The British Academy (2019) sets out eight principles for purposeful business (pp. 8–9):
1. Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them.
2. Regulation should expect particularly high duties of engagement, loyalty, and care on the part of directors of companies to public interests where they perform important public functions.
3. Ownership should recognize the obligations of shareholders and engage them in supporting corporate purposes, as well as in their rights to derive financial benefit.
4. Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture.
5. Measurement should recognize impacts and investments by companies in their workers, societies, and natural assets both within and outside the firm.
6. Performance should be measured against the fulfillment of corporate purposes and profits, measured net of the costs of achieving them.
7. Corporate financing should recognize impacts and investment by companies in their workers, societies, and natural assets both within and outside the firm.
8. Corporate investment should be made in partnership with private, public, and not-for-profit organizations that contribute toward the fulfillment of corporate purposes.
These principles inextricably intertwine corporate purpose and stakeholderism and propose a new contract between business and society. Importantly, the British Academy (2019) cites four factors that highlight why change is needed now: the global nature of challenges facing society, such as climate change, especially, and the global nature of business itself; second, opportunities and challenges presented by new technologies; third, the increasingly intangible nature of companies and their assets; and fourth, the perception of business in wider society, noting that trust in business institutions is essential for social and economic progress (p. 12). In particular, the Academy asserts that companies must help to drive urgent change in response to “growing concerns around the external impacts of business regarding social inequality, the environment, competition, consumer protection, and privacy in digital markets” (British Academy, 2019, p. 12).
The proposals capture two underlying dimensions of corporate purpose, namely, the “positive benefit of producing profitable solutions to the problems of people and planet, and the avoidance of harm in not profiting from producing problems for people or planet” (British Academy, 2019, p. 20). A reformulated duty would make it mandatory for directors to state their companies’ purposes, then act in ways they consider most likely to promote the fulfillment of the stated purposes and, importantly, be obliged to have regard for the consequences of any decision on the interests of shareholders and stakeholders in the company (British Academy, 2019, p. 20). In practice, therefore, corporate leaders would be empowered to pursue socially and financially advantageous outcomes for a business rather than having to put shareholder interests first. Accordingly, they could, in particular circumstances, prefer the interests of stakeholders other than shareholders so long as the corporate purpose is being fulfilled.
It would be a major corporate-law reform for shareholder-capitalism countries where directors presently enjoy greater freedom in decision making and would alter the balance between corporate and governmental responsibility for achieving social outcomes. A similar leap is suggested in a proposal regarding ownership, under which the traditional property-right view of the firm is turned on its head by suggesting that “ownership does not relate to the assets of a firm but to its purposes. Hence, with the rights of ownership come obligations and responsibilities to respect the interests of others affected by its purpose” (British Academy, 2019, p. 22). By developing these principles against the backdrop of the UN SDGs and the global movements for responsible and moral business,Footnote 37 the Academy’s proposal significantly strengthens the forces for change. It is worth noting, in this context, the remarks of Larry Fink that “a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability” (Fink, n.d., section 3, para. 2).
Quite clearly, the views of the Academy and many other proponents of stakeholder capitalism are consonant with emerging global sentiments that expect business to be an engine for long-term wealth creation achieved in harmony with nature. A recent global survey shows that 56 percent of respondents believe capitalism does more harm than good; a minority of respondents trust business, in contrast to a strong majority of the informed public who do trust business; 73 percent desire change; a majority believe business serves the interests of only the few; and 87 percent believe that stakeholders, not shareholders, are most important to long-term company success.Footnote 38
Under the Academy proposals, stakeholders, broadly defined, would be key participants in, and beneficiaries of, this form of business. What remains unclear is how competing claims upon corporate outcomes and any ensuing disputes can be resolved. The Academy states that “a purposeful business will also ensure that measures are in place to ensure accountability within the business for remaining faithful to its purpose and for ongoing monitoring and reporting of delivery of its purpose” (British Academy, 2019, p. 17). With responsible purposes clearly agreed upon, more stable ownership, inclusion of stakeholders in a company’s governance structure, and better ongoing dialogue between a company and its stakeholders, it is implied, somewhat hopefully, that less disputation will arise. However, perfect alignment of stakeholder interests even under these new arrangements cannot be assumed.
The respective interests of the corporation itself, management, capital, labor, suppliers, the community, and those acting on behalf of nature can be expected to fall out of alignment from time to time. And if a company strays from its stated purposes, especially if narrowly expressed, one or more stakeholders will want a mechanism for corrective action and one that is enforceable if all other attempts at resolution are unsuccessful. Ironically, many companies that are having to reimagine their businesses as a result of climate change might not have been able to do so if they were bound by narrow purpose statements.
A legal mechanism to consider such cases that are incapable of being resolved internally, through market forces, or through stakeholder pressure will need to be developed. Presently, in shareholder-primacy jurisdictions, the law favors wide discretionary decision making by corporate leaders, allowing them to determine, from time to time, what is in the best interests of a company, including in regard to stakeholder interests. To make such consideration mandatory would therefore require a major rewriting of corporate-governance principles and structures in those jurisdictions.
Interestingly, although the UK has traditionally followed the shareholder-primacy model, it has incorporated stakeholders into legislation in two explicit ways. First, Section 172(1) of the UK Companies Act, which enshrines the principle of ESV (Williams, Reference Williams2012, p. 360),Footnote 39 requires that the directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and, in doing so, have regard for, among other matters, the likely consequences of any decision in the long term and the interests of other stakeholders – employees, suppliers, customers and others, the community, and the environment. However, it has been argued that, notwithstanding the references to stakeholders, the section introduced in 2006 makes little difference to the preexisting law (Williams, Reference Williams2012, p. 362). In other words, there is little difference between the ESV approach adopted in the UK and that of the traditional shareholder-value approach that exists in other places.Footnote 40
Section 172(2) of the UK Companies Act, however, expressly allows the directors of a company whose purposes consist of or include purposes other than the benefits of its members to give effect to those nonmember stakeholder interests. In most cases, however, corporations have wide discretion over the purposes for which business can be carried on. B Corporations, which balance purpose and profit, are notable exceptions.Footnote 41
A second stakeholder requirement under English company law is that specified large companies are required to publish in their annual reports how the directors have regarded the stakeholder matters set out in Section 172(1) of the UK Companies Act. In particular, they must specify how they have engaged with employees, showed regard for their interests, and considered the effect of that regard on the principal decisions taken by the company during the financial year. Similar disclosures are required regarding other stakeholders, such as suppliers and customers.Footnote 42 Because these reports are only starting to be filed, it is too early to tell whether such ex post facto requirements will have any significant bearing upon the extent to which directors take account of and prioritize respective stakeholder interests when making major decisions.
Also, to be noted is that the 2018 UK Corporate Governance Code issued by the UK Financial Reporting Council embraces purpose as the central principle (Financial Reporting Council, 2018). Finally, in 2019, the Institute of Directors issued a 10-point manifesto that was designed to achieve three broad objectives, the first of which was to “increase the accountability of the UK corporate governance system to stakeholders and wider society” (Institute of Directors, 2019, p. 3).
In America, the US Business Roundtable 2019 “Statement on the Purpose of a Corporation,” signed by 181 CEOs (Business Roundtable, 2019) representing $13 trillion of market value, was widely regarded as a watershed occurrence and elevated the intensity of global debate concerning corporate purpose and stakeholderism. Whether it becomes a pivotal moment in a fuller adoption of stakeholderism remains to be determined because the signatories were not calling for and did not support radical changes to corporate governance structures, which could have serious unintended consequences (McMillon and Bolten, Reference McMillon and Bolten2020). They also believed that prescriptive government control over business would hurt many stakeholders who are in need of help (McMillon and Bolten, Reference McMillon and Bolten2020).
While acknowledging that each participating company has its own corporate purpose, the signatories expressed a fundamental commitment to stakeholders to delivering value to their customers; investing in their employees; dealing fairly and ethically with their suppliers; supporting the communities in which they operate and protecting the environment by embracing sustainable practices across their businesses; and generating long-term value for shareholders, who provide the capital that allows companies to invest, grow, and innovate.Footnote 43
As widely welcomed as this statement was, it has generated considerable controversy around what it means and how it will be implemented. Professors Bebchuk and Tallarita (Reference Bebchuk and Tallarita2020, p. 133) conclude that, in effect, the Business Roundtable statement does not move away from ESV and was not intended to shift the corporate-governance requirements of the signatories or others. They noted that there was little evidence to show that the signatories had adjusted their corporate-governance settings following the statement and that most were already meeting the principles set out in the statement. They regarded it largely as a public relations exercise (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 98).Footnote 44 At the very least, however, it may be regarded as an influential statement of good contemporary corporate citizenship against which the signatories are prepared to be publicly judged, expressed in the hope that others will follow suit. Furthermore, the statement adds significant weight to the global forces advocating action on climate and long-term business sustainability and is widely cited in literature and debates concerning the future of stakeholderism. Notably, stakeholderism is likely to receive a boost as a result of the US elections, due to the opinion of the new president that corporations have responsibilities to workers, the community, and the country as well as to shareholders and that the era of shareholder capitalism should be brought to an end (Hinks, Reference Hinks2020).Footnote 45
Subsequent to the Business Roundtable statement, the WEF issued a bold stakeholder manifesto (Schwab, Reference Schwab2019) in 2020, stating:
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities, and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.
In asserting that a company is more than a wealth-generating economic unit and that it fulfills human and societal aspirations as part of the broader social system, the manifesto suggests that performance must be measured by how a company achieves environmental, social, and good-governance objectives as well as by the return to shareholders (Schwab, Reference Schwab2019, part B). Furthermore, a company that is multinational in scope is to be regarded as a stakeholder, “together with governments and civil society – of our global future” (Schwab, Reference Schwab2019, part C). These conceptions go much further than merely displacing shareholder capitalism as they seek to hold companies that trade internationally, and their controllers, globally accountable for improving the world.
Contributing to the 2020 WEF, Professor Mayer asserts that corporate purpose is “rapidly becoming a global phenomenon” (Mayer, Reference Mayer2020, para. 2) and that once a clear, all-encompassing understanding of corporate purpose is achieved, everything else will follow from that (Mayer, Reference Mayer2020). Citing the British Academy Principles for Purposeful Business, he argues that it’s “no longer a question of whether and why to change, but what and how to do it” (Mayer, Reference Mayer2020, para. 6). Resolving the “how” question cannot be underestimated; however, while this receives attention, an alternative and stakeholder-friendly form of negotiated corporate governance is emerging.
The New Paradigm – Negotiated Stakeholderism
The New Paradigm (Lipton, Reference Lipton2016), in which large companies and large investor funds deeply collaborate to implement shared long-term financial, social, environmental, and sustainability goals, has emerged as a negotiated form of stakeholderism. It rests on the propositions that “private ordering through the New Paradigm by corporations and investors who best know their respective concerns and needs is more likely to result in balanced solutions than government interventions” (Lipton, Reference Lipton2017, section 4, para. 3) and that stakeholder governance and ESG are in the best interests of shareholders. It further maintains that the “board can exercise business judgement to implement the company’s objectives and the company and its shareholders engage on a regular basis to achieve mutual understanding and agreement as to corporate purpose, societal purpose and performance. Ultimately, the shareholders’ power to elect the directors determines how any conflicts are resolved if they are not resolved by engagement” (Lipton, Reference Lipton2019, section 3, para. 1). Thus, in being implemented without any need for governments to rewrite corporate-governance legal frameworks, the New Paradigm is less reliant on corporate law for guiding principles and dispute resolution.Footnote 46 As a consequence, negotiated stakeholderism coexists as an alternate and sometimes overlapping system of corporate governance even in shareholder-primacy jurisdictions.
Through direct action such as that employed by CA100+, goals for the climate and other important issues can be more quickly put in place. In the process, particular stakeholders, such as the environment, may be accorded preferential treatment or are, at least by agreement, considered in new ways or with increased levels of urgency. The New Paradigm, accordingly, responds to incessant modernity demands to redefine the purpose of corporations, protect the environment, and create long-term sustainable businesses.
Even though New Paradigm agreements are less reliant on corporate law, it does not mean that this domain is or will be free from conflicts requiring resolution. Even where, for instance, CA100+ signatories are active, including where agreements have been struck, proxy campaigns are continuing in many cases to increase or accelerate the corporate commitments. And as the ongoing costs and complexities of transitioning to new business models emerge, tensions between aspiration and reality may well give rise to formal disputes. Because the New Paradigm is voluntary, it is still possible that major and influential shareholders may change their views on a particular issue or the directions and purpose of a company more generally.
Nevertheless, as climate action, PRI, and UN SDGs gain even wider acceptance, negotiated governance solutions are likely to increase. The New Paradigm, however, is not a comprehensive system. For those outside of the negotiation or collaborative system, such as smaller companies, those that don’t attract institutional capital, and those that have not received or have not acceded to approaches from such investors, corporate law retains its traditional role. Shareholders in these types of situations who wish to advance ESG objectives in jurisdictions that enshrine the shareholder-primacy approach cannot, without board support, force companies to adopt such agendas. A recent attempt at the Woodside Petroleum Ltd (a leading Australian company) 2020 AGM highlights the obstacles faced by shareholders wishing to influence the company’s climate policies.
There, a resolution was unsuccessfully proposed to alter the company’s constitution to allow for shareholders to pass advisory resolutions that would not bind the board. Shareholders, according to local law, could not compel the directors to act in particular ways, but with a constitutional amendment, they could pass advisory resolutions as indications of climate-related actions shareholders wanted the company to take. Notwithstanding the failure of the resolution to pass, a majority of votes cast in favor of Paris Agreement goals and targets prior to the meeting sent the board a clear message expressing the opinion of the majority. In a shareholder-primacy jurisdiction such as Australia, these are substantial hurdles to be faced by those wanting to influence the company’s direction and strategies in the absence of being able to negotiate a New Paradigm type of agreement or replace the board.
Challenges to Implementing Pluralistic Stakeholderism
In a well-considered analysis of the obstacles to implementing stakeholderism, Bebchuk and Tallarita (Reference Bebchuk and Tallarita2020) distinguish between two types of corporate governance, namely, ESV and pluralistic stakeholderism, the latter of which they conclude faces insurmountable hurdles to its adoption.Footnote 47 The former, they argue, is little different from shareholder value, which has deep roots in corporate-law history and gives effect to shareholder primacy. ESV, such as exists under English company law and in many other jurisdictions, recognizes that in the course of advancing shareholder interests, corporate leaders may take into account the interests of other stakeholders, as they often do, but without being compelled to do so.Footnote 48
Pluralistic stakeholderism, in contrast, “treats stakeholder welfare as an end in itself” where “the welfare of each group of stakeholders is relevant and valuable independently of its effect on the welfare of shareholders” (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 114). Directors are faced with independent constituencies, thereby requiring them to “weigh and balance a plurality of autonomous ends” (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 114). The authors outline a number of problems with implementing this form of stakeholderism. Whether it can be practiced and enforced when there are divergent needs and priorities among the stakeholders is a fundamental challenge to its successful operation as a system, with the serious possibility that substantial new costs may be imposed on stakeholders, society, and shareholders (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 176). How corporate leaders would decide what is in the interests of a community or society more broadly is a vexed question that will not always be easily determined or necessarily acceptable to respective stakeholders affected by such a judgment.
The nonalignment of incentives also has to be considered. Traditionally, corporate leaders are not incentivized to pursue stakeholder interests in exercising their discretions (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 139). There are, however, significant examples emerging where, through direct negotiation by major investors individually and collectively, such as through CA100+, nonfinancial incentives are being introduced. For instance, meeting climate-related benchmarks can be an incentive to retain the support of key employees or an investor or to keep the investor from taking other action against the board or the CEO. But at present, these occurrences are still exceptions to the rule, albeit growing in number and impact.
