By Robert G. Eccles and George Serafeim
Globalization has concentrated economic power within a group of large companies who are now able to change the world at a scale historically reserved for nations. Just 1,000 businesses are responsible for half of the total market value of the world's more than 60,000 publicly traded companies. They virtually control the global economy.
This vast concentration of influence should be the starting point for any strategy of institutional change toward a sustainable society.
Consider how quickly this situation has emerged. In 1980 the world’s largest 1,000 companies made $2.64 trillion in revenue, or $6.99 trillion in 2010 dollars, adjusted using the consumer price index. They employed nearly 21 million people directly, and had a total market capitalization of close to $900 billion ($2.38 trillion in 2010 dollars), or 33 percent of the world total.
By 2010 the world’s largest 1000 companies made $32 trillion in revenue. They employed 67 million people directly, and had a total market cap of $28 trillion. That's equal to 49 percent of total world market cap. And it's down from 64 percent in 2000, at the peak of the Internet bubble and before the financial crisis of 2008.
There's substantial concentration even within the top 1000. Eighty-three companies account for one-third of the group's $32 trillion in revenue. The top 172 companies account for about half of it. The 172nd largest corporation, the Russian oil company Rosneft Oil, had revenue equivalent to the GDP of the 74th largest country, Uruguay.
These companies and their supply chains have an enormous impact for both good and ill on society. They create goods and services for customers, wealth for their shareholders, and jobs for millions of people. They also consume vast amounts of natural resources, pollute the local and global environments at little or no cost, and in some cases limit employees' well-being if wages and working conditions are inadequate. These latter, undesirable practices make our business-as-usual society unsustainable.
Many companies now acknowledge some responsibility to the world beyond their operations. What's more, they know that if they are to continue such rapid growth in developing markets -- or, as Willie Sutton might say, "where the money is" -- they might need to bring in more than goods and services, such as civil-society upgrades where they're most needed: housing, health and education.
Market opportunity, peer pressure, investor pressure, and brand reputation are doing for these companies what otherwise might be accomplished only through regulation. And since regulation is enforced by national agencies, all roughly 200 countries in the world would have to pass and enforce similar regulations. What a headache.
Instead, the market itself has already gone a long way toward making the global economy adaptable by concentrating market and moral leadership into 1000 boardrooms. The number 1000 is somewhat arbitrary. We choose it in part because it's a relatively manageable number to target, and civil society institutions and NGOs are becoming increasingly sophisticated in the ways they do just that.
Major investors are also a powerful constituency demanding change. Wealth is even more concentrated within asset management than it is among companies. The top 500 fund managers have over $42 trillion in assets under management. The top 10 fund managers account for one-third of this amount; the top 50 for two-thirds. This means that a small number of institutional investors might wring great change from businesses. They’re making progress.
Many companies might see only short-term competitive disadvantage in sustainable practices. This need not be the case. Through innovations in processes, products, and business models, the Global 1000 can make more money by improving their performance in key sustainability metrics -- called ESG, for environmental and social issues and corporate governance. Financial reporting itself is slowly changing to reflect the importance of these non-financial indicators. Integrated reporting -- the practice of issuing financial and ESG data in one document -- helps companies understand where new initiatives might come from, and helps investors understand whether a company sees how the world is changing.
Remaking these 1000 companies will change the behavior of millions of other companies, as healthier business practices trickle down their supply chains and into the constellation of private companies. Ultimately, creating a sustainable society—one that meets the needs of the present generation without sacrificing those of future generations—requires responsible behavior by every individual. And it's easier for every individual to change if the institutions that structure our lives and society pave the way.
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-0- Sep/11/2012 12:27 GMT