ESG, not a cooking spice, is at the heart of a new business model. In fact, ESG (Environmental, Social, Governance) is at the core of this August’s Business Roundtable (“Roundtable”) new statement of business that redefines the purpose of a corporation to promote “an economy that serves all Americans.” This new purpose was briefly discussed last week.
Since 1978 the Roundtable has issued Principles of Corporate Governance that emphasizes that corporations exist principally to serve shareholders. Its new purpose statement, signed by 181 of its 200 some Corporate CEO members outlines a modern standard for corporate responsibility.
As Darren Walker, President of the Ford Foundation says, “it is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society.”
According to Bill McNabb, former CEO of Vanguard, “By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers.”
This would seem to be at odds with what Milton Friedman, the Noble economist, said in 1970, that “there is one and only one social responsibility of business … to engage in activities designed to increase its profits.”
In fact, Roundtable members, CEO’s of nearly 200 of America’s most prominent companies have been committed to profits. In 1977, their purpose statement stated, “The paramount duty of management and of boards of directors is to the corporation’s stockholders”… “The interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
But times change and stakeholders change, and it is time for corporations to focus more on overall corporate responsibility.
Corporations are stretching their purpose to include environmental and social issues beyond their routine governance mandate because they must – so as to make more profit longterm. E and S is now an important and integral part of how to do business.
More and more today’s investors examine how companies are addressing broader stakeholder concerns beyond just profit.
For the last 40 plus years, many businesses have been operating on increasing their shareholder value by leveraging a higher purpose as well. The companies that gave value and had a higher purpose, from Whole Foods to the Container Store among dozens more, simply made more profit for their shareholders by focusing on all stakeholders.
Large investors have been increasingly demanding corporations be more diverse and socially responsible. Investors are interested in corporations that align their way of doing business at all levels, with all stakeholders, not just for financial gain but including the community, social, employees and relationship outcomes built on a strong value-cultured ethical foundation and principles.
It’s no surprise then that the savviest business people in America now have a business purpose that is more inclusive and addresses some of the most pressing concerns of our times.
Investors as well as the younger workers companies want to attract and keep demand this. Having a positive environmental, social and governance rating is no longer just a feel-good option. It can have an immense effect on a company’s bottom line, community standing and stock price.
Today’s consumers want to buy from companies that reflect their business values. It is estimated that 80% of CEO’s believe demonstrating a commitment to society is important and look to sustainability ratings for guidance and benchmarking. An estimated $30 trillion of assets are invested worldwide that rely in some way on ESG information, up 34% since 2016.
Forbes lists several reasons why companies must prioritize ESG.
- Employees: Millennials have been a major force behind the purpose-driven movement. In fact, 75% of millennials said they would take a pay cut to work for a socially responsible company.
- Investors: Global socially responsible investments grew by 34% to $30.7 trillion over the past two years, which represents more than $1 in every $4 under professional management.
- Customers: In fact, 66% of consumers would switch from a product they typically buy to a new product from a purpose-driven company and nearly half of consumers say they would definitely or probably change their consumption habits to reduce their environmental impact.
To get recognition from ESG rating agencies for positive community impacts, companies need to align their corporate responsibility initiatives with the criteria these agencies use to assess and measure the company’s performance. This requires an understanding of the methodologies used by premier ESG reporting agencies, such as MSCI, TruValue Labs and CSRHub, and it’s critical they find ways to track and measure the progress made across the firm to achieve these goals.
Michael Wilkins, Managing Director and Head of Sustainable Finance, S&P Global Ratings, said: “The fixed-income market’s heightened focus on ESG has only emerged recently. However, ESG has been at the heart of our ratings approach for many years. We have long incorporated ESG considerations into our credit analysis. What we aim to do now is to more clearly underline to industry bodies, investors, and stakeholders how we do so.”
The Business Roundtable’s “new purpose” is a sign of the times and indicates a direction more companies need to take to promote sound ethical principles in how they do business. I applaud their steps and hope more companies follow their lead. Our society will benefit from this.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