It is also argued that pluralistic stakeholderism might insulate corporate leaders from accountability and further entrench managerialism (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 165). Accountability to all may lead to accountability to no one (Council of Institutional Investors, 2019). It might also raise illusory hopes that corporate leaders will protect the interests of stakeholders (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 101), whereas legislators and regulators might be deflected from acting to protect stakeholder interests where such intervention is necessary (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 172). Overall, the authors conclude that pluralistic stakeholderism would not make stakeholders better off. In relation to those wanting action on climate change, they say it is time “to abandon the illusory hope offered by stakeholderism” and “devote all efforts and resources to advancing laws, regulations, and policies that address the catastrophic threat of climate change and to educating the public about the urgency of adopting such measures” (Bebchuk and Tallarita, Reference Bebchuk and Tallarita2020, p. 175). Even so, there are growing instances of significant climate outcomes being achieved through private negotiations and actions that are supplementing government measures.
Another matter to consider is that pluralistic stakeholderism and mandatory purpose statements open up various possibilities for legal action to be initiated by disaffected stakeholders. First, for the objectives of pluralistic stakeholderism to be fully achieved, corporate leaders will need to have a duty, rather than a discretion, to consider and weigh up the respective interests of identified stakeholders. From the perspective of stakeholders, this system could only be fully effective if the law is adapted to provide the means for subjecting corporate decisions to judicial scrutiny on behalf of stakeholders who believe that their interests have not been considered appropriately or at all.
Who would have the standing to mount challenges and what threshold tests they would have to satisfy in these circumstances would also need to be determined. It would require, therefore, a radical departure from the present system of corporate governance in shareholder-primacy jurisdictions for fully enforceable pluralistic stakeholderism to be introduced. In such circumstances, a legal quagmire could well ensue as stakeholders with heightened expectations, motivated by varying degrees of self-interest and altruism, seek to advance or protect their particular interests. At the same time, corporate decision makers would be able to cite a wider range of issues they considered in order to justify their decisions, with the potential to diminish their accountability.
Finding a practical solution to this will not be easy. Nevertheless, a modern and reformed corporate-governance system that reflects global realities is likely to need to incorporate enforceable rights for stakeholders, fairly apportioned between them inter se. Such a system faces the challenge of establishing the rights’ regime so that it does not unduly impede legitimate business activity or the courts that will have to mediate between the claims of various stakeholder interests that have to be appropriately weighed and prioritized. In the meantime, market forces and New Paradigm types of agreements are playing an increasing role in ensuring that certain stakeholder interests are considered, especially when climate change and ESG issues are involved.
Despite the implementation challenges it brings, the adoption of pluralistic stakeholderism cannot be ruled out. As difficult as it may be to rewrite the foundations of corporate governance, at least in those countries where shareholder primacy prevails, in the age of liquid modernity, anything seems possible. Momentum is a transformative force today. To this end, it is reasonable to ask whether traditional corporate-governance models can remain immune to change, even radical change, when the world of business is dramatically changing. Global opinion and public politics are being transformed by concerns for the planet, issues of sustainability more broadly, human rights, and issues relating to inequality. Who could have imagined, just a few years ago, large corporations agreeing to reinvent their business models in order to protect the planet? Now the momentum is growing for corporations to govern for long-term wealth creation, be good corporate citizens, demonstrate their care for the environment, and explicitly take into account their stakeholders in operating their businesses. In the Western world especially, corporations and their leaders can no longer separate their business responsibilities from global moral imperatives.
Thus, bolstered by the groundswell of support for stakeholderism in one form or another, the next few years may determine whether and how it will be formally adopted and how the implementation issues will be addressed. As climate sovereignty and the sovereignty of nature, together with other compatible ESG forces, are in the ascendency, they may well answer each of the unresolved questions. In the meantime, a changing landscape is confronting all stakeholders, including corporations, their leaders, investors, and interest groups – including business schools. All need to respond to how corporate governance is evolving through negotiated agreements, market pressures, global opinion, and serious proposals for law reform. The tectonic plates are shifting.
Global Forces and Some Implications for Business Schools and Their Accreditation
When stepping back and reflecting on the mighty forces confronting our world, we are compelled to ask how business schools and accreditation bodies will respond to what is unfolding. Consider the combined effects of climate change and climate action, CA100+, the TCFD reporting framework, PRI, ESG, and calls for corporate leaders to operate their businesses for all identifiable stakeholders. As a result, managerial discretion is shrinking under the weight of global expectations, capital activism, and public politics. Separation of ownership and control must now be interpreted in the light of these modern developments. And then there are the seismic impacts of digital disruption and disruptive innovation on businesses and business models. Together, these are transforming business practices and governance before our very eyes. Business schools are challenged to keep pace. Their mission statements, which not uncommonly proclaim the intention to prepare students for thriving careers in a fast-changing world, will be meaningless if the forces of change are ignored.
Consider the knowledge and skills required of a corporate CEO whose business is affected by climate change and who will need to make more scientifically based operational, strategic, financial, and reporting judgments for which the CEO will be accountable. Boards are facing the same issues. Responding to climate change may require a corporation to completely revise its business model, thereby needing expert leadership and courage to implement the transition. Just as companies, in response to the global winds of change, are having to undertake onerous transitions, so too, by analogy, will business schools. Theirs won’t be driven by green energy and the like but by how to transition to program portfolios built on theories, both traditional and emerging, that are relevant for explaining and understanding contemporary business in its modern setting.
If, for example, an MBA program specializes in strategic management and leadership and does not incorporate the effects of the global forces that are reshaping business models, spawning new finance models (Fink, n.d.),Footnote 49 and transforming key aspects of corporate governance, how will it advance the knowledge and practices of those undertaking the course? Will management of strategic transitions become a key focus? And how do you prepare graduates or executives to redesign a business model, create new strategies, and link these to capital allocations that, according to the CA100+ Net-Zero Benchmark, are proving to be most challenging?Footnote 50 Because these touch every part of the business, does this mean that systems thinking must become a key component of management education?
Consider the professional input that is required to model, manage, report on, value, and audit climate-change risks and manage the associated communication and public relations. Think of the skill base and judgment required by a climate-reporting auditor to certify that a company’s disclosure meets the legal requirements of materiality and the broader demands of TCFD reporting. As well, recruitment and human-resource-management practices and the teaching of them will all be affected by these fast-unfolding realities. Ensuring that those who are recruited have values that align with those of the company and its purposes will become even more important in the future. Similar observations can be made in relation to every major taught or domain covered in business school programs. What will be the value of any major if it fails to adapt to the forces of change?
The mindsets needed to lead, to manage, or even to have sustainable professional careers will be even more closely scrutinized as time goes by. Successful business professionals will need to have, at least, the five minds identified by Howard Gardner (Reference Gardner2008): the disciplined mind, the synthesizing mind, the creating mind, the respectful mind, and the ethical mind. The synthesizing and ethical minds will assume greater importance than ever before in the face of morally based global changes.
To the foregoing list can be added the curious mind,Footnote 51 which will need to constantly follow the knowledge flows in order for leaders and business professionals to be transformed by the renewing of their minds. “Those who master the ability to learn faster will achieve much higher impact in a rapidly changing world” (Hagel, Reference Hagel2020, section 3, para. 2). Business schools have a challenging but exciting task to adapt to modernity and fully participate in the slipstream of disruption that is unfolding in our world. So, it might be time to introduce a modernity test for all programs they offer.
As Hagel et al. (Reference Hagel2009a) explain, value is shifting from knowledge stocks to knowledge flows. “As the world speeds up, stocks of knowledge depreciate at a faster rate…. In more stable times, we could sit back and relax once we had learned something valuable, secure that we could generate value from that knowledge for an indefinite period. Not anymore. To succeed now, we have to continuously refresh our stocks of knowledge by participating in relevant flows of new knowledge” (Hagel et al., Reference Hagel2009a, para. 5). Corporations, therefore, face the challenge of scaling their knowledge accordingly (Hagel and Brown, Reference Hagel and Brown2017). Similarly, a challenge for business schools is to be sufficiently entrepreneurial and agile to participate as genuine stakeholders in these knowledge flows and in the process of lifelong learning and continuing self-development.Footnote 52
Microcredentials, small-bite learning, and nondegree learning will play an even greater role in the future of management education. For many business schools to participate meaningfully in these markets, substantial barriers to entry, both internal and external, will have to be overcome. It is also likely that live paid subscription streaming services will develop as an important contemporary form of flows. They will provide research-based, cutting-edge insights to knowledge-hungry professionals who want to incorporate and leverage the latest thinking into their professional practices and decision making through instantaneity.
Proactive leadership, speed of action, and reputation will most likely define the winners here – those who can successfully connect with global audiences on issues of global significance, in real time. For those in the workplace, it will not be sufficient to change the speed of their learning – they must learn at the speed of change. As the chair of Shell says, “Over the course of the coming decades, as the world moves increasingly towards lower-carbon energy, we will have to learn new skills at Shell. The ways we work will have to evolve” (Royal Dutch Shell PLC, 2021, p. 5), and if modern workplaces have to be reimagined (Friedman, Reference Friedman2016b), business schools have a major role to play in the process.
Presently, many of the orthodoxies on which business schools base their programs are being called into question by developments in global thinking and practice, but are schools keeping pace? So often, curriculum design and delivery lag too far behind what is happening in the real world. Most accredited schools, for example, are able to point to aspects of ethics, responsibility, and sustainability (ERS), but often, they are not systematically enshrined in the content and framing of the courses or in research strategies and outputs. This occurs notwithstanding the well-designed elements of the EFMD Quality Improvement System (EQUIS) standards relating to ERS, which permeate most chapters of the standards. Maybe the accreditation process should be used as an even greater lever to bring about a more holistic approach to teaching and researching ERS issues and climate-change transitions.
A recently released report (Ceres, 2020b) sets out what is required to become a just and sustainable company by 2030, within the context of the UN SDGs, themselves increasingly becoming framing concepts. For European schools, the proposed European Green Deal, which sets out comprehensive requirements for transitioning to a Sustainable Europe, will have an impact on business programs. Key issues include fighting climate change; measures to manage the transition, including green finance; sustainable investment; and the role of the private sector (European Commission, 2019, 2.2.1, pp. 15–17). Tax reforms will also play a key role in facilitating sustainable behavior (European Commission, 2019, 2.2.2, p. 17). “New technologies, sustainable solutions and disruptive innovation are critical to achieve the objectives of the European Green Deal” (European Commission, 2019, 2.2.3, p. 18). Universities are expected to play a role in developing competencies, skills, and attitudes on climate change and sustainable development (European Commission, 2019, 2.2.4, p. 19).
Further, Article 12 of the Paris Agreement requires countries to cooperate in taking measures, among others, to enhance climate-change education and training. In consequence, lessons in climate-change activism may soon become mandatory in schools of signatory nations (Lloyd, Reference Lloyd2021) and have been incorporated into the New Zealand curriculum (Graham-McLay, Reference Graham-McLay2020). It’s entirely foreseeable, therefore, that business courses and accreditation standards may soon, too, give effect to Article 12.
Other developments also have implications for business schools. As institutional capital and large businesses grow the number and significance of their “New Paradigm”Footnote 53 agreements, corporate theories are being reshaped. And when principles of capital are taught in future, it will only be right and proper to consider natural capital as part of the curriculum. It is gaining traction as an element of corporate governance, risk management, finance, and investment and is a key consideration in climate action and sustainable business. Under the European Green Deal, the Commission will support “businesses and other stakeholders in developing standardised natural capital accounting practices within the EU and internationally” (European Commission, 2019, p. 17). Further, globalization is taking on a new and expanded meaning. As Thomas Friedman observes, the global flows of knowledge and information “are exploding and they are the new globalisation” (Friedman, Reference Friedman2016b, n.p.).
Stakeholderism in its various guises must also be on the radar of business schools and may become the guiding principle of enlightened corporate governance and good corporate citizenship, whether backed by legally enforceable stakeholder rights or otherwise. These important and developing forces invoke serious questions about the design and accreditation of fit-for-purpose business programs in the modern liquid world. If pluralistic stakeholderism is adopted, it may require corresponding amendments to the EQUIS standards and also to the way in which accreditation visits are structured. Presently, a school’s corporate links are an essential element in gaining and retaining accreditation, and peer-review teams (PRTs) meet with corporate partners during an accreditation visit. But if pluralistic stakeholderism is institutionalized, the standards may need to reflect not only that there are corporate links but also that the school and its corporate partners are making positive contributions to meeting stakeholder outcomes. At the very least, the nature of the corporate connections’ conversation during a PRT visit will become more multilayered.
Successful business school leaders are likely, therefore, to be those who, through productive paranoia (Collins, Reference Collins2011, pp. 27–30), are best able to anticipate and embrace the forces of change and the new realities they bring with them. As Juan Goytisolo says: “If one lives only in the present, one risks disappearing together with the present.”Footnote 54 Or, in the words of Søren Kierkegaard, “Life can only be understood backwards but it must be lived forwards” (Kierkegaard, Reference Kierkegaard1843). Presenting the past as a guide or model for the future may have been sufficient in the past but not in our increasingly liquid world.
For life to be lived forward requires new forms of leadership thinking and action. However daunting this may appear to be, many lessons can be learned from the COVID-19 pandemic. First, it required all institutions to respond rapidly to new global realities. Organizations, including business schools, were forced to pivot; this often meant radical leadership decisions had to be made and implemented, including quickly providing their products and services in alternative ways and deploying their workforces from home. For many, such actions secured their survival; others, unfortunately, fell by the wayside, and remarkably, a good number thrived. Leadership thinking and action, both prepandemic and during the pandemic, no doubt contributed to the outcomes for individual organizations. For example, those with entrenched digital strategies and systems benefitted greatly from the e-commerce and online-delivery booms. Their leaders had them well placed to thrive, notwithstanding severe disruptions, even black swan events. And for those that survived by adapting quickly by going beyond the methodologies to which they were firmly committed, such as business schools with no digital strategy or commitment to online teaching and learning, potentially transformative lessons have been learned for the future.
With the global forces at work, COVID-19 has shown us the dangers of limited thinking. A recent publication highlighted how limited forms of thinking led to mistakes in dealing with the pandemic (Martin et al., Reference Martin, Straub and Kirby2020). In the early stages, it was regarded as a scientific problem when it was, in reality, “a sprawling, complex system of a challenge that would also call on holistic thinking and values-balancing decisions” (Martin et al., Reference Martin, Straub and Kirby2020, para. 11). Paralysis, they argue, follows from limited thinking. COVID-19 has demonstrated that new global realities can and must be responded to even when it requires loosening one’s attachment to deeply held orthodoxies. When existential threats such as a pandemic or the creeping effects of climate change confront the world, leaders of business schools and other leaders can’t bargain with or ignore the hard realities of liquid modernity.
A searching accreditation test for a business school might well become, therefore, “How is the school responding to modern global forces, and how is it preparing professionals, managers, and leaders for 2030 and beyond to 2050?”
I. Introduction
As the European Foundation for Management Development (EFMD) celebrates 50, the world undergoes a state of deep existential crisis. Events unfold in front of our eyes that are impossible to understand for anyone born around the same time as EFMD. This state of affairs predates the current pandemic, when climate change, aging populations, data privacy, and exploding inequality, to cite a few, were already pushing institutions to the brink.
We have lived through many bad and good times in the last century. But in all those times, we had theories that allowed us to understand world events and make valid predictions about how they would evolve. Even the most dramatic event of the last half century, the fall of communism, had a narrative that all could share and understand.
In that context of predictability and epistemological security, business schools grew in scope and influence, boosted by the push for quality and innovation of accreditation agencies. This expansion coincided with the spread of neoliberalism, and many argue that business schools were its evangelists, as graduates educated in its theories set off to positions of influence. By the turn of the century, neoliberalism showed signs that it was unfit to sustain stable and shared growth as inequality grew and financial crises emerged worldwide. The situation reached its nadir in 2008 as the world lived through one of its most significant financial troubles. The trials of neoliberal ideas, and the crisis that outlined them, have created a severe legitimacy crisis for business schools. The current pandemic will only heighten the challenge as society looks to universities for intellectual leadership.
