The Hunt for the How
Season 1 Episode 1: The new era of stakeholder capitalism with Jon Iwata
From climate change, DEI and social justice, to economic inequality, worker safety and related issues, leaders are looking for guidance in addressing key questions as they lead their businesses into a future propelled by change and opportunity. In conversation with notable business leaders, Michael Dix, CEO of Intentional Futures hunts for the how.
Edited for length and clarity
Michael
It’s fitting that we’re starting this podcast series with Jon Iwata, a respected business leader who spent 35 years at IBM, including a decade as chief brand officer. Jon is currently a fellow at the Yale School of Management, helping tomorrow’s business leaders learn how to innovate and compete more effectively by applying the ideas behind stakeholder capitalism. Jon, I’m really excited to have this conversation with you. Thanks for joining the show.
Jon
Michael, thanks. I’m honored to help you kick off this podcast series.
Michael
Yeah, this will be fun. Let’s start with something very fundamental. How do you define stakeholder capitalism and the promise that it holds?
Jon
I think it’s a rather unlovely term for a rather simple idea, which is that stakeholders of various types bear on the success of a company, and therefore the company should commit to create value for all the stakeholders that bear on their success. And it is about value creation.
Michael
And then how does it differ from traditional capitalism or today’s business orthodoxy?
Jon
Yeah, that’s a debate that one can get caught up in quickly. Because if you go back to Milton Friedman’s point, which is to optimize for the shareholder, that will compel you to create great products and services for the customer, treat your people well and play by the rules. That’s really unassailable. However, in practice, when you optimize for shareholder value creation, you can make decisions and do things that in the short-term result in profit, but in the long term may kill your company. And I think that the stakeholder capitalism approach is not just more balanced. It does result in more sustainable financial results for the investor, but also value created for the other stakeholders too.
Michael
Yeah, and it’s a different mindset, I would argue as well, where you’re thinking less about getting as much of a kind of fixed pie in the near term and more about creating abundance, a larger pie over the long run. Do you agree with that?
Jon
I do. The time horizon makes a world of difference.
I was talking to one leader who said he had an activist investor making a lot of trouble for the CEO. One of his advisors said, you and the activist actually agree on the same things and he nearly leapt across the table. The difference is the activist wants you to do it in three years, and you want to do it in 30 years. Because if you do it in three years, you’re going to have to make decisions that will really impair the sustainability of the company.
I do think that time horizon does make a big difference.
Michael
Yeah, I love that example. Let’s say when you first started talking, we recognize that we’re fellow travelers in this journey to understand not just what these ideas are, or why they matter, but how to implement them in the real world. Because what we’re talking about is a significant shift in mindset, in practice, in scorekeeping, and incentive programs. It affects a wide range of things. I’d love to hear more from you on what’s driving your quest, and then how your work at Yale factors into this.
Jon
Well, as you as you pointed out, I spent my professional life at one company, IBM. I happened to be a very young guy at corporate headquarters. Improbably, I spent 29 of my 35 years at corporate headquarters. I wouldn’t recommend it to too many people, but it was a tremendous education. And what I learned there was that a company could have several hundred thousand employees, but the decisions are made by small number of people — and what they believe…what their mindset is, as you put it…translates into decisions large and small, big strategic bets and every day behavior that reverberates throughout the business.
I came away from that really interested in understanding how people at the tops of businesses make their decisions, what drives their behavior, and it starts with what they believe the purpose of the company is.
And here comes along stakeholder capitalism. I was doing work at Yale as an Executive in Residence there. And I really wanted to focus on this — the how, as you do [in the ‘Hunt for the How’ series], for the practitioners.
We’ve got a great team of collaborators. And we have been for the past year or more, interviewing and talking with CEOs, former CEOs, current CEOs, chief marketing officers, chief sustainability officers, heads of HR, leaders in civil society, and asking them, not the “why” of stakeholder capitalism (although they have points of view on that or defining it) but if you assume that the leadership of a company wants to create value for multiple stakeholders, is a new Management Science needed or would help? In other words, you could be committed to it [the mindset of stakeholder capitalism], but what will help you be excellent at it? And we have been hearing “yes,” there is a range of things that leaders and professionals can learn, can possess, can apply — skills, methods, tools. It’s very, very interesting to hear this.
