I brought socially conscious change to Volvo without hurting profits. Other CEOs can do the same

Editor's Note: (Pehr Gyllenhammar was the CEO of Volvo for 24 years. He has also worked with or served on the board of such institutions as Lazard, Reuters, Rothschild, Chase Manhattan Bank, the Aspen Institute, The Rockefeller University and the London Philharmonic Orchestra. His upcoming memoir, Character is Destiny, will be published by Morgan James Publishing in May of 2020. The opinions expressed in this commentary are his own. )

Ever since the Business Roundtable issued a Statement on the Purpose of a Corporation last summer recommending a shift to a stakeholder capitalism business model, it has become a popular topic of conversation. It's even a central theme in this year's Davos conference.

Stakeholder capitalism is a significant departure from the prevailing business model of maximizing shareholder value, which seeks to enrich shareholders and maximize profits. Instead it focuses on enriching the lives of all the people a company touches, including its customers, employees, suppliers, communities and shareholders. A number of influential CEOs have pledged to shift their company's purpose to stakeholder capitalism. But to prove they are really committed to change — and not just affixing their signature to a statement of lofty aspirations — they must embrace a system where they are held accountable for their stewardship. And they must get shareholders on board to keep them in check.

Of course, the challenge lies in convincing shareholders to effectively level a playing field that has historically prioritized their own profits. A corporate culture of maximizing shareholder value is fairly deeply entrenched in companies around the world today, and bloated industries have given rise to outsized expectations from shareholders. In an era in which corporate America is arguably more swollen and self-serving than it has ever been, the change to a paradigm such as stakeholder governance is imperative. With existing companies that have been focusing exclusively on boosting shareholder value for decades, shareholders must understand and accept that such a changeover can happen without an unduly negative effect on profits.

I know from personal experience that it is possible to bring socially conscious change to a large corporation without sacrificing profit. When I became Volvo's CEO in 1971, I completely redesigned our plants and assembly methods to prioritize the health and wellbeing of the workers. I addressed the first global environmental convocation — the 1972 UN environmental conference — and made a public commitment to make Volvo more environmentally friendly. And to protest the regime of apartheid, I closed Volvo's Durban plant in South Africa in 1976, one of the first CEOs to divest.

These were bold initiatives but were never designed to come at the expense of shareholders or profits. My intention was to develop work systems to both increase productivity and make people at large happier with the company. It was my job as CEO to communicate that effectively, which I did by going out and talking to people, whether they were Volvo workers, shareholders or members of the public. I was clear and consistent in communicating my intention to pursue programs and policy that were right for the future, for the people and for Volvo, and the wide base of shareholders accepted that. And over time, it became clear that my actions as CEO always aligned with my publicly stated intentions, which engendered trust and enabled me to continue innovating policy while keeping the company profitable.

To ensure that real change occurs, shareholders must hold corporate leaders accountable for breaching public trust when they do not align corporate governance with their publicly stated goals and intentions. As in political governance, it is necessary to have a substantive system of checks and balances that prevent the consolidation of power in the elite inner circle. Creating those checks and balances requires moving away from one-person leadership. The United States is one of only a few countries in which many corporate chiefs also serve as chairman of the board. The positions of CEO and chair were conceived as separate jobs so that one could serve as a counterbalance for the other. One of the first changes shareholders should make to improve governance is to disentangle the roles of CEO and board chairman in corporations where those positions are held by a single individual.

Shareholders also must regularly scrutinize the company's remuneration programs, and commit to giving workers better terms, better training and better working standards. And they must be willing to reject any business practice that is needlessly harmful, whether to individuals or to the environment. All of that will require putting bold initiatives on the corporate ballot and voting in support of them.

One avenue that can help keep companies accountable is by using the ESG (environmental, social, and governance) investing model. ESG investors will not put their money into a company with a poor track record in reducing carbon emissions, demonstrating diversity in hiring or perpetuating an outsized CEO-worker income gap, to name just a few. The ESG model operates in an equation that corporate shareholders can understand — one that directly correlates to profitability. A good ESG rating makes that company more attractive to investors and drives the stock price up.

The ESG movement is growing in the United States, and it is putting increasing pressure on management teams to adopt the stakeholder capitalism concept. In 2018, Larry Fink, the CEO of BlackRock — one of the largest investment managers in the world — publicly stated his belief that ESG will be a major component in how everyone looks at investing. And just last week, Fink released his annual letter, in which he stated that climate change is an urgent issue for investors, and that BlackRock will drop investments in organizations with poor sustainability records, including thermal coal.

To survive and thrive in business requires the ability to adapt to a changing environment. The Business Roundtable's rethinking of corporate purpose is a signal of precisely that. It's not important to know how many of the CEOs who support it are doing so for political or public relations purposes, or what motives an investment giant like BlackRock might have for dropping climate-unfriendly investments. What is important is to acknowledge is the trend at play here, of outside pressure forcing business leaders to align their actions with their stated ethics. The reality is that this paradigm shift toward a value-based sustainable culture does not require altruism, just pragmatism. It doesn't matter how each of these corporate horses are led to the water — it only matters that they drink.