The first part of this chapter argues that the triad of globalization, technology, and sustainability has disrupted human societies’ underlying economic context worldwide. The underlying economic context sets the stage for the institutions that organize communities and is defined by the dominant technological, mental, natural, and geostrategic forces and pressures. Given this disruption, most theories and all ideologies imagined in the twentieth century (and before), including neoliberalism, are unfit to shape economic and political systems that ensure peace and prosperity. The existential crisis mentioned at the onset of this chapter is, therefore, an epistemological crisis. The new underlying context requires new institutions, knowledge, and skills to restore stability, predictability, inclusivity, and above all, hope.
A courageous agenda and purposeful leadership at business schools must be part of the solution to redesigning the fit-for-purpose institutions, knowledge, and skills for this century. On the one hand, we need a shift in the management and governance of businesses, which has been the business of business schools. On the other hand, we must have equally essential changes in other institutions, such as governments and nonprofits, which should also become the business of business schools.
As breeding grounds for the knowledge and the leaders of tomorrow, business schools must live up to their reason for existence. Their response will define their public value and legitimacy for the coming decades. It will also outline the world our students will inherit and the historical legacy of our generation.
The second part of this chapter argues that business schools need to enhance their commitment to sustainable innovation to fulfill this role. Thus, they must make central to their strategies and cultures the principles of and the accountability for sustainable impact. They must also develop a more open and deeper engagement with a broader group of stakeholders, including extending beyond business to nonprofits and the public sector and reaching out beyond finance and economics to politics, law, international relations, history, technology, and science – in other words, building a cross-stakeholder and interdisciplinary agenda that develops leaders mindful of the human experience. This interdisciplinarity must create new knowledge of relevance to address the challenges of the present and the future. The chapter concludes by discussing the impediments to reform borne by business schools’ current business and governance models and assessing the lessons of the COVID-19 crisis for their digital transformation.
This chapter’s main contribution is to focus the discussions taking place in the literature in the context of the future instead of the past. The fundamental changes in the underlying context imply that looking at the role of business schools and neoliberalism in the twentieth century is an academic endeavor with limited relevance to our shared future. The focus should be on imagining solutions that work in the new context that we are only now beginning to discover. Given the dramatic challenges ahead and the vertiginous speed at which they unfold, the call for action should leave no business school dean unmindful. As we attract many thousands of students every year, our first order of accountability should be to them and their future.
II. The Rise and Fall of Neoliberalism and the Legitimacy of Business Schools
Fifty years of EFMD fostered the rise in business schools’ influence and scope worldwide. As EFMD learned to walk, the world was reimagining the postwar success after a decade of crisis in the 1970s. The neoliberal prophecy transformed John Stuart Mill’s promotion of individual freedom and agency into the empire of the markets and promised a chimera of growth by restraining government and regulations. Its prophets supported a nonnuanced worldview. Milton Friedman proposed the pursuit of profit as the sole responsibility of business. Thatcher preached that “the government of business is not the business of government.” Fama proclaimed that “financial markets are perfect.” And Fukuyama predicted “The End of History,” when all the earth’s peoples would assemble under a neoliberal worldview and rules.
Neoliberalism was the epilogue to the underlying economic context that emerged in the West and spread to the developing world after World War II. The underlying economic context refers to the stage that frames the development of economic, social, and political institutions that organize communities. It is set by the prevailing technological, mental, natural, and geostrategic forces and pressures. The Enlightenment, World War II, and the steam engine are examples of past changes to the underlying economic context that have required institutional transformations to ensure a stable and predictable framework for societal dynamics.
The underlying economic context of the second half of the twentieth century was a goldilocks environment that ensured peace, prosperity, and harmony – after decades of hopelessness that had taken humanity to the brink in the first half of the century. Innovations in technology and management churned never-before-seen productivity growth rates, raised living standards, and improved material quality of life. Global trade and investment benefited from the peace that memories of World War II and the strategy of mutually assured destruction secured. International institutions supported by the Pax Americana assured stable global governance. European unification showed the power of enlightened leadership to overcome the shortcomings of humanity’s nationalistic instincts. Cross-boundary media, communications, and transport fostered the convergence of human cultures and values. Global firms became increasingly efficient and a staple of development strategies. Central banks mastered the volatile effects of inflation, which had eroded many social and political orders before World War II. And increased access to education, active social policies, and semiskilled-biased technological change in services and the factory floor nurtured middle-class prosperity.
By the turn of the twentieth century, the signs of discredit in neoliberalism were emerging. The gap between rich and poor skyrocketed. Recent estimates show that the top 1 percent of the global income distribution captured 27 percent of the rise in income between 1980 and 2016, whereas the bottom 50 percent captured only 12 percent (Alvaredo et al., Reference Alvaredo, Chancel, Piketty, Saez and Zucman2018). A disturbing element is the squeeze of the middle class in industrialized economies. The climate crisis also showed little sign of abating. The Kyoto Climate Protocol, which relied on market-driven approaches to fight global warming, entered into force in 2005 and failed to produce the expected results. By 2008, the financial crisis brought the global economy to its knees. It sparked severe austerity policies worldwide, damaging the financial industry’s legitimacy and reputation and relaunching old debates between pro-government and pro-market doctrines that had pitted left against right throughout the twentieth century.
In the wake of the inequality, climate, and financial crises, the legitimacy of neoliberalism and its institutions and stakeholders have fallen deep into disarray. Raworth (Reference Raworth2017) and Collier (Reference Collier2018) were among the many who departed from the mainstream to offer a critical view of how neoliberalism and the academic body sustaining it had evolved and suggested roads for improving it. Peter Bakker, president of the World Business Council for Sustainable Development, cited in Dyllick (Reference Dyllick2015), summarizes the ongoing malaise: “The conventional model for capitalism is found wanting in terms of the benefits to the majority of society, the impact on the planet, and even in terms of continued economic prosperity. The call for change rings loud – capitalism requires a new operating system and needs a reboot if we are to avoid the ultimate recession or worse total collapse” (p. 17).
As individuals, organizations, and nations worldwide adopted neoliberal ideologies in the 1980s, business schools became the order’s temples and prospered. They received tribute and paid back hefty returns to graduates, their employers, and supportive academics. Cornuel (Reference Cornuel2005) argued that these returns assured that “in the future, the legitimacy of business schools will no longer be questioned” (p. 819).
On the other end, when the neoliberal order began to unravel, business schools were under siege, and their legitimacy was challenged. Mintzberg’s (Reference Mintzberg2004) contribution was clairvoyant when he argued against the narrow and academic focus of business school curricula, which ignored the role of professional managerial skills that had to be learned from experience. Goshal (Reference Goshal2005) claimed that business schools had been teaching amoral theories that undermined sound management. They were accused of promoting selfish behavior and biasing minds against social responsibility. Khurana (Reference Khurana2007) argued that business schools sold their soul to corporate interests. More recently, as Parker (Reference Parker2018) contended that “the business school acts as an apologist, selling ideology as if it were science as part of the longest public relations campaign in history” (p. ix), the challenge to their legitimacy reached its zenith.
The debate rages on, but it remains too fixated on the past: on the allegiance of business schools to corporate capitalism and the frailties of neoliberal thinking, paying insufficient attention to the disruptions that occurred in the underlying economic context in the last 15 years. It is possible that neoliberalism would have collapsed from within, even in an unchanged underlying context, like communism had done four decades before. However, the critical challenge now is to address the changes in the underlying economic context that are making the theories and institutions developed in the twentieth century unfit for purpose. They must be rehabilitated with extreme urgency.
III. Builders of Sustainability, Inclusivity, and Meaning in a Disrupted World
A. Globalization, Technology, and Sustainability as Disruptors of the Underlying Economic Context
The economic and political trends that tore apart the early-twenty-first-century environment are associated with three central forces: globalization, technology, and sustainability. Globalization captures the incredible rise in the flows of people, goods, services, and capital across immensely separate regions, not only in physical distance but also in culture, political systems, and history. Globalization is the destiny of humanity and the safest road to peace. Since the 1980s, it has had and will continue to have dramatic effects on income distribution and job insecurity and on the state’s power against global corporations. It has widened the pit between a thriving elite of globetrotters and the masses of the low-skilled, low-mobility, low-adaptability workforce (Saval, Reference Saval2017).
The recent years have increased the complexity of globalization. Now, we trade in a highly intertwined multipolar global economy comprising regions with widely diverse cultures and antithetical economic systems in deep rivalry for dominance, stressing international relations and risking an atavistic resurgence of protectionism and nationalism. For business schools, this demands insights into cross-cultural management, international economics, and international business that encompass the political, geostrategic, and historical dimensions of management. Starkey and Thomas (Reference Saval2019) argue that business schools in China are already making their difference in teaching a very contextually influenced approach to management theories while competing in rankings against leading US and European schools.
Technology is the second force. The disruption of digital technology and artificial intelligence has challenged the convergent socioeconomic frameworks of the twentieth century, which nurtured the middle class that ensures social stability. The automation these technologies bring about will swipe through labor markets, creating unemployment, inequality, and social upheaval (Ford, Reference Ford2016; Manyika et al., Reference Manyika, Lund, Chui, Bughin, Woetzel, Batra, Ko and Sanghvi2017). Digital companies have reached gigantic size through platform models that exploit their users’ data and engage in very aggressive anticompetitive practices and tax arbitrage (Daub, Reference Daub2020). Their business models pervert traditional economic theory on pricing and competition policy and challenge regulation’s ethical and legal aspects (Rifkin, Reference Rifkin2015). The theories that have underpinned the practice of management and policymaking during the twentieth century frequently seem inapt for the realities of unbounded increasing returns and intangible capital (Haskel and Westlake, Reference Haskel and Westlake2017). It is urgent to reassess these theories; to unlearn the old; and to rebuild institutions, knowledge, and skills on the new. For business schools, the proximity with engineering and technology must be an integral part of the new mission. The most dramatic gap in today’s labor force is the analytical translators that bridge business and technology (Henke et al., Reference Henke, Levine and McInerney2018).
Throughout the last two centuries, technology and globalization, accelerated by the neoliberal agenda of free trade and free enterprise, have contributed to improvements in wealth and living conditions in developed and developing countries. Technologies under development hold tremendous promise to address humanity’s biggest challenges. However, both can have extreme distributional effects that leave large swaths of the population worse off and expand inequality within societies, with distressing political consequences. Therefore, their societal implications depend on the capabilities (institutions, knowledge, and skills) of political and economic systems to minimize those adverse effects and compensate the losers.
Sustainability, the third force, is a normative principle that has gained relevance with the exploding climate crisis and the rising political fragility of capitalism. Sustainability is still a young and general concept, used in very different ways and evolving rapidly (Muff et al., Reference Muff, Kapalka and Dyllick2017). Overcoming the climate crisis must remain the priority of our time and our promise to the next generation. But the term encompasses a social dimension beyond the environmental aspect and balances these two dimensions with the economic viewpoint, promoting a triple-bottom-line balance of people, planet, and prosperity.
The relevance of business for sustainable development led, by the late twentieth century, to a corporate social responsibility engagement that failed to go beyond greenwashing and marketing. The call for business leaders to work with the UN to “initiate a global compact of shared values and principles” led to the UN Global Compact in 2000. Beginning with an initial group of 44 firms, the UN Global Compact has grown to more than 12,600 companies and civil society organizations in 160 countries. Along with forums such as the World Business Council for Sustainable Development and the Global Reporting Initiative, it complements top-down regulation, highlighting the need for change in business practice to become an active partner for sustainable development, at the risk of complete delegitimization in society.
In 2015, the UN adopted an agenda for 2030, focused on progress in 17 Sustainable Development Goals (SDGs), stressing the economic, social, and environmental dimensions of progress. The goals set up an essential frame for reestablishing business legitimacy as they build globally espoused targets and an international language to report them. Muff and colleagues (Reference Muff, Kapalka and Dyllick2017) argue that the emerging typology of sustainability has shifted perspective from an inside-out to an outside-in approach, which allows business and civil society to apply the goals to their institutional context. Weybrecht (Reference Weybrecht2017) contends that for companies, successful implementation of the SDGs will strengthen the enabling environment for doing business, minimizing risks while also providing a myriad of new opportunities.
The challenge remains how. In a recent op-ed, Bill Gates argues that very frequently, the chief executive wants to know: “What can my company do that will make a difference?” (Gates, Reference Gates2021, para. 2). He proposes a plan for business leaders focused on mobilizing capital, procurement, research and innovation, and dialogue with the public sector. The main point here is that the world yearns for insights that make business a credible and legitimate partner for a sustainability agenda benefiting our planet and our species.
B. Reflections for the Redesign of Capitalism at Business Schools
The disruption of globalization, technology, and sustainability render most, if not all, the major theories and ideologies of the twentieth century unfit for today. The political and social tensions of the last 15 years, unimaginable only 30 years ago, are a sign that we are approaching a breaking point. We need new international institutions, new managerial practices, new skills, new corporate governance, new policies, and new political systems that are fit for purpose in the underlying context.
This existential and epistemological challenge of redesigning human societies opens the opportunity for the renovation of the “public value” of business schools toward a new legitimacy. Next, I highlight four areas for reform that would have important implications in the mission and scope of business schools: redefining the corporation’s purpose, enhancing the managerial effectiveness of government, blurring the boundaries between corporates and nonprofits, and delivering the skills for the future.
The Purpose and Governance of Business
In August 2019, 200 leaders of the top US corporations at the Business Roundtable updated the “Statement on the Purpose of a Company” to focus on the value created for a plurality of stakeholders. It was a symbolic departure from shareholder value, which the Roundtable espoused since its creation. After the crises and scandals, it was evident that the stock market’s discipline did not ensure the focus on long-term returns and public value. Visionary leaders, such as Paul Polman at Unilever (Skapinker and Scheherazade, Reference Skapinker and Scheherazade2016), have introduced new paradigms of business purpose that build on “shared value” (Porter and Kramer, Reference Porter and Kramer2011). They are the exception that must become the rule.
The development of corporate impact metrics and the reorganization of purpose and governance around them remain first-order priorities for knowledge and talent development at business schools. The SDGs open the door to a new definition of purpose for the corporation toward an impact-driven agenda. Lacy and colleagues (Reference Lacy, Haines and Hayward2012) find that CEOs see sustainability as more important than ever: growing in strategic importance, driving new business models, and essential for long-term success. They also find that CEOs see education as the most critical development issue for the future success of their business and see developing new skills, knowledge, and mindsets for the next generation of business leaders as a vital enabling condition to accelerate a tipping point in the integration of sustainability into the core.
The Managerial Effectiveness of Government
By the end of the twentieth century, with the state’s role in decline, business schools moved away from the management of public entities (government, municipalities) and public policy. However, the crisis of recent years, the successful models in East Asia, and more recently, the COVID-19 crisis have placed government effectiveness and the quality of public-sector management back at the center of progress.
The underlying context of the twenty-first century and its potential for divergence and social upheaval described previously will reignite the state’s role as a societal moderator. Therefore, societies must develop well-managed state institutions that effectively protect their citizens, provide public services, manage public policy, and cooperate internationally. For this, many will need the same managerial capabilities that corporations have developed and that business schools have become effective at delivering – to name a few: innovation, leadership, customer centricity, operational excellence, accountability to stakeholders, and cross-cultural management. Hence, a substantial contribution of business schools in developing the talent and insights for more effective government would go a long way in building more resilient societies.
Moreover, progress will also demand deep and trustful partnerships between the public and the private sector. Since the late twentieth century, many efforts have failed because the corporate and public staff members speak different languages and have not learned to collaborate. Their joint education would go a long way toward fostering the success of these partnerships.
Blurring Boundaries of Corporates and Nonprofits
While the state receded, a new family of stakeholders, classified under the placeholder nongovernmental organizations or nonprofits, exploded worldwide to address societal challenges. Nonprofits are a vast and diverse class, mostly financed through philanthropy. Their primary purpose is to create an impact in society, for which they need efficient management to keep costs low and outreach high. Their relevance will increase with the challenges ahead, given their capabilities in grassroots innovation and proximity to communities.