Michael
Yeah, I agree that with you wholeheartedly that we need new tools, methodologies, ways of thinking about this, I want to turn the conversation a little bit to getting into what stakeholder capitalism is and isn’t a little more deeply. And maybe you could start with just your view on the myths that exist today about stakeholder capitalism that are common, and maybe a little dangerous if we don’t overcome these.
Jon
Sure. One myth: stakeholder capitalism is about solving the world’s problems. The world, society, the planet are stakeholders to be sure, but they’re not the only stakeholders who matter to a company’s success. Often, you hear people immediately think that stakeholder capitalism is synonymous with addressing societal issues or planetary issues. I don’t think that is correct at all. And the CEOs I’ve spoken with, some of them emphasize ESG or aspects of ESG, but true stakeholder capitalism — it’s in the term — is all the stakeholders who matter. Your employees matter, your suppliers matter, your partners matter, shareholders still matter. So the risk here is that the role formerly played for the past 50 years, the primacy of the shareholder, now could turn into the primacy of societal issues. And I think that is a risk of another imbalance. So that’s a myth.
Michael
Yeah, I think that’s a fine point. And the degree to which it includes a stakeholder depends on the organization itself and the category it operates in and the stakeholder ecosystem it engages within and depends upon.
Jon
Exactly. We don’t say it’s “audience capitalism.” We think about the audiences for our messaging. These are people who have a stake in our success, and we have a stake in their success. It’s a value exchange. They have choices, right? They can invest in a different company, they could certainly work for a different company, buy from different companies, they don’t have to grant you a license to operate in their nation or community. So you have to provide value, you have to differentiate to win them over. As one colleague put it, if you don’t do purpose work, you’ll die but if you only do purpose work, you won’t win. And when you really are inside of the executive committee, when you’re inside of those rooms, it is about winning, it is about having people choose you. And that’s not new.
Another myth is that stakeholder capitalism is marketing, very sophisticated marketing or ham-fisted marketing. The cynics around the Business Roundtable declaration say that what’s really changed is it was good public relations, it was good marketing.
Stakeholder capitalism has implications for excellent marketing. Excellent marketing to me is not excellent storytelling. It’s not narratives that inspire people and move people — there’s an element of that. But it also draws upon differentiation and developing true value propositions, understanding your stakeholders through segmentation, being very precise, being very clear about making choices, not trying to do everything. And then really good marketing also is trying to cause people to take an action.
Another myth that I hear sometimes is that CEOs who champion stakeholder capitalism want you to look at that because it’s a diversion from their financial performance. Do some CEOs do that? I don’t know, possibly. And that’s back to the [idea that the] bottom line is all that matters, rather than this is a way to arguably achieve financial performance, a better way, a more sustainable way to achieve financial performance. That is subject to a good debate, too.
Michael
So I think you and I spoke recently about [this]. And maybe the lofty aspiration of success here with stakeholder capitalism is that the most hardcore capitalist becomes convinced, to the point that you just made, that this is the best way to achieve enduring long-term success, to out-compete and to thrive as a business and generate profits and shareholder value. Now, I believe that’s possible, and we’re working towards that. But there’s a lot of skepticism, naturally, and some of it is well founded and valid. I’d love to hear your views connected to some of the more substantial critiques of this approach that are rising up.
Jon
I think that if you really want to make this pervasive in business, it cannot be dependent on an individual’s values, personal values, their personal feelings of morality. Because when that person leaves, when that person moves on, it could go with them. You can’t institutionalize caring, I don’t believe.
You can institutionalize the basis of competition. You can institutionalize and put into the fabric of a business that this is how we win, this is how we perform and this is how we will be here for another 100 years. And I think those things are not motivation dependent, in terms of individuals. I think those things are teachable, and they’re more enduring. I’d love if people were motivated by higher principles, but one can’t count on that.
Michael
Yeah, I’ve also heard some CEOs that I’ve spoken with dismiss the evidence that this approach leads to better success by saying maybe there’s a fatal flaw in the logic, it’s a little bit of a tautology. The few exceptional firms that are very purpose-driven with visionary charismatic leaders have basically been successful maybe because of other reasons. And it looks like it’s correlation not causation. And what do you say to that?