In many cases, nonprofits have leveraged these capabilities to build deep partnerships with the corporate and public sectors, addressing public-service challenges or delivering commercial products to the bottom of the pyramid. These partnerships are never easy and often fail because the parties do not share a common language and have a deep mistrust. Moreover, as corporate purpose and governance increasingly acknowledge the relevance of impact, and nonprofits look to become more efficient at managing their resources, the boundary between these organizations will fade, and their governance will converge, such as proposed by the B-Corp certification (Wilburn and Wilburn, Reference Wilburn and Wilburn2015).
This suggests a convergence of their educational journeys to forge mutual understanding and a shared language and facilitate cross-stakeholder partnerships. Unfortunately, the development of talent and knowledge for nonprofits remains a side priority for business schools. Although there is an increasing demand by young professionals, business schools have not addressed their needs. Tuition structures, for example, fail to recognize their lower expected salary and high expected impact.
Skills for the Future
With the revolutions in digital and data technology, the skill set of managers is changing rapidly. Although the demand for managers with data-handling skills is on the rise, these are likely to become commodities as interfaces become user-friendly, similar to what happened with spreadsheet skills. However, understanding technology and, above all, dialogue and collaboration with technologists have become pivotal.
Soft skills are likely to be the only future-proof skills at a time of high-speed technological development. Looking at the impact of information communication technology (ICT) on demand for skills through a meta-analysis of the literature, van Laar and colleagues (Reference van Laar, van Deursen, van Dijk and de Haan2017) highlight the seven core skills of technical, information management, communication, collaboration, creativity, critical thinking, and problem solving and the five contextual skills of ethical awareness, cultural awareness, flexibility, self-direction, and lifelong learning.
Moreover, as mentioned before, globalization’s rising complexity implies a historical, political, and geostrategic understanding of cross-country relationships. Many authors have also argued for a revision of the learning goals of business schools that moves away from narrow functional knowledge, relying heavily on finance and economics, and toward a stronger focus on applying (doing) and reflecting on values, attitudes, and purpose (sensing) (Dyllick, Reference Dyllick2015).
All these dimensions are highly challenging for business schools. They require a strong partnership with science and technology and the humanities, which have a deep cultural distrust of business schools. Besides, they force a complete reinvention of delivery and assessment methods. How to teach and evaluate creativity, collaboration, purpose, or empathy in a classroom and evaluate learning through exams, especially in an economic context that demands a large class size to be financially sustainable? The challenge is more substantial for learners already in the workforce, who must reskill for the future, with the extra hardship of unlearning the old to learn the new.
Recent developments have stressed the importance of project-based learning and the co-creation of learning opportunities with external stakeholders, either from governments, nonprofits, or businesses. Entrepreneurship is also a critical tool to develop these skills. Several schools have committed heavy resources to the development of entrepreneurship hubs, looking to foster start-ups and innovation. However, entrepreneurship’s potential in developing skills for the future dwarfs the effects on creating new ventures (Ulvenblad et al., Reference Starkey and Thomas2013).
IV. Business Schools as Lighthouses of Hope
The previous section has argued that the triad of globalization, technology, and sustainability has disrupted the underlying economic context and that capitalism is open to a redesign of institutions, knowledge, and skills. Some clues that hold promise for business schools have also been provided.
This section proposes that business schools have a fundamental role in developing the institutions, knowledge, and skills needed to reboot capitalism in the twenty-first century. Their knowledge capabilities and their license to educate the youth mean that it is their responsibility to lead toward the future – that is, to spark the ideas, nurture the solutions, and breed the talent that will help transform our economic and political system into a beacon of resilient hope and shared prosperity. Throughout history, universities have been at the forefront of the creative intellectual energy that moves societies toward their future. The intellectual freedom, critical thinking, and creative rigor that they embody have always been the lighthouses of humanity’s progress, away from the darkness of insecurity and fear. Business schools must step up to this challenge in partnership with businesses and society as a whole. They are responsible for the kind of leaders they send out into the world.
This call to action opens the space for a renaissance of business schools – different, more open, more impactful. Their future mission must be to envision the institutions, organizations, knowledge, and skills for post-neoliberalism and the effective ways of managing them. The redesign of business schools to reimagine the purpose of the corporation, broaden its scope to the management of nonprofits and government, and build the skills of the future represents an opportunity to enhance the “public value” of business schools, as proposed by Wallace Donham, the second dean of Harvard Business School almost a century ago (Starkey and Thomas, Reference Saval2019), and to reestablish their legitimacy in the process.
To be clear, I am not espousing that the challenges facing capitalism and our cultural environment result from the actions, intended or unintended, of business schools. Neither am I claiming that business schools do not share part of the blame for some hyperbolic interpretations of neoliberalism. The urgency of the situation we live in should focus us on the future, not the past, especially when the context is changing so much and so fast. This said, it remains true that business schools were torchbearers of late-twentieth-century neoliberalism, and as such, they have the responsibility to lead the agenda for its redesign. With great power comes great responsibility. Who will take on this responsibility if business schools do not stand up to the task?
A mission of forward-looking innovation in institutions, knowledge, and skills for the new underlying context poses challenges for the internal organization of business schools. First and foremost, it requires an internal culture of innovation grounded on a set of values for sustainable impact. Business schools have outpaced other departments of universities in fostering spaces and incentives for innovation, and herein lies their advantage, but the demands of the future we face need more.
For the remainder of this section, I will discuss how business schools must transform internally to respond effectively and in a timely manner to this innovation challenge. The first element is to create a culture of accountable impact, focused on the SDGs. The second is to open up by strengthening engagement, broadening the core stakeholder list, and widening interdisciplinarity. This implies a reversion of the trend to isolation and lack of accountability that characterized their 100-year history and, therefore, will face dramatic resistance. Leadership will be critical to overcome that resistance, but so will collective action.
A. Reversing the Isolation of the Business School
At the onset of their rise to stardom, business schools brought universities closer to reality and impact, leveraging their origin as professional schools designed to develop managerial capabilities (Starkey and Thomas, Reference Saval2019). This openness quickly narrowed to the corporate world, at the cost of estrangement from other managerial competence seekers, including government, foundations, and nonprofits. A wider approach to management would have had a significant impact on Western societies by strengthening the effectiveness of these stakeholders and creating a shared language for collaboration and co-creation. But it was not to be.
In time, the estrangement grew even to the corporate entities that had created and nurtured them at the onset. Under US schools’ influence and the search for academic respectability, the theoretical model, focusing on abstract research, the scientific method, and peer-based evaluations, spread to business schools. The increased rigor provided a more solid footing for many of the research contributions; attracted highly talented academics to the field; and permitted a fruitful collaboration with other academic areas, such as economics, psychology, and sociology. In this process, adjunct faculty with insights from practice and the ability to bridge into academia gave way to core faculty, tenure systems, and doctoral degrees. This was a welcome move, to the extent that it created academic excellence and a body of committed faculties that helped grow business schools. But it slowly isolated business schools.
What drove this movement is beside the point. But the wedge it created between business schools and their external stakeholders and the damage done to their “public value” and their legitimacy are clear. Participating in a dean’s conference by the Association to Advance Collegiate Schools of Business (AACSB) or the EFMD Quality Improvement System (EQUIS) or reading the journals or the press is an exercise of constant self-doubt. Dyllick (Reference Dyllick2015) argues that the efforts to pursue “scientific rigor and gain academic legitimacy have been taken to an extreme, resulting in an increasingly self-centered community of business schools, isolated from business practice and society” (p. 16). Podolny (Reference Podolny2009) argues that most business school academics are not curious about what goes on inside organizations (Wilson and Thomas, Reference Wilson and Thomas2012). Writing in the Financial Times, Michael Skapinker (Reference Skapinker2011) reports that, in response to a column published in 2008 on “why business ignores the business schools,” where he highlighted the gap between researchers and practitioners, he received extensive comments from business school academics, overwhelmingly agreeing that managers generally ignored them.
The estrangement from stakeholders must be addressed to retrieve the legitimacy of business schools and their capability to play their role in reframing our institutions, skills, and knowledge in the context of the century’s turbulence ahead. For this, business schools will have to reform and transform in multiple dimensions of their ethos.
B. Transforming the Business School – Part I: Impact
The first dimension of the transformation is the unwavering commitment to impact. In recent years, impact has gained relevance as a result of its inclusion in the criteria of accreditation agencies. EFMD has begun a Business School Impact System (BSIS) that provides an impact accounting framework to identify, measure, and assess impact in seven categories: financial, educational, business development, intellectual, regional, and societal. According to Shenton and Kalika (Reference Shenton and Kalika2017), following their engagement with BSIS, schools tend to revisit their “fundamental purpose,” raising questions of identity and historical roots. In time, this pushed them toward more engagement with external stakeholders and toward regaining legitimacy with their regional corporate community. It also had implications at the pedagogical level and, albeit to a lesser extent, for their research. Kalika and Shenton (Reference Kalika and Shenton2020) suggest that all organizations can apply BSIS, whatever their mission.
Research has been a highly controversial aspect of business school impact. The professional literature and many deans’ conferences have discussed at length the distance between researchers and the modern organization and its managers. Wilson and Thomas (Reference Wilson and Thomas2012) and Dyllick (Reference Dyllick2015) are part of a large body of literature highly critical of the low-value-added contribution by business school research published in top journals. However, O’Brien and colleagues (Reference O’Brien, Drnewich, Crook and Armstrong2010) show that business schools with stronger research output add economic value to their students in the form of higher wages and faster wage progression, although they find that there are decreasing returns that become negative in what they address as “excessive research.”
To enhance its impact and contribute to the redesign of capitalism, research must balance the search for truth and methodological rigor with the solutions it generates for society’s challenges. Kalika and Shenton (Reference Kalika and Shenton2020) argue that BSIS encourages the tracking of impactful research and, in some cases, a strategic alignment of the research agenda. However, with career progress for academics mainly a function of publication in four-star or A-rated journals and driven by opportunities for mobility, the scope for a school-determined research agenda is limited (Wilson and Thomas, Reference Wilson and Thomas2012).
Measuring impact as a by-product is not enough. In the core dimensions of learning and knowledge, but also in its engagement and operations, impact must move to the core of the business school’s mission and strategy. This means going beyond the BSIS approach of assessing impact to outlining an impact model. This model should highlight the dimensions of impact that the school is accountable for in its activities, the impact targets it commits to, a strategy that allows the school to potentiate its community to reach those targets, and resources available. The closer the impact strategy is to the business strategy, working from a shared value framework (Porter and Kramer, Reference Porter and Kramer2011), the larger the resources available and the stronger its reach will be. The final impact must be assessed and measured, using metrics of outputs and outcomes that capture the activities and their end outcomes, including direct measurement and surveys of the stakeholders and their perceptions. Finally, business schools must be accountable for their impact on stakeholders and the public by reporting clearly and transparently.
Sustainability must be at the center of any impact model. As was highlighted before, it is the new metric of progress for human societies. Weybrecht (Reference Weybrecht2017) argues that “sustainability provides a unique opportunity for management education, and should be seen as such,” but that “business schools are still, to a certain degree hiding undisturbed behind closed doors and, despite being crucial in the implementation of the SDGs, have not yet been as engaged as they could, and need to be” (p. 85). She continues that “business schools have a responsibility to translate this important global plan into something that resonates with their community. This can then be used to mobilize support internally, to coordinate curriculum, research, and operations on campus…. The opportunity is there for business schools to use these terms to bring people, ideas, and research together, not to separate them. But beyond having a positive impact through teaching and research, the SDGs provide another opportunity for business schools who are able and willing to engage; that of being a true driver and enabler of change” (p. 85).
The Principles for Responsible Management Education (PRME) initiative provides an important community for business school engagement with responsible management. In 2007, the UN Global Compact launched the PRME, an initiative to ready tomorrow’s business leaders in the quest for sustainable business. PRME engages business schools as signatories, promotes collaborative activities, and emphasizes reporting through the Sharing in Progress reports (Haertle et al., Reference Haertle, Parkes, Murray and Hayes2017). Perry and Win (Reference Perry and Win2013) report that the initiative is perceived as having a limited impact within the partner schools and “is gaining support based on activity that is already occurring and because it supports the school’s accreditation” (p. 58). In 2015, PRME espoused the SDGs, and in 2019, PRME launched the SDGs Dashboard, a data-reporting platform noting business schools’ contributions to the goals.
One challenge to the use of PRME as an impact framework is that it ignores two crucial elements of the business school as an organization. First, school policies are an essential element of their contribution to the SDGs. Diversity and inclusion in human resources and faculty policies and, more importantly, in admissions are critical elements of the SDGs. Second, business schools must also be accountable for the environmental impact of their operations. Hence, an extended PRME framework provides an exciting roadmap for defining a business school’s impact model.
C. Transforming the Business School – Part II: Opening Up
Although business schools have been apt at opening among themselves, with a multitude of collaboration in joint degrees, international networks, and exchange agreements, opening to external stakeholders has proven more challenging. Hawawini (Reference Hawawini2005) proposed a change in business schools’ governance to include alumni and corporate sponsors in the search to attract additional funding through fundraising campaigns. We must open beyond this.
The future of business schools is to become platforms of community engagement, where alumni, corporate partners, and other stakeholders in civil society committed to a sustainable future join the work of developing the leaders for that future. In the era of crowdfunding and digital platforms, business schools can attract the human energy and financial resources that share that common purpose. This would be the ultimate test of their legitimacy.
Engagement is critical to business school innovation. Shenton and Kalika (Reference Shenton and Kalika2017) argue that business schools committed to impact quickly understand these partnerships’ importance. Cross-stakeholder partnerships will enable business schools to take advantage of external partners’ experience and insight to co-create and co-deliver skills and understanding. It takes a cross-fertilizing effort to develop knowledge and talent that are impactful, as the analytical might of academia meets the experience and case studies of those on the front line of action. These partnerships will also provide resources that many business schools desperately need, as a result of being chronically underfunded by state budget constraints and growing social inequality, as suggested by Hawawini (Reference Hawawini2005).
Another dimension of openness involves expanding the traditional list of stakeholders. As discussed before, the focus on business instead of management has drawn business schools away from governments and nonprofits. The upshot is that in many nations, the managerial capabilities of these two institutions have not caught up. Yet, nonprofits and governments are a fundamental element of twenty-first-century capitalism. Social innovation has endowed nonprofits with an uncanny ability to understand new markets’ challenges and opportunities. Partnerships with nonprofits are a pivotal part of the SDGs, but they are fraught with communication challenges and mistrust. Sharing an educational journey would go a long way in facilitating an exploration of the complementarities among these stakeholders, as suggested by Gates (Reference Gates2021).
Finally, the third dimension of openness is interdisciplinarity. One of the harmful effects of the development of science was the specialization into silos of knowledge that ignore adjacent scientific areas. It is clear today that such specialization is counterproductive and that responding to our century’s challenges requires collaboration between different knowledge areas. As mentioned before, delivering the skills of the future requires convergence with science and technology, on the one hand, and international relations, politics, and history, on the other hand. Interdisciplinarity is a challenging exercise in collaboration because it requires learning a new language and humbly accepting different versions of the truth. It requires unlearning many established paradigms to relearn new ones. Such an attitude is uncanny to academics’ mindset. Some of this effort will require leadership to foster interdisciplinary centers.
D. Resistance to Change
The pressure to open up has been on the agenda for nearly a decade now. Accreditation agencies, such as EFMD and AACSB, have been at the forefront, adjusting standards and spreading best practices. Stiff resistance comes from two sources: the governance model and the business model.