Jon
Well, then I look at turnaround situations. Because sometimes if you look at a company that is on a meteoric rise and with new technology (e.g., born on the cloud, digital companies), and their market value is just astronomical, then the leader or founder can opine as to why they’ve been successful. They’re so high up on Maslow’s [hierarchy of needs], they’re self-actualizing. I can see how people could be skeptical about that.
However, if you look at other stories, for example Hubert Joly at Best Buy. Would you like to have led Best Buy 10 years ago, a big box retailer? What’s your hypothesis about how you’re going to get out of this and what’s the future? His hypothesis was: My people, our culture is broken, they are not proud to work here, they’re not motivated, they don’t care about the customer, because we haven’t cared about them. We are going to focus on the culture, we’re going to focus on our people. And yes, we’ll do some things with our portfolio, we’ll make some bets. But we’re going to put more energy on the culture and people in the belief that that equation of not all stakeholders are equal, employees come first, will result in all good things. He did it, and Best Buy today is kind of improbably doing quite well.
Jack Rowe, very few may remember Jack Rowe, he was a CEO at Aetna, despised classic HMO… everyone suing them, the only stakeholder who loved Aetna was the shareholder. And he said, “We are going to fix this by caring about patients again. We’re going to fix this by making our people proud to work here, because I’m watching them come into the building, and they won’t put their badge on until they get to the door, because they’re not proud to be here.” So, his hypothesis, like Hubert’s and Howard Schultz’s at Starbucks, is you put your people first, and then good things will happen. And you see that. Now, I’m not [arguing for] people-first, the employee stakeholder is first among equals. But I’m just responding to the criticism or the critique that they are correlated, not causal. Those CEOs would say, “Had I not invested here, I wouldn’t get the results that we love over there.”
Michael
Yeah, I love the notion of looking at turnarounds, because you have a through line and continuity. And you can really assess the change within that context over time. Microsoft’s another interesting turnaround story that now is heralded as being number one on JUST Capital rankings, and has paid a lot of attention to culture, and employees as a mechanism of its rebirth.
I want to go on a little bit of a side journey here with you, because I noticed that you were the chairman of IBM Values and Policy Advisory Board. A lot of what we’re talking about does hinge on values and how those are defined, how clearly they’re defined, how actionable they are, how they’re reinforced, in what ways by leadership over time and [how they] guide decision making. I would love to hear your thoughts on the role values actually play in this equation. And then what you saw at IBM, in your work there.
Jon
That board was created within months of President Trump taking office, and it was because of this new dynamic where it was expected of companies, particularly by employees, that they should speak out on a range of issues. You will remember there wasn’t a week that went by, seemingly, when there wasn’t some issue that caused companies to decide: Are we going to have a position on this? Do we have a policy on this? Do we have a point of view? Are we going to remain silent? Are we going to talk to our employees only or talk publicly? Are we going to join forces to do something? And inside of IBM it would have been very easy to react week by week… but then the question is, what guides our thinking on this particular issue? Is it going to be because the CEO decides? Is it going to be because the strongest, loudest, most passionate voice around the table wants us to take a stand?
Ginni Rometty, the CEO at the time, after months of this churn, says, “I’m forming this team, you lead it, I’m calling it values and policy, because they are together. Help us come up with a way to think this through.” Some of this is common sense, perhaps, but in the heat of the moment when you’re feeling compelled to speak out on something, these are helpful. Our values, if they are to mean something, should inform our decision here.
Secondly, our business interests. Is the issue… warm, hot, cold, cool, something in between? These are highly subjective. Our stakeholders, do they do they care about the issue? I know they may want us to speak out, but how relevant is any given issue to them? Can we make an impact? Do we have brand permission? Do we have resources to make an impact on this issue?
And a really important one for a company that’s been around for a while, is our history. In other words, what has been our behavior through time on any given issue? It doesn’t mean we’re handcuffed to the past. But it does mean that if we speak out or remain silent on something, take a position or not, it may represent either a consistent data point in a long line of behavior, or it could be a departure from that. And if it’s a departure from that, let us do it with intent. Let us explain it. Let us defend it. Let’s understand that.
To give you an example, a lot of members of the executive committee were relatively new to IBM and were quite agitated around these issues, as many were back then. I said, okay, let’s be informed, let’s have a vector called our track record. What did we do when Cuba became communist? What was our record in the Vietnam era? What was our record in apartheid South Africa? What was our record during the Civil Rights Movement, not just in the United States? What was our record when this legislation was passed, and that legislation, and so on. Again, it wasn’t to say, “Oh, therefore, we have to.” It just means that if this management team, if we make a decision today, let us be aware that it is either consistent or inconsistent with our business, with our behavior in the past.
So, all of this is a big drink of water here. But I find in many discussions with companies, eight out of 10 do not have what they consider to be any kind of rigor, or even philosophy about how to address these issues.
Michael
Yeah, I hear this come up a lot. And it may be the most vexing shift, or pressure for CEOs, where not so long ago, it was okay to stay neutral and silent on most issues and be very selective on the few that were kind of obvious candidates to speak out or act out on because they were directly related to your business or something that historically you leaned into. And now it seems CEOs don’t feel they have permission to be silent on anything. Which raises the question of what do you lead to? How do you choose? And how do you figure out exactly what to do? What’s the volume level of the position to take? How do you back it up through resources and action or fundamental change to how you’re conducting yourself as a business? And it’s very challenging.
I love the notion of looking back at your history, not to use that as a roadmap for going forward, but for understanding where you’ve been consistent, and where you’re going to break with that. And just being clear about that. Because, as we know, trust is born from consistency over time. And so, a lot of the danger here is just being reactive to new pressures from various constituents, as you’re listening to more and more stakeholders, and you want to serve them. They’re going to be loud about many different things, and you need to have a rudder. I think that’s one of the really challenging issues here. And it’s maybe even some of the skepticism that you hear. “Well, now we’re just going to be blowing in the wind against all these pressures, and that’s not a great way to operate a business.” And so, you have some people who are taking very strong stances against it, like Bryan Armstrong at Coinbase, for example.
Jon
Yes. So-called CEO activism. It’s often personified by the CEO. It’s better to think about the institution. You have different ways of thinking about these things, and one tool I always found helpful is a very simple one. It is to finish the sentence: Since our founding, we have always believed or we have always stood for “blank,” and that’s why we have “example, example, example”. Today, consistent with that, we are going to “this or that.”
Michael
I love that it’s maybe even helpful if you’re going to be changing, say, like for the last 60 years, we’ve done it this way. Now we’re going to make a shift. It at least sets up that context as well.
Jon
Well, TOMS shoes is synonymous with “Buy one, give one.” They moved away from that recently, with a whole bunch of good reasons. That’s an example of where we say, “Since our founding, we have ‘blank.’ But today, we are going to do this, we’re going to make this change. And here’s the reason why.” And I thought they did that quite well.
Michael
Another skepticism that I hear that might be worth talking about… and then we can get into the most important questions on the How, which I would love to explore, is on measurement. And some of the forms of value that I think we’re talking about generating for stakeholders are not economic and can be very challenging to measure and detect and assess. And if you believe that you can’t actually drive change, unless you’re setting targets and measuring and having accountabilities against them, then you may dismiss this entire system as being something that sounds great but is way too challenging to implement with rigor, and stick to.
Jon
Yeah, grossly oversimplified, there are two kinds of measurement systems that come into the C suite. One feels like it’s imposed on a company, or been created to define standards of performance and behavior that all businesses are expected to achieve or comply with — everything from accounting standards, to supply chain standards, and so forth. The other are targets and measurements, KPIs and metrics that the company chooses because it’s an expression of their leadership, it’s an expression of their differentiation and uniqueness. Sometimes a company choosing a metric like that migrates over to something all companies eventually have to conform with. We’re seeing that happening right now with these carbon goals, x years ago, months ago, leaders stepping out saying, “We will be carbon neutral by this date, by this year.” Then another one does, another one does, another one does. How much news are you going to generate today if you if you articulate a carbon neutral goal? Maybe not as much, right? Because it’s beginning to migrate over to, “Well, what’s your carbon commitment?”