The first source of resistance is the collegial governance model and the career-management system of faculty. Academic freedom, job security, and collegiality emerged to promote boldness and freedom of thought and are the hallmark of university governance. However, they have become barriers to change because incumbent faculty’s intrinsic biases and self-interest can block change. Given that the peer-review and editorial system in research journals is in a close loop with faculty, the system becomes impenetrable. Moreover, because mobility and outside options matter more for faculty careers than internal recognition and rewards, especially for untenured faculty, any behavior change must come from collective action among the leading schools in the system.
The second source of resistance is the market-driven business model, where students’ tuition covers costs. Government funding has declined in most countries, and tuition levels have skyrocketed, threatening the returns from a business degree in many regions of the world (Wilson and Thomas, Reference Wilson and Thomas2012). This has undermined the contribution of business schools to social mobility. One drawback is the transfer of rents from students to faculty as schools use the escalating tuition costs to compete for faculty, raising wages and, therefore, their cost structure.
More importantly, this business model slows innovation and change. Cornuel and Hommel (Reference Cornuel and Hommel2015) identify five potential barriers to responsible management education (RME): student preferences, the challenge of delivering it online, the intellectual fuzziness of the concept, the standardization of teaching models, and the pressure from rankings. According to Dyllick (Reference Dyllick2015), business students are more focused on an attractive, well-paid future career than those in other majors. He also reports that business majors are less likely to discuss ideas outside class or read books, according to the National Survey of Student Engagement. Hence, business school rankings focused on salary progression have become the centerpiece of student recruitment and a barrier to change and innovation because innovations that risk rankings, standardization, or employability threaten survival (Khurana, Reference Khurana2007; Wilson and Thomas, Reference Wilson and Thomas2012). Cornuel and Hommel (Reference Cornuel and Hommel2015) conclude that unless companies change their business and recruitment strategies and the intellectual underpinnings of modern management adjust, business schools will continue to focus on graduates’ short-term returns.
However, Generation Z, which will sustain business schools in the coming decade, shows a much stronger commitment to sustainability. In a survey of the incoming class of master’s students at Nova School of Business and Economics (SBE) in 2019, 87 percent wanted their studies to help them learn how they could positively affect the world, and 90 percent agreed that universities should actively incorporate and promote learning for sustainable development. The times seem to be changing.
In the end, business schools will have to answer to society, and competition will demand change. The experience of Nova SBE serves to illustrate. The fundamental motivation for our openness to civil society entities and the focus of our mission on impact comes from international competitive pressure. Our openness and commitment to impact attract students who join us from all corners of the world. They are our mission of sustainable impact and our livelihood in a shared-value approach. In this sense, greater competition on openness and impact criteria will be a relentless force for transformation. For example, the Research Excellence Framework and the Teaching Excellence Framework in the UK impose a demonstration of impact on universities’ public funding.
E. A Not-So-Digital Future
The drive for more openness, innovation, and impact to live up to the responsibility to develop institutions, knowledge, and skills for a sustainable future coincides with the effects of technology and globalization on our sector. These effects have been felt for a couple of decades now. The international flow of students and faculty and the threat from nimble digital players enhanced the competitive stress. As we reform for collective legitimacy, we must adjust for individual survival.
Fortunately (or unfortunately), business schools have proven more apt to respond to the competitive challenge than to the legitimacy challenge. They answered incredibly well to the challenge of internationalization. Student exchange and faculty mobility skyrocketed early in the century, promoted by European Union financing, the globalization of business and trade, and the swift adherence to English as a shared language. Here, business schools were quickly ahead of the rest of their host universities.
Meanwhile, the much-feared disruption by digital entrants proved elusive. Students continued to prefer to travel to facilities where they would share an enriching exchange of body warmth and nonverbal communication, at the same time that they shared ideas. In 2020, the COVID-19 pandemic forced billions to learn from home and might be a turning point. However, an early indication is that students are yearning to head back to campuses, even if they acknowledge the value of using asynchronous, video-based learning for parts of the learning process. In surveys of students at Nova SBE during the COVID-19 pandemic, 50 percent of students preferred a fully presential model, 45 percent favored a blended model, and less than 5 percent selected a fully online model, even if the pandemic created health risks from attending presential classes. Moreover, the ineffectiveness of monitoring technologies has undermined online evaluation’s credibility, challenging the move to online degrees. In our surveys, only 34 percent of students considered online assessment to be honest and fair, and only 38 percent believed that it effectively evaluates learning.
The upshot will be the generalization of blended-learning, flipped-classroom models, where digital will complement but not replace the warmth of campus life. The Netflix moment never came. Business schools will not hollow out like movie theaters and bookstores did. This is good news for business schools that have invested heavily in first-rate facilities, which will remain a source of competitive strength instead of a legacy burden in the digital age’s competitive struggle.
The digital transformation will nevertheless change business schools in alternative ways. Artificial intelligence and the data revolution of this decade, which is rippling across sectors, will, from my perspective, have more dramatic effects than the digital, internet-based revolution of the first two decades of the century. Klutka and colleagues (Reference Klutka, Ackerly and Magda2018) argue that artificial intelligence will affect student acquisition and student affairs, help instructors grade, and supply struggling students with the resources they need to succeed. In the future, this could free up faculty members to oversee large classes while still engaging with students on a deeper level.
V. Conclusion
By 2005, Cornuel (Reference Cornuel2005) and Hawawini (Reference Hawawini2005) confirmed the legitimacy of business schools for the value they were creating for their stakeholders and painted an optimistic scenario for their future. Yet, more than 15 years later, as EFMD celebrates 50, business schools’ legitimacy is a matter of heated debate. For some, they are irrelevant. For others, they are villains for their role in the expansion of neoliberalism after the 1980s. For most, they have expanded the corporate world’s managerial talent, although they should adjust some of their insights.
I have argued that business schools should focus on the future as they seek to reestablish their legitimacy. The underlying economic context has changed much over the last 15 years as a result of the accelerated changes brought about by globalization, technology, and sustainability. We must redesign our institutions, knowledge, and skills to restore society to a path of shared and stable prosperity. Engaging in this redesign is an opportunity and a responsibility for business schools. It is a crucial element of their license to operate and their accountability to their students.
However, before we redesign the institutions, knowledge, and skills that frame our society, business schools must redesign themselves. An unwavering commitment to bringing sustainable impact to the core of the mission, strategy, and accountability is a priority. The other is opening to deep engagement with external stakeholders, including business, nonprofits, and government, and an interdisciplinary approach that bridges politics, science, law, technology, history, and international relations to the core finance and economics areas. Such internal redesign is not an easy task for business school deans, who often face business and governance models highly resistant to change. The art of change management has been studied at length and depends essentially on leadership. The urgency of the change ahead of us should inspire the deans of the future.
The good news is that the COVID-19 crisis has clarified that the digital transition will not hollow out business schools like it emptied movie theaters and record stores before, soothing fears of disruption. This realization heeds the vital lesson that our schools’ essence is the knowledge sharing, social experience, and shared purpose students find on our campuses. That is the same human essence that sustains communities and provides purpose to human beings in the perennial tension between the individual and the group (Collier, Reference Collier2018). The preservation of our communities’ human essence should be the inspiration for what we teach and research for the sake of our future.
On March 24, 2020, at 8:00 p.m., when Indian prime minister Narendra Modi announced a nationwide lockdown following the outbreak of the global pandemic, the entire Indian School of Business (ISB) community responded with alacrity. The pressing requirement and biggest challenge was to vacate around 800 students from ISB’s two campuses in two different states of India distanced by 1,800 kilometers within 24 hours, which was completed safely with a sense of esprit de corps. Like everyone else, even though we were not prepared for such an eventuality, ISB was at its agile best.
Since then, in the last 9 months (I am writing this in December 2020), although the early days were very challenging, slowly but surely, the school returned to near normalcy. After evacuating the students in March, we sanitized the two campuses, one of 90 acres (Mohali) and the other of 250 acres (Hyderabad); completed the existing classes for the Post Graduate Programme (PGP; which is equivalent to, and will hitherto be used interchangeably with, an MBA) and the modular programs online; achieved near 100 percent placements; continued and completed the admissions process for the new MBA cohort; had the virtual graduation program for the previous batch; started online classes for the new batch; and finally, brought in the MBA class of 2021 physically to the two campuses. This was made possible because of our financial stability; complete passion, dedication, and hard work from all the stakeholders involved; regular meetings with the full Board of Directors as well as smaller task forces; scaling up of infrastructure needs like information technology; and teamwork, frequent and transparent communication, and a deep sense of mission. All the above subsets broadly make up what can be termed organizational and individual resilience.
This chapter provides two perspectives: (1) what we did at ISB to attend to the immediate challenges imposed by COVID-19, that is, to maintain business continuity, and (2) what we, as management institutions, need to do to reshape educational offerings so that graduates are better prepared to handle the new normal that has emerged.
The first challenge, maintaining business continuity, has so far involved adopting hybrid/blended learning processes, combining online synchronous and asynchronous online delivery, and preserving interactive dialogue and the peer-to-peer learning that is the hallmark of teaching at ISB. This has had a differential impact on full-time versus modular programs as well as nondegree executive education. The faculty had been debating the adoption of blended learning for a few years and had implemented it in part in only one out of our four programs (the weekend program for working professionals was delivered about 20 percent online), but the sudden arrival of COVID-19 cut short the debates. We rolled up our sleeves and got going. This chapter catalogues the creative approaches we adopted to overcome some challenges – while others persist.
The second challenge requires rethinking the program content and learning mechanisms. This will require a change in our own – that is, the educators’ – mindset. The increase in uncertainty – and its cousin, ambiguity – will mean that our foci in management education will have to shift from operational excellence and efficiency to resilience, from process optimization to flexibility in dynamic markets, from annual budgets to quarterly or even monthly ones, from core competence to multiprocess excellence and multiple business models to accommodate variance in challenges across product markets. This will not be an easy task. While we profess the value of multidisciplinary thinking and the importance of process over function, most management faculties are organized by function (finance, marketing, accounting), with incentives organized by depth within narrowly defined research issues rather than collaboration across disciplines. Much of the time in academic committees can be spent on guarding the turf rather than embracing the benefits of diversity in thinking, making structural changes in academia slower than in most organizations, with the plausible exception of the church.
There is an old saying: practice what you preach (and teach). In retrospect, perhaps we never thought that we ourselves would be called upon to actualize this. This is not the first time that crises have adversely affected management education in recent years. The global financial crisis of 2008 and the 9/11 World Trade Towers destruction at global levels, natural disasters and tsunamis at regional levels, and past pandemics like severe acute respiratory syndrome (SARS) and Ebola have all upended businesses and economies. But the 2020 COVID-19 pandemic stands out for its magnitude and duration. While affecting global and national economies in fundamental ways, the pandemic has consequently affected business schools and management education in deep and long-term ways. It has made academic leaders, scholars, policymakers, and the higher education community rethink their own position and future existence. ISB is no exception.
Impact on Business Schools: A Case Example of ISB
Business schools have been affected both adversely and positively by COVID-19. An immediate effect was the response to the psychological and intangible impact on the diverse stakeholder community. As a private and global business school, our stakeholders consist of students, faculty (both visiting and residential), parents, nonteaching staff of various departments, the state and the central governments, and the Board of Directors – to name just a few. In the early days, the fear of the pandemic was an overriding concern, and naturally, the health, safety, and security of all our people were uppermost priorities. We were also not sure how long the closure of the campuses would last. Although safety protocols were and are in place, this crisis was the first of its kind, and therefore we had to learn and improvise solutions as we went along. A major challenge was that with the students having reached their destinations and homes safe and sound, the examination results needed to be announced after their computation. Additionally, we had to ensure that the graduating students were placed and that any job offers that were reneged were offset by new opportunities. That was put on a priority basis even as the admission process for the new MBA batch of 2021 was in full force. Additionally, amid this turmoil, ISB became the first school in India to host an online graduation ceremony.
Obviously, as in all other institutions of higher education, students and parents were having second thoughts on joining the current batch. With a combination of dexterity and transparency, the admissions team set about reaching its target of approximately 880 students for the MBA class. That was not easy because many of them deferred their admissions; some had problems with getting their student loans; and others were not sure that if they quit their jobs and joined the class, renewed placements would be easy and salaries would be as per past track record in pandemic-hit global and national economies. That was when teamwork, hard work, persuasion, and creativity all came together to ensure that the final admission numbers were not way below those of previous years but much better than expected and far better than those of other competitive business schools. Our rapid response team, comprising faculty, admissions and delivery staff, information technology, and campus operations, rose to meet challenges, sharing information and perspectives twice a week.
We were acutely conscious, at the same time, of preserving our hard-won institutional reputation by sending clear communications and responses to traditional media and social media; making decisions in the best interests of the institution while considering diverse views and discussions; interacting with and responding to governments at multiple levels; and keeping channels of conversation open with competitors and partners in India and overseas to understand how others were coping and address and answer collectively and individually the concerns of students, alumni, parents, and potential students. Importantly, we decided to engage with and listen to students on a continuous basis to build our own solutions to the overriding fear that the unique campus experience and interactive classes managed by a global faculty would be diluted by online courses. That is, our brand was based on an intense classroom and extracurricular experience, quite at odds with post–COVID-19 online regimen.
The third significant hurdle was to get the PGP class of 2021 up and running as fast as possible – in a completely new format: digital classes. While many of the leading business schools across the world took a long-term view right at the start that the entire academic year would be online, at ISB, we decided that we would take a more difficult but preferred route of going online only until needed, and when possible and permitted by the government to open the campuses, we would welcome the students. In effect, it would be a hybrid model. We did have some teething problems in creating the right technology platform, setting up three-camera studios, and developing technology support staff. But once that was taken care of, things went relatively smoothly. However, it was not a perfect ecosystem because teacher training was necessary, and several faculty members are still learning how to use relevant features (e.g., virtual breakout rooms); also, given that the students were in various parts of the country, with a few of them overseas, too, they did have internet-bandwidth issues.
The fourth set of issues involved managing business continuity and maintaining our reputation and brand across our product (program) portfolio. Although we did fall short on revenues from the MBA admissions because of lower admission numbers, there was also, at the same time, an increase in our costs for the information technology infrastructure, maintenance, and training, to name a few expenditure heads. At the same time, because of the lockdown and plummeting corporate revenues, the share of revenue from executive education came down sharply. This was because of a weakness in the executive education revenue model, which depended almost wholly on nondigital classes. The management also made a conscious decision not to cut the salaries of the 600-odd staff and the 70-odd faculty despite some financial pressures. This was contrary to what many business schools in India and overseas did. We did this because of our strong conviction that the heart quotient (empathy) of our school is quite high, and the well-being of our people is uppermost. Although the challenges just described were particular to ISB, they are also emblematic of the problems faced by most of the leading business schools and universities in India and overseas.
At another level, although ISB is a world-class business school on every count, we are still not as “global” as we would like to be. That means that although we have a reasonably good share of international visiting faculty, our share of international students is not high. However, that is not the case with many higher education institutions in the United States, the UK, Canada, and Australia. All of them depend a lot on international students, and in recent years, despite the respective country restrictions on student visas and the high cost of education, students from countries like China and India thronged institutions in these countries. All this means that the financial position of business schools and other universities in these countries has been under greater pressure while ISB has held steady and is now headed into the positive zone for two reasons. First, the demand for our modular programs (e.g., executive MBA [EMBA] that meets for a week approximately every 6 weeks; MBA for working professionals that meets every other week) has increased significantly because these programs enable participants to ride out uncertainty related to reemployment after course completion. Second, travel restrictions have perhaps shifted Indian demand for foreign universities to better domestic options.
Although many of the top American universities are financially comfortable, perhaps with large endowments, that is not the case for most business schools. In India, of the roughly 6,000 business schools scattered across the length and breadth of the country, only the top-ranked ones are run on a financially viable business model (Taxila Business School, n.d.). That is because the main revenue model of the private schools consists of tuition and boarding fees, and government-promoted ones like the Indian Institutes of Management (IIMs) and Indian Institutes of Technology (IITs) have a regulatory bar on raising student fees, along with many other such restrictions.