I think the same thing is going to happen, or may be happening now, around data and artificial intelligence and algorithmic safety. Some companies are stepping out saying we will and will not do certain things with your data, we will and will not do certain things with aspects of artificial intelligence. I would bet, safe bet I think, that some of those things will be required. First they’ll be expected, and then they may actually be required by the EU, or by California or by everybody.
So when you come back to the C suite, the mentality of compliance is one mindset. The mindset of leadership though, the CEO’s and other members of the leadership team, is that combination of things we must do and should do and are expected to do, but what are the things we’re going to choose to do because we want to lead in our industry or in all of business? I find that to be a kind of super motivating way to get the company moving.
Michael
Let’s shift into what your views on the most important challenges and questions that need to be addressed in order to have this be operationalized at scale by many companies in many different categories. Which I think is the challenge you and I are… it’s the journey we’re going on. And this is maybe getting at the root of the issue of the how, you know, what is necessary in order to fulfill the question of how do you do this well?
Jon
Let me start by quoting Jim Citron who leads the CEO practice at Spencer Stewart for North America. Jim says, just because you have a noble purpose doesn’t mean that the challenges of operations of a business are magically solved. And he differentiates between leaders and managers. He says a leader does not scale. A leader can be passionate, inspirational, committed, hard charging. But if you really want to take your noble purpose and your mission or your commitments, and have that interwoven into the fabric of the business, you have to do the largely thankless, unsexy work of looking at your business processes, looking at your functions, looking at decision rights, looking at target setting, looking at your performance management system, who are you putting in what roles, what accountability is in place. Versions of this I’ve heard over and over again, from Ken Chenault when he ran American Express, from Howard Schultz, from Kevin Johnson, and many others, where it’s sort of like purpose-as-operating-system or a management system that is driven firstly by this determination to create value in a particular way. But then you must go through and complete all the other pieces of the management system so that it’s actually operational in your business. And again, that is hard work, it sounds like plumbing to some people. But the great debates occur there. And the hard work can’t be ignored. So that’s one piece of it.
Michael
Yeah, and unpacking what you said, there are many pieces within that, including the performance management system alone, that if you don’t actually start redefining what success looks like and how you can tell deep within the organization, for managers and beyond, you may have only skin-deep change.
There are two other very large challenges that loomed large for me, as I tried to puzzle through how to drive this shift for lots of organizations.
One of them is the timeframes, thinking simultaneously long term and short term, because I don’t think you can ignore either.
And the other is making sure that this new approach is not significantly more complex than the current approach. Because if it is, there will be real challenges in having it take hold. Because in order to operate you need to be focused and people will gravitate towards things that are easier to understand and implement.
Jon
True. On the time horizon, particularly from the standpoint of investors and public companies, part of this is setting expectations. And I don’t mean about your quarterly earnings targets or your annual financial objectives, but setting expectations about how the company will deliver those financial results and over what time horizon. Sam Palmisano, when he was head of IBM, eventually created these roadmaps to help you understand and to expect what we could do for investors. These roadmaps provided a longer time horizon, but did not liberate us from accountability. If we perform the way we expect to and hope to, you can expect this kind of performance over time. It took years for the investors to say that is a credible way to understand IBM, and to understand what I can expect from IBM.
I’ve talked with many CEOs about the investor dimension. Some believe that you must clearly articulate what they can expect and some investors will leave, and you will see that reflected in your market value in the short term. But you want the right kinds of investors in your company, and if you stick to it and your board stands by it, then you will see a re-mixing in the investor base to shareholders who buy into your strategy, buy into your purpose and buy into the expectations that you’ve set in terms of what they can expect from you.
Michael
Yeah, I love that notion. There’s something there that resonates with me as a as a former Product Manager, where we used to try to get laser focused on who we’re serving. And I used to advise people — because it can be a very uncomfortable exercise you have to make, especially if you have a large product brand, like Windows, [to do] client product management. So, you have a billion customers, and how do you get sharper around who you’re serving?