Response of Business Schools: Creating Resilient and Agile Structures
For 30 years, I was involved in the management of the Austin Technology Incubator at the University of Texas. There, we talked about how entrepreneurs must build an airplane while flying it. The task we faced at ISB in managing the consequences of COVID-19 was a tad more difficult – rebuilding an airplane as you try to land it in turbulent weather.
Given the previously described landscape of problems and challenges that arose because of the pandemic and the resultant lockdown, as some of the classic management lessons teach about responding to crises, the first move at ISB was to form a multidisciplinary COVID-19 task force. With representatives from each department, this group met on a daily and more frequent basis virtually and sometimes even offline, putting their own safety at risk. The discussions from these meetings formed the basis of the action plan on sanitization, infrastructure maintenance, the safety of the faculty on the two campuses, and interacting with the local government while at the same time quickly laying the foundation for the new batch of online classes. We realized that greater collaboration and teamwork would be needed in the new normal. For example, while we are all heartened by the very promising start to Round 1 of the admissions process for the PGP 2021 cohort, we are now looking at how there can be greater support from the Alumni and the Career Advancement Services teams to ensure the same success in Rounds 2 and 3.
As the lockdown and the march of COVID-19 progressed, it soon became clear that the pandemic and the abnormalities of life would continue and have an impact for a year or two – not just a few months as many thought initially. In such a possible scenario, we needed to review our short- and long-term goals and path ahead and see where course corrections were needed.
Although initially the students adjusted and were happy with online classes, they experienced problems with bandwidth and other related issues. Whereas many reputable higher educational institutions in India and overseas decided to go online for the entire academic year, we believed that a superior hybrid model of offline and online combined with “value additions” was what the students would look forward to. Value for money (fees) also emerged in the minds of the students and their families. We realized that we had to respond to this new state of mind. The answer lay in enhancing our value-added benefits through new features such as the Digital Headstart Module (DHM), which helps students join and navigate the digital format and learning management system (LMS); an additional term of new content (e.g., modular courses such as crisis management, using blockchains in management processes, digital transformation); truly interactive classes; extra experiential modules such as JumpStartIndia@ISB (JSI@ISB) (ISB, 2021); and subsidized executive programs as part of lifelong learning at ISB. We also developed a “wellness fund” to support students impacted by the pandemic during the program.
JSI@ISB, an innovative initiative where the students work with faculty and nonprofit organizations on ventures that will be useful to the nation in the COVID-19 era, was conceptualized and implemented with great success. We realized that the students wanted to add to their experience in current circumstances beyond academic pursuits. The goal is to support the government’s informed decisions during the crisis and build a vibrant, healthier, and more robust India. The initiative was launched in mid-May and began with eight overarching topics that focused on key primary areas of recovery. In a span of 6 months, there have been around 40 projects, with the close involvement of 250 students and several faculty members. The key topics under this initiative include areas such as food and agriculture; informal (gig) economy; boosting the economy; monitoring the recovery; transportation, logistics, and mobility; health care; institutionalizing remote work; and corporate health tracking.
One of the key objectives of this initiative is to work closely with the government of India. To date, we have already signed memorandums of understanding (MOUs) or started engagements with various state governments and central ministries. ISB has built good relationships with all the growing government engagements over the period of the last 6 months. As a part of this initiative, several sessions and panel discussions were organized to bring together the different perspectives of key stakeholders and government. These sessions were very well received and attended by interested students as well. Additionally, to gauge the progress of the projects and help foster coordination and cooperation among students and mentors, a Preliminary Project Presentation was organized in mid-July. During this 2-day period, the students presented their project objectives, progress, and future road maps and got the opportunity to address audience questions. Another round of presentations is planned to present and discuss the outcomes of various projects under the JSI@ISB initiative.
Digital learning is only the tip of the far-reaching changes that technology will usher in over the coming years. Not only do students and faculty need to be more tech-savvy, but even the staff, processes, and infrastructure need to move with the times. This, we believe, will usher in the transformation to ISB Digital. Our cybersecurity and information technology (IT) security will have to be strengthened. In moving toward ISB Digital, the school has set up a high-powered working group of Board members to suggest a strategy and roadmap. We must develop our brand in this space and cannot simply have “online” digitally recorded versions of our programs. This will not differentiate us from other platforms, such as Coursera. The faculty members must hone their skills and use up-to-date studios to develop interactive learning processes. The medium-term objective: our delivery should not be seen as merely ISB Online but should be recognized as “ISB Digital Interactive.” All this has not been easy because our programs span five locations (Hyderabad, Mohali, Gurgaon, Mumbai, and Bengaluru), including two major campuses (Hyderabad and Mohali). We also realized that we needed to “remodel” our business model. The main revenue stream for our school has traditionally been the 1-year MBA PGP program, which absorbs about 900 students every year. Although we held ground on this immediately in our admissions, we realized that going forward, we needed to strengthen our PGP modular programs, the advanced management programs, and the executive education programs. We needed to rethink these. At the same time, there were cost pressures as a result of increased expenditures on COVID-19 preparedness and well-advanced digital platforms. All these and more pioneering work will also involve a new look at our financial plans and long-term financial viability and robustness because of fresh investments, increased competition, global financial metrics, and governance structures and mechanisms.
The importance of being in constant touch with all our major stakeholders was not lost on us. The school has been in regular contact with the governments both in the center and in the two states where we have campuses to understand their latest thinking and the proactive steps that we should take to onboard students when the governments give the go-ahead. We are also in touch with other leading business schools, both within the country and overseas, to understand how they have progressed and what plans they are making for the future. We also keep in touch with our three partner business schools: Kellogg, Wharton, and London Business School.
The Governing Board of ISB, comprising leading overseas and domestic business and academic leaders, played a critical role in advising and supporting the management and leadership of the school. Apart from the quarterly Board meetings, it also formed smaller task forces when and where needed to give expert guidance as we went along this journey in a pandemic-induced regime. At the same time, we were constantly reminded that every step and decision of the school leadership should uphold ISB’s hard-earned global status and reputation built over the last two decades.
New Normal: Learning from and Planning for the Future
Although challenging, 2020 has not exactly been a bad year for ISB. Poets & Quants gave ISB an integrated ranking of 16 worldwide across Financial Times, Forbes, Bloomberg Businessweek, and The Economist. The resident faculty is ranked in the top 25 globally in terms of per capita research productivity in the leading global management (UT-Dallas 24) journals. ISB had the honor of receiving global visibility with accreditations from the Association of MBAs (AMBA), the EFMD Quality Improvement System (EQUIS), and the Association to Advance Collegiate Schools of Business (AACSB). We gained the unique distinction of becoming the 100th and the youngest business school in the world to achieve the coveted “Triple Crown” accreditations. And we are certainly poised to not only recover but also flourish if we make the right investments in faculty, the technology infrastructure, and enhancing the quality of learning.
Ironically, just 3 weeks before the lockdown, we had a “Board Strategy Day” to lay down ISB’s roadmap for the future. It included three components: digital transformation in terms of both content (e.g., financial technology [FinTech]) and delivery formats (e.g., blended learning), global presence, and corporate/government engagement. All three thrusts have been facilitated – or at least forced upon us – by pandemic-instigated challenges. Perhaps, as Truman mused, we should never waste a good crisis.
Even as the pandemic and the economic recession will usher in an era of shake-up and consolidation in the Indian higher education segment, our long-term survival will also depend on how we respond to the macro-policy environment, the new National Education Policy (NEP) that was announced by the Union government a few weeks back during the pandemic (Chattopadhyay, Reference Chattopadhyay2021). We had to be dynamic and resilient as well. The NEP will bring the global universities like Harvard and Yale to our backyard and increase competition. Although ISB is a world-class institution, we needed to go global and reinvent ourselves on many other fronts. We realized that we needed to embark on a journey of ISB Global and ISB 2.0.
In ISB’s fascinating journey of only 20 years, we have created a formidable and influential alumni base of about 11,700 business leaders, growing at roughly 1,200 per year. On this count, we are perhaps among the fastest-growing business schools in the world. Although the role and relevance of alumni have long been recognized by global institutions of higher education, the pandemic era reaffirmed our faith and recognition of this important stakeholder group. Alumni helped us in our placements, funding, knowledge, and network. We became closer as a community. This was another positive outcome in this era.
As an organization, we will have to adjust to a “new normal.” To manage uncertainty, we will have to be more agile and flexible to adjust to changes in our competitive environment, the preferences of our students, and constraints imposed by regulators. Although the market for education is tighter, new competitors are pouring in from UCLA’s Post Graduate Programme in Management for Executives (PGPX) India program to the Washington University–IIT Bombay EMBA. Even after the pandemic subsides and vaccines are available, we believe that the virtual environment is here to stay for a while in some form or another.
Clearly, 2020 has been a year of inflection for us at ISB. The renewed continuance of our journey of ISB 2.0 has indeed been with a clear redirection toward going digital, going global, and promoting greater societal and nation-building. Now, more than ever, we need to be creative, adaptive, and resilient. Digital transformation has enabled us, at least in executive education, to expand our wings internationally and within custom-designed programs for Indian multinational corporations (MNCs). And JSI@ISB has expanded our corporate and government connection. As we look toward the future, our program and research portfolio will surely embrace the online MBA (iMBA), lifelong learning contracts, and specialized master’s programs (e.g., science, technology, engineering, and mathematics [STEM], FinTech, and digitally focused concentrations). Another opportunity is for ISB to embrace the demand for local content – case studies and theoretical frameworks that address challenges faced by small but growth-oriented companies going up the performance ladder globally. Tech research is performed in Bengaluru and patented in Silicon Valley. Garments are manufactured in Punjab but branded in Oregon. These organizations must learn how to enhance both value creation and value appropriation.
Implications for Business: The Paradox of Uncertainty and Dynamism
As we have seen from the foregoing discussion, COVID-19 has induced business schools to reinvent themselves through a judicious mix of resilience, agility, and adaptive structures. The case example and references to ISB are only indicative; equally importantly, this is how successful and progressive schools managed in the year 2020. If this has been the experience of business schools, what has been that of businesses?
The pandemic upended the world in ways unimagined in recent memory. Its impact has been felt on economies, societies, lives, livelihoods, health care, global institutions, businesses, educational institutions, and virtually every aspect of life across almost all nations of the world.
In normal times, organizations face many challenges, and the progressive ones equip themselves to deal with them. But COVID-19 has brought about issues and challenges beyond those in normal times that have drawn up questions about their very survival. Although this is not the first time that a crisis of global scale has spiked companies, what is different this time is its duration and magnitude. Leaders and managers found that their best-equipped strategies and experiences were often not enough to keep them above the water. One important reason is that, surprisingly, this has been a period of both uncertainty and dynamism – paradoxical and more complex in many ways.
This dichotomy and paradox of uncertainty amid dynamism is what has given us hope amid despair. Although the immediate and short-term impacts have been devastating for the majority, we have seen that some nations have been more resilient than most others. While some economies, sectors, and companies have done well, many others have fallen by the wayside. We have also seen that some countries have been able to respond much faster than others. This is also true in the smaller case of businesses and other institutions.
What has differentiated these more successful countries and corporations is resilience and agility. However, those in this group are the minority, and it will be useful to learn lessons from them in survival and existence. Consider some instances of the paradox of uncertainty and dynamism.
At the macroeconomic level, the latest International Monetary Fund (IMF) data show that the Indian economy was expected to contract by 10.3 percent in 2020 but could rebound very gradually in 2021 (Suneja, Reference Suneja2021). The UN’s International Labour Organization projected that COVID-19 pushed an additional 400 million people into poverty in the last few weeks of 2021, even as the richest of the rich, such as Mukesh Ambani and other billionaires like Jeff Bezos, have grown richer still (“About 400 Million Workers in India,” 2021). Similarly, whereas sectors like commercial real estate and automobiles have crashed, others, such as health care, e-commerce, and digital, have moved up the ladder.
When companies were able to pull themselves up after the first round of lockdowns was lifted in many countries, one of the first pandemic-induced changes was the way in which employees worked. In the formal sector, the norm of work changed overnight from working in the office to working from home. But after many months of the pandemic and many months of lockdown, while many companies have shut down – permanently or for the medium term – their physical commercial spaces, work from home has gathered momentum. This also means that managers and business leaders will have to restructure their home-office spaces. For example, managers from the large metropolises working in, say, software companies in Bengaluru will move back to their smaller hometowns and villages. These managers will have to reorient themselves from working in swanky offices to the confines of their smaller homes, with all their limitations. Experts also say that after vaccine availability, hybrid ways of working will also come into play, such as working part of the week at the office and part of the week from home.
If one looks hard enough, there are always silver linings to dark clouds. For example, India’s truck manufacturing industry was hit hard at first as a result of the imposition of the pan-India Goods and Services Tax (GST), which reduced friction for transportation across states, leading to higher utilization and therefore lower short-term demand for vehicles. Then, technology hit home, and shipping companies started using scheduling algorithms to further enhance the daily utilization of vehicles. Although this has temporarily reduced the demand for vehicles, the demand for services related to transportation has increased dramatically. In another context, Amazon India has successfully leveraged the small kirana (mom-and-pop) stores to close the last-mile delivery. These models (order online and pick up at a convenience store, which, by the way, will also deliver) have been exported to Brazil and Mexico. These case studies represent what the West can learn from the East and therefore provide content for global management schools. ISB’s investment in the Centre for Learning and Management Practice (CLMP) and ISB-Studios will help facilitate ideas from the East for the West (and the East).
COVID-19 and related developments have also had an impact on the business models and operating models of companies. With the public transportation sector having shrunk dramatically, companies like Uber have shifted their focus on urban ride shares to home delivery, with the spotlight on Uber Eats. At operating levels, if quarterly and annual budgets were the norm, today, companies are looking at shorter planning cycles. Revenue assumptions that finance managers had planned for 2020 are no longer valid after the dramatic economic contraction. Offline retail and malls have moved into the online and e-commerce space. Giant trade fairs, exhibitions, and conferences, which used to get large sponsorships, have moved to the virtual world. There has been a perceptible growth of educational technology (EdTech), FinTech, and online pharmacy (e-pharma) companies.
The global pandemic has also reoriented international relations and geopolitics. With the American economy contracting, the Trump administration took measures that would adversely affect Indian software companies. With the Chinese economy hit, global trade took a phenomenal blow. European countries like the UK, France, and Spain have seen large-scale unemployment, with the result that it has affected Indian workers in those countries. Similarly, with the Middle East economy being affected, large numbers of Indian migrant workers have returned to their home countries. Likewise, in India, with urban factories and manufacturing taking a toll, migrant workers have returned to their villages in their home states. All of these have affected the growth of Indian manufacturing.
In the light of the dichotomy, McKinsey analyzed 25 companies that had recently undergone agile transformations in some of their businesses (Handscomb et al., Reference Handscomb, Mahadevan, Schor, Sieberer, Naidoo and Srinivasan2020). These companies’ agile units responded better to COVID-19 shocks than nonagile units based on parameters like customer satisfaction, employee engagement, and operational performance. The examples can go on, but the main point is that economies and companies have seen a period of simultaneous dynamism and uncertainty that signals an acute and urgent need for resilient and agile managers and leaders.
Educating Future Leaders for Resilience and Agility
From the foregoing discussion, we have seen how business schools and businesses that have succeeded and perhaps even thrived in the pandemic are those that are resilient and agile. If successful institutions need such characteristics, can they be managed and led without leaders who amplify those traits? Indeed, both of these ideas are not new in the management education field. But in the context of going forward, beyond the pandemic, we increasingly need more of such leaders.
Resilience and agility involve a mix of leadership, psychological, and personality traits. Can they be taught in classrooms? Can they be acquired in short periods in either MBA, executive education, or advanced management programs? In another context, it has now been established that both leaders and entrepreneurs are not just born with those abilities, but they can be molded to learn and embody those competencies through teaching and experiences. Similarly, resilience and agility, the needs of the hour, can also be acquired.
Resilience and agility, however, must be at the system level. Agile private companies can be and are thwarted by public policy structures and administrators. Here, COVID-19 has provided two opportunities. JSI@ISB represents the first baby steps toward bringing management principles to public administration, hopefully culminating in initial programs for public management. Public administrators are trained to administer. They need to learn management. ISB has a unique opportunity to be a platform for dialogues between corporate managers and public policy decision makers and administrators, thereby complementing management literature from the West.
Academic research into resilience started about 40 years ago with pioneering studies by Professor Norman Garmezy (1918–2009), a psychologist who was known as the “grandfather of resilience studies.” Since then, there have been many resilience-related theories, but one of the most studied circumstances around resilience is that of people surviving the Holocaust. In his bestselling book Man’s Search for Meaning, Viktor Frankl inspired millions of ordinary people and management leaders toward resilience (Frankl, Reference Frankl1985). In more recent times, Jim Collins, with his book Good to Great, gave it a contemporary context (Collins, Reference Collins2001). And Srivastava and colleagues (Reference Srivastava, Shervani and Fahey1998) propose business innovations that balance short-term efficiency with growth and risk (resilience) management by leveraging multiprocess excellence in product-market ecosystems.
All these perspectives together are being brought forward to the concept and practice of resilience in a postpandemic world. Therefore, tomorrow’s resilient managers will be able to accept reality quickly – finding meaning and purpose in a world that may be uncertain and dynamic – and work for the greater good of the institution, society, and the world. These principles can themselves be applied to the education industry. Academic institutions can embrace the concept of customer lifetime value by developing lifelong learning contracts with periodic new-content boot camps, career-transition services via alumni networking and job portals, and leadership coaching when their graduates want to switch jobs down the line.
Academic institutions must not only collaborate among themselves but also with corporate and government communities. In many areas, such as FinTech, the artificial intelligence/machine learning (AI/ML) industries are ahead of academia because they have access to more resources and data. Consequently, academic institutions must share ideas and programs – and people. As an example, in developing programs on artificial intelligence for senior executives, ISB has partnered with Microsoft. Such academic–business learning alliances can bring unique perspectives to both sides because industry often does not have the luxury of time to examine issues in depth, and academic partners can unearth new perspectives. Indeed, based on a government-sponsored online conference titled “Vaishwik Bharatiya Vaigyanik (VAIBHAV) 2020,” ISB has come up with a framework to justify industry–government–academic cluster-based research parks and special education zones.
Agile managers who lead agile corporations, on the other hand, are those who can collaborate and cooperate in a world of volatility, uncertainty, complexity, and ambiguity (VUCA); can transform themselves and their competencies quickly to adapt to changing circumstances; and crucially, can solve wicked and complex problems that arise out of extraordinary situations. For example, it is unprecedented to have a large cohort of people, all over the world, starting to work remotely at once. But the last year of COVID-19 has shown that these managers can adapt to the changing environment.
In fact, COVID-19 is a classic example of how one can find opportunities in challenges. The future of work is being recrafted. Global supply chains are taking new shapes. Factories are getting leaner and more flexible. Artificial intelligence and the internet of things (IoT) are emerging as new frontiers. Entire industries, such as media and entertainment, are being reinvented.
A World Economic Forum report (Kretchmer, Reference Kretchmer2021) cites that during the pandemic, female political leaders in Denmark, Finland, Germany, Iceland, New Zealand, and Norway were managing the crisis better than their male counterparts. Resilience, pragmatism, benevolence, trust in collective common sense, mutual aid, and humility are mentioned as common traits of the success of these female leaders.
COVID-19 is forcing a change in behaviors, values, and mindsets. Reskilling and upskilling will increasingly become the needs of the hour. If we do not reskill, there will be talent shortages. Even as job losses and unemployment have been rampant in the COVID-19 era, there is a mismatch between demand and supply. There is also a shortage of high-quality trainers. All of these will be the megatrends in business in 2021. Business and business leaders will never be the same.
New Pathways: Beyond 50 Years of EFMD and 20 Years of ISB
In 2021, EFMD Global celebrated 50 years of its establishment and growth since 1971, with a mission to create socially responsible managers. ISB commemorated 20 years of service, being set up as a pioneering private-sector Indian management education institution with a world-class focus. In the intervening years of both organizations, they have been trailblazers. But their future responsibilities will be dramatically different from those of their past. The reason is 2020 – the year of the global COVID-19 pandemic, in many ways, is a year between the past and tomorrow. Those of us in the global management education space have a new calling to respond to the emerging trends from the pandemic or those that have been catalyzed by it. Here is my attempt to summarize 10 key trends that I foresee:
In the wake of online universities and digital classes, group learning, and teamwork will be critical.
Shorter MBAs, such as 1-year programs, will gain popularity among students.
Management education could be repackaged with part classroom learning and part employment.
Globalization is not going away (value migration will be the way of the future), although we will have more localized content.
Indian business schools will need to increasingly equip themselves to be world-class global institutions.
While companies will increasingly use artificial intelligence and other technologies, augmented intelligence in companies will necessitate refreshed course curriculum and pedagogy.
Lifelong learning and executive education will gather steam.
Corporate–academia partnerships will see higher levels of acceptance.
In India, there will be greater pushback by the government to have a greater say in higher education.
But regulation is not the answer; natural and volunteer programs for nation-building, like ISB’s Jumpstart India, will give world-class management education greater acceptability.
In closing, academic institutions must manage and learn from their ecosystems, which include not only academic partners but also the corporate community, government, civil society, and of course, alumni.
The crisis has revealed challenges of different models for business schools. At the same time, as history shows, institutions of higher education are resilient organizations with a high adaptive capacity. Hence, responses to the crisis range from strategic continuity to disruption caused by financial impediments. It can be assumed that a new landscape of schools and programs will emerge.
In order to investigate the adaptive structures of business schools, this chapter has three objectives:
Analyze the main uncertainties of the future.
Present different scenarios of adaptive structures of business schools.
Develop models of business schools in the future.
For this purpose, the chapter draws on the extensive literature of adaptation in higher education institutions and uses learnings from recent accreditation experiences. Implications for practice, with a special emphasis on structure and strategy, conclude this chapter.
Introduction: Uncertain Futures for Business Schools
Universities are among the oldest organizations in the world and therefore have always been subject to changes in their institutional environment (Bok, Reference Bok2009; Hardy et al., Reference Hardy, Langley, Mintzberg and Rose1983; Weick, Reference Weick1976). In response to these changes, universities, like business schools, developed a resilient structural form and strong internal processes that make them successful institutions (Pinheiro and Young, Reference Pinheiro, Young, Huisman and Tight2017). Over time, scholars of organization theory and sociology have therefore characterized universities as professional bureaucracies (Mintzberg, Reference Mintzberg1989), loosely coupled systems (Weick, Reference Weick1976), or organized anarchies (Cohen et al., Reference Cohen, March and Olsen1972). Major features include a differentiated structure of independent and autonomous experts who are intrinsically motivated by the quality of their work and their professional standards in research and teaching; a relatively stable but complex environment with constant student demand and secured funding; a professional support structure administering services; and a relatively lean leadership cadre with a collegial and participative governance style. These features are complemented by a set of boundary-spanning activities that guarantee a translation of external demands into internal responses (e.g., technology-transfer units, interdisciplinary research institutes). With this, the constant exchange between the inside organization and the external environment has turned universities into institutions that are rather sensitive to societal developments.
The model of business schools has also evolved over time as an elaborate system of core processes and support services. From a value-chain perspective (Peters et al., Reference Peters, Smith and Thomas2018), they provide different degree programs (bachelor, master, PhD in all forms) with the help of sophisticated support activities ranging from faculty management to the learning infrastructure. Depending on their financial viability and market position, business schools have developed different business models. In recent years, the ecosystem of business education has changed dramatically with the rise of learning technologies, increased globalization, mobility and competition, the need for short-cycle education, heightened public expectations for relevance and impact, and more (Cornuel, Reference Cornuel2007; Locke, Reference Locke, Callender, Locke and Marginson2020; Peters et al., Reference Peters, Smith and Thomas2018). Business schools – as a result – are in a state of flux.
The developments of 2020 and 2021 have added further. Universities arrived at volatility, uncertainty, complexity, and ambiguity (VUCA) challenges (Korsakova, Reference Korsakova2019). VUCA challenges have been introduced to higher education markets by a combined appearance of different trends. Volatility is triggered by the fact that societal conditions are not constant (Meyer and Sporn, Reference Meyer and Sporn2018). Demographics are changing, and the demand for education is constantly changing. Uncertainty encompasses the notion of the missing predictability of institutional development and, for example, employment arrangements moving from permanent to precarious. Without a doubt, the complexity has increased for higher education. There is not one challenge that is occurring but a facet of issues that need the attention of universities and schools. Ambiguity arises for higher education in the sense of multiple contradicting demands in the form of more impact and more innovation or more quality and more diversity. VUCA does create the need for a profound rethinking of the organization of universities and business schools. In a sense, they are moved out of their comfort zones of stable environmental conditions (Bennis and O’Toole, Reference Bennis and O’Toole2005).
Adding to the already-existing dynamic environment came the COVID-19 crisis. The consequences have included issues like online teaching competence; safety for students and faculty; research disruption as a result of the lack of opportunity to travel and network; and administrative threats caused by the rising costs of response, for example, new infrastructure needs, personnel challenges caused by the home office, or the impact of the pandemic on student learning and outcomes, thus influencing their qualifications for the job market (Baker, Reference Baker2021; Marinoni et al., Reference Marinoni, van’t Land and Jensen2020).
All these changes can trigger financial restructuring and reorganization. Globally, schools are facing changes in student demand for educational programs. Those programs creating revenue for business schools are especially in jeopardy of financial restructuring. For example, some Australian and US schools have been downsizing their program offerings. Strategies have been revised as to the portfolio of program offerings, and mergings of different program types have been the result. The faculty has been restructured in the process as well, in the sense of replacing full-time faculty with colleagues who work on a part-time and flexible basis. Altogether, the COVID-19 crisis led to financial restructuring that scrutinized existing strategies and reformulated them in order to face a much more uncertain future (Lockett, Reference Lockett2020).
In this chapter, business schools and their adaptive capacity are the major foci. Along those lines, many business schools around the globe have chosen accreditation as a way to have a visible and sustainable tool at hand for quality management and continuous improvement. The European Foundation for Management Development (EFMD) is the major provider of formative evaluation schemes and strongly emphasizes – among other things – diversity, internationalization, and impact. Major accreditation systems include institutional assessment (under the name EFMD Quality Improvement System [EQUIS]) and program assessment (under the name EFMD Accredited). Hence, and because this volume is dedicated to 50 years of EFMD, this chapter also looks at EFMD accreditation when analyzing business schools.
The Role of and Impact on EFMD Accreditation
Accreditation at EFMD over the last 25 years has developed into a very successful system of assuring quality, on the one hand, and producing a visible global brand of excellently performing business schools, on the other hand. Today, there are some 200 EQUIS-accredited schools and some 130 EFMD-accredited business programs. Standards and criteria of accreditation encompass institutional factors like strategy, resources, faculty, networks with the world of practice, internationalization, research, and last but not least, students and programs. A peer-review system of colleagues from accredited institutions and representatives of corporates and nonprofit organizations regularly evaluates all these areas. Through the decades-long experience, a clear understanding of the different models of business schools developed within EFMD. Respect for diversity regarding different forms and market positioning has been a key element in this development and reinforces the understanding of business schools as a driver for societal change (Cornuel, Reference Cornuel2005; Thomas and Cornuel, Reference Thomas and Cornuel2012).
Now, through the COVID-19 crisis, the accreditation system has become challenged as well. One aspect involves the actual delivery of the accreditation, which had to move online. According to the schools involved, this has worked rather well. The other aspect is certain standards used in accreditation that have turned into areas of major concern: digitalization; internationalization; and ethics, responsibility, and sustainability (ERS).
Digitalization is the most obvious area of change in recent months. From one day to the other, business schools worldwide had to move to virtual classrooms and offices. Within days, universities and business schools reorganized teaching and research and worked with administration remotely. In the assessment during an accreditation visit, digital venues played a bigger role and helped those that were able to build their activities on an already-existing digitalization strategy. Others were pressed to respond quickly without much preparation.
Internationalization is another standard of EFMD accreditation featuring prominently. The pandemic crisis put all efforts of mobility on hold. Schools have been in the process of responding with virtual internationalization, internationalization without mobility, online mixed teams, or virtual visiting professorships. Again, the business models of many accredited business schools have been challenged.
ERS is a third area where accreditation standards need to be developed further. Throughout the COVID-19 pandemic, business schools have paid more attention to the increased inequality of students and their access to online learning. Sustainable measures of resource use have become more widely discussed (e.g., travel regulations), and the integration of stakeholder diversity has increased in prominence (de Wit and Altbach, Reference de Wit and Altbach2021).
Theory of Adaptive University Structures
The crisis has revealed the limits of university business models and available resources. At the same time, history shows that universities and business schools are resilient institutions with a high adaptive capacity. Hence, responses to the pandemic are expected to range from strategic continuity to disruption caused by financial impediments. Building on existing theories of adaptive university structures (Sporn, Reference Sporn1999) and entrepreneurial universities (Clark, Reference Clark1998), this chapter presents scenarios and possible business models of the future.
The question of disruption or continuity of strategy uses the following definition:
In an organisational context, business continuity management (BCM) has evolved into a process that identifies an organisation’s exposure to internal and external threats and synthesises hard and soft assets to provide effective prevention and recovery. Essential to the success of BCM is a thorough understanding of the wide range of threats (internal and external) and a recognition that an effective response will be determined by employees’ behaviour during the business recovery process.
Although strategic continuity is important, business schools and universities need to be analyzed regarding their adaptive capacity. The notion of adaptation to environmental challenges has been debated in higher education research since the 1990s. Under the topic of entrepreneurial university (Clark, Reference Clark1998) or responsive university (Tierney, Reference Tierney1998), research focused on describing the mechanisms of adaptation and the role of organizational aspects prevailed. Up until today – with the ever-changing turbulent environment for higher education institutions – these theories are of great importance.
The work on adaptive university structures (Sporn, Reference Sporn1999) seems especially fitting for the analysis in this chapter. The model proposes six factors of influence (see Figure 9.1): shared governance, committed leadership, professional management, clear mission, differentiated structure, and entrepreneurial culture. The interplay of these six forces shapes the ability of business schools to respond to their environment – an environment that is defined as a crisis or opportunity by the institutions. In this sense, the model also assumes an open-systems and institutional approach to university adaptation (DiMaggio and Powell, Reference DiMaggio and Powell1983).
Regarding the external environment, business schools and universities are viewed as embedded in an institutional context to which they have to respond. Clark has coined this as the demand–response balance – a condition where the university is aligned with the expectations of external stakeholders. For the sake of adaptive structures, it is important to note that the sense of crisis or opportunity is a necessary precondition for higher education institutions to respond.
A very important facet of adaptation is shared governance. Business schools, like universities, are bottom-heavy organizations with a dominant role of the experts (i.e., the professors). This group requests a key position in the functioning of the institution. Their contribution to teaching and research is the building block for the core value of business schools. The notion of shared governance is then interpreted as the involvement of the experts in all decisions in order to facilitate faculty buy-in and motivation. Basically, shared governance helps leaders to build their work on the support of the key players in the organization.
Following from that is the importance of committed leadership. In times of organizational transition, leaders are becoming the key drivers for change. Their understanding of the institutional environment can help to translate both threats and opportunities into strategies for the future. Leaders help to motivate internally in order to make necessary changes more transparent. At the same time, committed leaders are able to develop a vision that is shared by the university community. Thus, the interplay between faculty interest and leadership dedication can form an important alliance for successful adaptation.