I think inherent in applying stakeholder capitalism is a similar exercise of being willing to optimize for certain audiences. [You] understand them, you serve them, and you optimize for them, because [of] their strong alignment with your purpose and the value you’re generating. And you may lose some people in that shift, to your point. But you will gain more over the long run, if you’re doing it right. And you’re making the right calls here, through customer loyalty, through attracting more of that audience and finding more innovative ways to serve them and create the value that they want.
And how about complexity? So I know you think about this a lot. And maybe this can stray into my final question for you…. If you had a magic wand and it could change a practice — so, change one thing, and have it just be implemented broadly at every company, in order to make significant steps forward towards operationalizing these ideas — what would it be?
Jon
I wish leaders just added the stakeholder perspective, multiple stakeholders, and their expectations, the value that we want to create for them, and give those challenges to their teams with the confidence that they will figure it out. I think — and I’ve heard this so often from leaders — that when they think about stakeholders, they don’t live in an intersection of “tradeoffs.”
You might think that if a company is sitting with all these stakeholders with these demands and expectations, you can’t satisfy them all. They might be in opposition to each other. So, you have to make tradeoffs, you have to find common ground, you have to strike compromises. Sometimes you do, of course, but more often what I’ve been hearing is, “No, those requirements, which seem to be in opposition to each other, are, in a designer’s language, constraints that define a design problem.” And the design problem is multi-dimensional, because you have many stakeholders, i.e., how do we simultaneously solve this further for the employee, without taking it out of the shareholder’s pocket, and doing it in a way that addresses some environmental challenge? And giving that brief or giving that challenge to your team and telling the team, “This is what I’m asking you to do. It’s going to be extremely hard to do because it seems to be unsolvable today. But I don’t know how to solve for it, I need your help, and I’m confident that you’ll figure it out.” It sounds so simple. But in my experience in business, when the leader comes into the room and says we need to figure out a way to do the following things and we have a time constraint and an economic constraint, we figure it out. You can call that innovation, but what often comes out is new thinking, new solutions, and new approaches.
Michael
I love that concept. And it’s a great foundation for all the other good things to follow, because you’re essentially redefining the problems and opportunities in ways that acknowledge the stakeholders and the value that can be generated and inspire new solutions and innovation that could be much more competitive.
Jon
Exactly. This applies to ESG targets, particularly. Sometimes an ESG target, let’s say plastics, is one stakeholder dimension problem that’s been framed. “We need to use less plastics.” But why not add to that, “And we need to do it in a way that increases our profitability, that increases our market share, and that our manufacturers can actually manufacture in volume without having to retool their factories, or what have you.” And the team would say, “I don’t know if that’s possible to simultaneously do all of that.” But if that’s never been put to the team to try to figure out a way, then it won’t happen.
Michael
Yeah, and in essence, you’re saying that the easy response would be to say, these are hard tradeoffs, let’s make a few tradeoffs that we’re willing to live with. The path you’re talking about is saying, let’s not accept the tradeoffs. Let’s constrain, let’s simultaneously generate value in these forums and have that be the challenge that we rise to.
Jon
I have to quote Charles Eames here. He said that there are very few keys to design, but one of them is the welcoming of constraints. And the more you understand them in detail, the stronger and better your design will be. And I love this line he added: Every problem has its own peculiar list. I love that “peculiar” part of it.
I’ll give you an example. The Nike Space Hippie shoe team set out to create the lowest carbon shoe ever. One peculiar constraint in that design brief was, it would not be consistent with a low carbon shoe goal if the material, which are scraps, trash, leftover material, is shipped halfway around the world to our manufacturers. So, one constraint was the manufacturers have to be near the trash. But because they solved for that, now they can manufacture in volume and not have to ship things around the planet. I love that each problem has its own peculiar list.
Michael
Yeah, that’s, and that’s a fantastic example. And a great note to end on. Jon, thank you so much for joining. I wish you the best of luck with your work at Yale. It’s important and necessary. And I look forward to having you back on from time to time to help me understand and make sense of all the stuff we’ll be learning.
Jon
Yes, well, “The Hunt For the How” is needed because many, many leaders are hunting for the how. So, thank you for creating the podcast. And Michael, thank you for having me on today.
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