The rise of professional management of business schools has contributed to the success of institutional adaptation. Over the last few decades, university administration has moved from a bureaucratic to a professionalized organization (Musselin, Reference Musselin, Krücken, Kosmützky and Torka2007). With this comes the evolution of a new class in schools and universities – the “third-space professionals” (Whitchurch, Reference Whitchurch2012). They are well educated in the field of their work (e.g., quality management, marketing, student services) and constitute a separate new group inside business schools – next to leadership, faculty members, and administration. Their work is characterized as service oriented, professional, and knowledge driven. Through their boundary-spanning capacity (e.g., entrepreneurship or technology-transfer centers), they are able to develop adequate responses to external pressures.
A clear mission has proven important for successful adaptation and change. Shared decision-making practices, committed leaders, and professional managers need to base their work on a clear mission and set of goals that are shared by the academic community and that combine past developments with future perspectives. A common understanding of the external challenges is a key feature of successful adaptive university structures. This clear mission is embedded in a vision and a strategy that help the institution to move forward.
A differentiated structure provides the higher education institution with different ways to respond to external needs. A business school could, for example, develop competence fields with different functions and services (undergraduate college, graduate school, entrepreneurship center). These differentiated units are relatively autonomous in terms of design and adjustments of their offerings and are at the same time accountable to central leadership.
The entrepreneurial culture is the remaining building block of adaptive structures. This refers to a set of institutional norms and values emphasizing opportunity-driven and solution-oriented behavior. Burton Clark, the famous higher education researcher, once talked about “joint institutional volition” (Clark, Reference Clark2004) as the major driver for organizational transformation in institutions of higher education. This implicit openness for innovation paired with a common understanding of the future can help the institution to move through a disruptive period. The coherence makes change and adaptation successful.
Adding to the notion of adaptive structures is the importance of a process view. Clark (Reference Clark2004) presented three dynamics through which sustained change happens. First, reinforcing interaction is a key element in the process. The institution needs to provide enough opportunities to interact and exchange views on the issues involved. Decisions are in line with the envisioned future and enhance a change-oriented culture. Second, a sense of perpetual momentum is needed in order to support the – what he called – self-reliant university. Ongoing adjustments, negotiations, interactions, environmental scanning, and so forth should be in place to maintain organizational dynamics and agility. Third, the institution needs to develop an ambitious collegial volition. Clark makes a strong argument that only an “ambitious volition helps propel the institution forward to a transformed character”; he goes on to say that “inertia in traditional universities has many rationales, beginning with the avoidance of hard choices” (Clark, Reference Clark2004, p. 94).
In order to discuss strategic continuity or disruption in the sense of adaptive structures of business schools further, it is necessary to look at the notion of strategic development versus disruption. For this, an example from the area of accreditation can help to illustrate how schools have responded to the challenge of maintaining a sense of quality improvement in times of severe societal crisis caused by the pandemic.
Back to the Practice of Accredited Business Schools: An Example
As was explained earlier in this chapter, business school accreditation is based on certain standards and criteria (see www.efmdglobal.org/). Among them are digitalization, internationalization, and ERS embedded in the main areas of strategy, teaching and research, and faculty and students, as well as connections to the world of practice. In all areas, EFMD defined a clear understanding of the meaning and implementation choices. At the same time, the COVID-19 crisis has challenged the accreditation system, and certain questions emerged that need to be addressed in order for the system to be fit for future quality-assurance exercises.
One recent example of a global business school – the Nottingham Business School China (NUBS China) – deliberating on the move from crisis management triggered by the pandemic to opportunities is informative. After a period of major disruption and immediate response to the COVID outbreak, the business school looked at the opportunities ahead and developed five opportunities for the future (Lockett, Reference Lockett2020) that resonate well with other accreditation experiences:
Opportunity 1: Extending the use of digital learning
Opportunity 2: Innovation in assessment
Opportunity 3: Research and external engagement
Opportunity 4: Reviewing the use of resources
Opportunity 5: Challenging internal bureaucratic processes
As this list shows, digitalization can create an opportunity for business schools. New ways of learning within existing programs or new offers will evolve. This will include hybrid, virtual, or blended formats as well as flipped classrooms or cross-campus, cross-institution, and cross-country collaborations.
Assessment can be redesigned as well, in the sense of working more closely with students on their educational journey. Feedback can be provided online or through a link between faculty and students enhanced through technology.
Research and engagement require time and dedication. As the example shows, time can become available through the confinements and home-office arrangements. The future could possibly bring more opportunities to publish and to work on relevant topics in that way, creating an impact on society and the academic community.
The use of resources is also affected throughout the crisis. Resource needs that are decreasing in some areas (e.g., travel) can be used for investment in other, new areas (e.g., online delivery) in order to meet market demands.
As described earlier, decision making at business schools can be cumbersome and bureaucratic. The pandemic crisis showed new ways of working together in order to develop solutions. This could lead the way for more efficient and effective ways of management.
This example demonstrates the power of the pandemic crisis and its effects on the way business schools are run. In order to take this one step further, scenarios are presented that show different types of institutional responses.
Scenarios of Adaptive Structures Responding to Crisis
Scenarios are often used to give a plausible description of a possible “future reality,” including some deliberations about the steps that lead to the future state and possible actions taken (Dean, Reference Dean2019). Based on past research (Pinheiro and Young, Reference Pinheiro, Young, Huisman and Tight2017) and experiences during the last year, three responses to the pandemic crisis are suggested: resilient schools, reengineered schools, and reinvented schools. In this section, the major characteristics and conceptions of the most affected accreditation standards (international, digital, ERS) and the response patterns (disruption or continuity) are presented before moving to the description of the varying adaptive structures and business models of these types.
Type 1: The Resilient School
Resilience refers to the notion that lies at the heart of business schools and universities since their foundation. It is the ability to be prepared, adaptable, and responsive to an external demand – be it a crisis or an opportunity. The literature (Pinheiro and Young, Reference Pinheiro, Young, Huisman and Tight2017; Sporn, Reference Sporn1999) draws a picture of flat, expert-driven institutions that are firmly embedded in their institutional environment (Olsen, Reference Olsen, Maassen and Olsen2007; Pettigrew et al., Reference Pettigrew, Cornuel and Hommel2014). Collegial leadership and a shared understanding of the functioning of the business school dominate decision making and action. A stable environment with secured funding and constant student demand is a prerequisite in this constellation. The power of the experts (professors of all levels) is based on a high degree of autonomy, the quality of the expertise, and individualized connections to the external environment. Resilient schools will mostly be found in public systems with a long tradition of higher education and a pledge for the “traditional model” of the university (Musselin, Reference Musselin, Krücken, Kosmützky and Torka2007).
Regarding the consequences for internationalization, the resilient school has invested sufficiently in the development of a functioning digital infrastructure, adequate teacher training, enhanced student services, and robust information technology (IT) support. Internationalization has been transformed in the sense of providing online opportunities for exchange through, for example, online intercultural learning teams and virtual visiting professors. ERS has been mostly concerned with acting responsibly in the manner of addressing rising inequalities and the widening digital gap; for example, according to a recent survey, 40 percent of students worldwide lack online access (Martin and Furiv, Reference Martin and Furiv2020).
Resilient business schools are apt for strategic continuity rather than disruption. Although the sudden crisis caused by the pandemic hit these business schools hard, they were able to respond sufficiently to address the most pressing issues in teaching and research. Further plans will most likely include “to move back to the classroom” and suggest the continued practice of existing strategies.
Type 2: The Reengineered School
On the contrary, reengineered business schools are more market dependent and driven by student demand. Hence, their functioning is dominated by a “business logic” where tuition-fee payments and a potential drop in enrollment numbers are major threats. The school leadership needs to respond with potential layoffs of faculty, closure of programs, or a combined set of measures that will “reengineer” the school in the sense of making it financially viable.
For reengineered schools, the changing pattern of internationalization represents a challenge caused by a drop in student mobility. Investments in this area will include solutions to satisfy demand through online offerings (e.g., exchange without mobility). Digitalization becomes the decisive tool in this scenario and will be used in all aspects of teaching and learning. The third area is ERS with respect to, for example, working students who lost their job and who will not be able to finish their degree programs. It is in the interest of those business schools to find a way to support those students and bring them back on campus (see global survey results in Marinoni et al. [Reference Marinoni, van’t Land and Jensen2020]).
Strategic disruption features prominently at the reengineered business school. The leadership often exercises crisis management in order to reassess and review existing strategies, stressing program efficiency and cost management. Examples are business schools in Australia or the United States where faculty restructuring and program redesign have led to a new portfolio and structure.
Type 3: The Reinvented School
A third scenario describes a school that has had a pathway of innovation and is ready to respond to an unexpected crisis. These innovator business schools can demonstrate a history of innovation and redesign. Reinvented business schools are stakeholder centered (mostly students, employers, and public officials). Their teaching model is constantly adapting and has been using models like the flipped classroom and transformative approaches to learning. Outreach is global, and faculty is part of a community of “entrepreneurs.” Connections with practice are key components to guarantee impact. Technology plays a large part in reinvented business schools as IT is used creatively to facilitate student and faculty work.
The reinvented business school is familiar with internationalization, digitalization, and questions of an ESR nature. The global outreach of these institutions has created a culture and structure that are built on the values of international mobility and exchange, with the objective of offering the best opportunities for graduates. Virtual and up-to-date technologies are part of their entrepreneurial tradition (Taylor, Reference Taylor2012). Innovation in the reinvented business school resembles the constant exploration of new opportunities and implementing them for the good of the institution. The impact of the reinvented school has included areas, such as, for example, ethics training, responsibility regarding health issues, or new sustainable infrastructure.
The reinvented business school is able to define the pandemic as a disruption that will create a revised strategy based on the sense of opportunity. Leadership has a strong entrepreneurial identity, the academic community believes in the value of exploration and experimentation, and the infrastructure is agile enough to adapt to new circumstances. This open mindset to newness paired with a strong foundation in institutional values and culture helps the business school to overcome the obstacle of a crisis in a way that will further develop and sharpen the strategic thrust.
The three scenarios are suggested categorizations of schools responding to the COVID-19 crisis based on certain assumptions (e.g., volatile environment, changed demand). Other types and different forms are certainly conceivable, depending on the institutional reality of business schools. For this chapter, these different types are taken one step further, with the goal of presenting models of business schools. This can sharpen the understanding of the diversity of business schools and their manner of responding to environmental changes.
Models of Business Schools in the Future
The modeling of business schools includes important aspects of organizational functioning (Pinheiro and Young, Reference Pinheiro, Young, Huisman and Tight2017): external orientation, core values, use of resources, internal dynamics of management and leadership, the locus of control, the modus operandi as the way to respond, and the positional objective or aspiration (see Table 9.1). When combined with the different types described in the previous section, three models of the business school emerge: the resilient, the strategic, and the innovative. These models of business schools will be combined with the elements of adaptive structures in order to provide a full account of their organizational characteristics (Sporn, Reference Sporn1999, Reference Sporn, João Rosa, Magalhães, Veiga and Teixeira2018).
Table 9.1. Models of Business Schools (based on Pinheiro and Young, Reference Pinheiro, Young, Huisman and Tight2017)
| Resilient | Strategic | Innovative | |
|---|---|---|---|
| External orientation | Cherish complexity | Control complexity | Use complexity |
| Core value | Robustness | Efficiency | Change |
| Resources | Allow slack | Maximize | Invest |
| Internal dynamics | Support variety | Rationalize | Capitalize |
| Locus of control | Networks: loose coupling | Hierarchy: tight coupling | Teams: independent actors |
| Modus operandi | Exploration | Exploitation | Innovation |
| Positional objective | Thriving – adapting to niche | Winning – being the best in the field | Creating – offering new solutions |
The Resilient Model of the Business School
The model of resilient business schools is built on the institutional tradition and past successes enabling a robust structure. Schools’ organization shows an external orientation that appreciates complexity in a stable and predictable environment; that is, strategies make use of the complex nature of its diverse markets. Slack resources help to support all elements of a network of loosely coupled units (e.g., institutes, centers, individual professors and department chairs). The school explores opportunities as they emerge and adapts to niches in order to thrive.
Applying the approach of adaptive structures (Sporn, Reference Sporn1999), the resilient school will most likely react to a crisis with the understanding that it needs to be addressed and overcome. Internal functioning is very much dominated by shared governance involving academic stakeholders. Leadership and administration have a complementary role to play in this process. The focus is on transactional aspects with which the different involved parties agree on a strategic orientation. The structure is differentiated and allows the organization to respond to diverging environmental demands. An entrepreneurial culture is not dominant in this model but might exist in some of the differentiated parts. This model is most likely to be found in systems with public funding with less competition, such as those in some European countries.
The Strategic Model of the Business School
The strategic model of business schools features a hierarchical structure and tight coupling of the different elements; that is, leadership and management can work based on the notion of efficiency and rationalization. This model resembles an enterprise approach to schools’ management. Environmental complexity needs to be controlled, and resources are scarce. Allocation is driven by the goal of developing a competitive advantage. A market position is exploited to the extent that the school is highly competitive based on its core competencies.
The adaptive structures of strategic business schools have a stronger commitment from leadership to successful change activities. Governance is geared towards professional values. Professional management needs to be in place in order to guarantee the success of the programs. Entrepreneurial responses mainly encompass exploiting programs for economic value. The structure is focused on hierarchical arrangements. The strategic model of business schools often includes redesign and reengineering as a consequence of a crisis, as examples from more competition-oriented systems in the UK and the United States demonstrate.
The Innovative Model of the Business School
Innovative business schools are institutions with a strong entrepreneurial identity and an emphasis on change. The value of constantly developing existing programs further and designing up-to-date new offerings lies at the center. The organization is built around capitalizing on teams of creative actors and investing resources for innovation. Innovative business schools use the results of environmental complexity as opportunities. They are able and agile enough to respond quickly and successfully.
Regarding adaptive structures, innovative business schools combine the different areas for success. Their shared governance involves the relevant stakeholders to the extent necessary to secure the implementation of new initiatives. Committed leadership is a key building block – inspirational and visionary leaders help the business school to move forward. A professional infrastructure and staff help to develop feasible and sustainable solutions in a team-oriented fashion. The clear mission and vision act as the glue uniting the different groups and stakeholders behind a common idea and model for the future – based on a strong entrepreneurial culture. Differentiation is relevant in the sense that different actors are brought together to form networks and find creative ways to adapt. Innovative business schools can be found in all systems and often emerge from a financially independent position, with a history of change and widespread support for innovation of the academic community.
Concluding Thoughts
This chapter set out to analyze the adaptive capacity of business schools in the era of the COVID-19 crisis. For this, an account of the institutional environment was provided, followed by a description of possible theoretical foundations of adaptive structures. As a result, the chapter suggests three models of business schools based on their context, tradition, and structural arrangement: the resilient, the strategic, and the innovative. This analysis is not all-embracing or universal; depending on the viewpoint, different models could be developed. To conclude, areas for consideration by practitioners and researchers are presented.
First, business schools are complex organizations with the challenge of finding the right balance between resilience and change. The question arises as to how business schools can stay agile and resilient at the same time, given the complex internal environment of diverse stakeholders and their demands. These schools will most probably look for strategic continuity by following an agreed-upon plan and making adjustments where needed.
Second, business schools have the chance to develop the notion of innovation through crisis. In recent EFMD meetings of deans and directors, the pandemic was described as an opportunity for change. With this transformational view of leadership, business schools are able to capitalize on the ability to adapt. Schools can also become more innovative through a visionary strategy for the benefit of the institution.
Third, the question of strategic continuity or disruption of business schools is determined by multiple factors. The context and location play a role, as does the role of leaders, the faculty, and the students. For the analysis and practice, a key starting point would be to fully grasp the type and model of the business school and build the strategy accordingly.
EFMD, with its global presence, has a responsibility and a role to play in this situation. The continued belief in an open system characterized by diversity and inclusion while securing a high level of quality will provide business schools with the opportunity to learn from each other’s practices. By understanding their specific contexts, benchmarking and mutual learning can be facilitated. With this, EFMD can help business schools to maintain their legitimacy and social impact in society.
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